REVIEW

for mid-term exam

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 Mid-term exam
v Assessment form:
v Multiple choices questions: 25 questions
v Writing: 2 problems

v Duration: 1 hour

v Open books exams

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 Content
v Lecture 1: Multinational financial management

v Lecture 2: Exchange rates

v Lecture 3: Balance of payments

v Lecture 4: Foreign exchanges market

v Lecture 5: Currency derivatives

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 Content
v MCQ:
v 5 lectures

v Problems:
v Exercise
v Balance of payments

v Arbitrage

v Currency derivatives

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 MCQ
v Historically, the primary motive for U.S.
multinationals to produce abroad has been to

a) lower costs

b) respond more quickly to the marketplace

c) avoid trade barriers

d) gain tax benefits

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 MCQ
v The primary objective of the multinational
corporation is to

a) maximize shareholder wealth

b) maximize world production

c) minimize debt

d) minimize the cost of doing business globally

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 MCQ
v ____________ is defined as the purchase of assets or
commodities on one market for immediate resale on
another in order to profit form a price discrepancy.

a) internationalization

b) arbitrage

c) financing

d) total risk

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 MCQ
v When a firm operates globally it offers advantages
such as

a) greater political power at home

b) bless taxes on its profits

c) greater negotiating power with foreign minority groups

d) greater negotiating power with labor unions

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 MCQ
v Multinational firms

a) are riskier than purely domestic firms because of the

exposures of operating abroad

b) are less risky than purely domestic firms because of

international diversification

c) may be less risky than domestic firms if the added risks

of operating overseas are more than offset by the ability to
operate in nations whose economic cycles are not perfectly in
phase

d) invest in developed countries only and avoid developing

economies

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 MCQ
v Of the following, exchange rates depend the most
upon relative

a) monetary systems

b) political systems

c) trade deficits

d) inflation rates between nations

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 MCQ
v ______ is another name for the complete replacement
of the local currency with the U.S. dollar.

v a) Seignorage

v b) Dollarization

v c) Depreciation

v d) Appreciation

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 MCQ
v To some U.S. manufacturers and labor unions, a cheap
yuan value gives China’s __________ an unfair
advantage in the global economy.

v a) imports

v b) subsidies

v c) bankers

v d) exporters

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 MCQ
v On Friday, September 13, 1992, the lira was worth
DM 0.0013. Over the weekend the lira devalued
against the DM to DM 0.0012. By how much had the
lira devalued against the DM?

v a) 7.69%

v b) 8.33%

v c) 5.21%

v d) 9.27%

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 MCQ
v Suppose that the Brazilian real devalues by 40%
against the U.S. dollar. By how much will the dollar
appreciate against the real?

v a) 67%

v b) 40%

v c) 32%

v d) 28%

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 MCQ
v The price of foreign goods in terms of domestic goods
is called

v a. the real exchange rate

v b. the balance of trade

v c. the trade-weighted exchange rate

v d. purchasing parity

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 MCQ
v An increase in the real exchange rate will

v a. raise national income

v b. lower national income

v c. make a country less competitive in international

trade

v d. lower the cost of foreign goods

v e. c and d

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 MCQ
v A slowdown in U.S. economic growth will

v a. boost the value of the dollar because inflation fears

will be calmed

v b. boost the value of the dollar because the Federal

Reserve will expand the money supply

v c. lower the value of the dollar because the U.S. will

be a less attractive place to investors

v d. lower the value of the dollar because interest rates

will rise

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 MCQ
v An increase in the supply of U.S. dollars by the Federal
Reserve will

v a. raise the value of the dollar because it will stimulate U.S.

economic growth

v b. raise the value of the dollar because it will lead to higher

U.S. interest rates

v c. reduce the value of the dollar because of inflation fears

in the United States

v d. decrease the value of the dollar because it will force

other countries to raise their interest rates

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 Exercise
v How would each of the following transactions show up on the U.S.
balance of payments accounts?
v Payment of $60 million in Social Security to U.S. citizens living
in Chile.
v Sale overseas of 130,000 50 cents CDs.
v Tuition receipts of $5 billion received by American universities
from foreign students.
v Payment of $10 million to U.S. consultants T. Rowe and
Associates by a Mexican company.
v Sale of a $200 million Eurobond issue in London by GMAC.
v Investment of $50 million by Ford to build a parts plant in
Uruguay.
v Payment of $45 million in dividends to U.S. citizens from
foreign companies.

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 Exercise
v Assume that:

v (1) a country has a current-account surplus of

$10,000;

v (2) its financial account has a deficit of $15,000;

v (3) its other two accounts – the capital account and net
errors and omissions – are negligible.

v What is the balance of the country’s reserve account?

How can the country eliminate the $5,000 imbalance
on its balance of payments?

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 Exercise
Assume the following information regarding UK and European
annualized interest rates:
Currency Lending Rate Borrowing Rate
UK pound (£) 6.73 % 7.20 %
Euro (€) 6.80 % 7.28 %

Milly Bank can borrow either £20 million or €20 million. The
current spot rate of the euro is £0.75. Furthermore, Milly Bank
expects the spot rate of the euro to be £0.76 in 90 days. What is
Milly Bank’s pound profit from speculating if the spot rate of the
euro is indeed £0.76 in 90 days?

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 Exercise
The current spot exchange rate is $1.45/€ and the three–
month forward rate from the commercial bank is $1.55/€.
Based upon your economic forecast, you are pretty confident
that the spot exchange rate will be $1.50/€ in three months.

Assume that you would like to buy or sell €100,000.

What actions would you take to speculate in the forward

market? How much will you make if your prediction is
correct?

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 Arbitrage in payment
v A company in Germany receives, in the same day, a
following payment notification: it will receive a payment of
150.000 CAD & 8.000.000 DKK and it has to pay 200.000
CHF & 5.000.000 SEK. Apply arbitrage concept in
payment and identify the account of the company at the
end of the day.

v Market information:
EUR/USD = 1,1235/75 USD/CHF = 1,5642/42
CAD/USD = 0,8618/48 USD/SEK = 7,8310/97
USD/DKK = 6,9255/55

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 THE END
GOOD LUCK FOR YOUR EXAM

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