INTERNATIONAL BUSINESS AND TRADE

FINAL EXAM
Name: __________________________________ Score: ____________________
 INTERNATIONAL BUSINESS AND TRADE
FINAL EXAM
Name: __________________________________ Score: ____________________

1. The current account balance of a country is calculated by subtracting which of the 16. What is the role of international financial transactions in managing currency risk?
following from its total current receipts? A. They increase currency risk.
A) Total current payments B. They decrease currency risk.
B) Capital account balance C. They have no effect on currency risk.
C) Financial account balance D. They create additional uncertainty in currency markets.
D) Invisible transfers 17. Which of the following is an example of an international financial transaction?
2. Which of the following is not a component of the current account? A. A bank loan between two businesses in the same country.
A) Goods B. A payment made between two individuals in the same country.
B) Services C. An investment in a local stock market.
C) Income D. A payment made from a business in one country to a supplier in another
D) Financial assets country.
3. If a country's exports are $500 billion and its imports are $400 billion, what is the 18. What is the purpose of a letter of credit in international trade?
balance of trade? A. To reduce currency risk.
A) $500 billion B. To facilitate payments.
B) $400 billion C. To provide trade financing.
C) $100 billion surplus D. To invest in foreign markets.
D) $100 billion deficit 19. Which of the following is an example of a financial instrument used in international
4. If a country's current account balance is negative, what is happening? trade?
A) The country is exporting more than it is importing. A. A shipping container.
B) The country is importing more than it is exporting. B. A letter of credit.
C) The country is experiencing a surplus in its capital account. C. A trade agreement.
D) The country is experiencing a surplus in its financial account. D. A product specification.
5. Which of the following transactions would be recorded as a credit in the financial 20. What is foreign direct investment?
account? A. Investment in foreign stocks and bonds.
A) A foreigner purchases a U.S. government bond. B. Investment in domestic stocks and bonds.
B) A U.S. company invests in a factory in China. C. Investment in physical assets in a foreign country.
C) A U.S. citizen opens a bank account in Germany. D. Investment in digital assets in a foreign country.
D) A foreign company purchases a U.S. company. 21. How can businesses use international financial transactions to invest in foreign
6. Which of the following transactions would be recorded as a debit in the financial markets?
account? A. By purchasing foreign currencies.
A) A U.S. citizen purchases a vacation home in Mexico. B. By investing in foreign stocks and bonds.
B) A foreign company invests in a U.S. company. C. By using trade financing.
C) A U.S. bank makes a loan to a foreign government. D. By reducing their exposure to currency risk.
D) A foreigner purchases a U.S. government bond. 22. What is the role of international financial institutions in facilitating international
7. If a country's capital account balance is negative, what does that mean? financial transactions?
A) The country is experiencing a surplus in its financial account. A. To regulate international financial transactions.
B) The country is experiencing a deficit in its financial account. B. To provide trade financing.
C) The country is experiencing a surplus in its current account. C. To facilitate foreign direct investment.
D) The country is experiencing a deficit in its current account. D. To provide foreign currency exchange services.
8. Which of the following is not included in the financial account? 23. How can international financial transactions contribute to market expansion?
A) Foreign direct investment A. By reducing dependence on domestic markets.
B) Portfolio investment B. By limiting access to working capital.
C) Loans C. By increasing exposure to currency risk.
D) Trade in goods and services D. By increasing reliance on government subsidies.
9. If a country's financial account balance is negative, what does that mean? 24. What does SWIFT stand for?
A) The country is investing more abroad than foreign investors are investing in the A. Society for Worldwide International Financial Transactions
country. B. Society for Worldwide Interbank Financial Telecommunication
B) The country is receiving more investment from abroad than it is investing C. Society for Worldwide International Financial Telecommunications
abroad. D. Society for Worldwide Interbank Financial Transactions
C) The country is experiencing a deficit in its current account. 25. What is the main purpose of SWIFT?
D) The country is experiencing a surplus in its current account. A. To provide a standardized messaging format for international trade agreements.
10. If a country's current account balance is positive and its capital account balance is B. To provide a secure communication channel for social media platforms.
negative, what is happening in its financial account? C. To facilitate international financial transactions between banks and financial
A) There is a surplus. institutions.
B) There is a deficit. D. To provide a platform for the exchange of cryptocurrencies.
C) It is balanced. 26. What are some of the benefits of using SWIFT for international financial
D) It cannot be determined transactions?
11. What is an international financial transaction? A. Improved cyber security and protection against fraud.
A. A financial transaction that takes place between individuals or institutions in B. Increased operational costs and decreased efficiency.
different countries. C. Greater risk of errors and inaccuracies.
B. A financial transaction that takes place within the same country. D. Reduced transparency and compliance with regulations.
C. A financial transaction that involves the transfer of physical goods. 27. What is exchange rate determination?
D. A financial transaction that only involves the exchange of digital assets. A. The process by which the value of one currency is determined in relation to
12. What is the role of international financial transactions in managing currency risk? another currency
A. They increase currency risk. B. The process by which banks determine interest rates for loans and deposits
B. They decrease currency risk. C. The process by which countries determine their fiscal policy
C. They have no effect on currency risk. D. The process by which countries determine their monetary policy
D. They create additional uncertainty in currency markets. 28. What is the difference between a fixed exchange rate system and a floating
13. What is trade finance? exchange rate system?
A. The financing options for international trade. A. Fixed exchange rates are determined by market forces, while floating exchange
B. The financing options for domestic trade. rates are fixed to another currency or commodity
C. The financing options for international travel. B. Fixed exchange rates are fixed to another currency or commodity, while floating
D. The financing options for international telecommunications. exchange rates are determined by market forces
14. How can businesses use international financial transactions to expand their C. Fixed exchange rates and floating exchange rates are the same thing
markets? D. None of the above
A. By reducing their dependence on domestic markets. 29. Which of the following factors can influence exchange rates?
B. By increasing their exposure to currency risk. A. Political stability
C. By limiting their access to working capital. B. Current account balance
D. By increasing their reliance on government subsidies. C. Inflation rates
15. What is an international financial transaction? D. All of the above
A. A financial transaction that takes place between individuals or institutions in 30. Which of the following statements is true about government intervention in
different countries. currency markets?
B. A financial transaction that takes place within the same country. A. Governments cannot intervene in currency markets
C. A financial transaction that involves the transfer of physical goods. B. Governments can only buy their own currency to increase its value
D. A financial transaction that only involves the exchange of digital assets. C. Governments can buy or sell their own currency to influence its value
 INTERNATIONAL BUSINESS AND TRADE
FINAL EXAM
Name: __________________________________ Score: ____________________

D. Government intervention has no effect on exchange rates 42. Which model of exchange rate determination assumes that exchange rates are
31. How do higher interest rates in one country relative to another country affect determined by the relative supply and demand for different currencies in the
exchange rates? foreign exchange market?
A. Higher interest rates in one country can increase demand for its currency and A) PPP Model
lead to an increase in its value relative to the other country's currency B) IRP Model
B. Higher interest rates in one country can decrease demand for its currency and C) Asset Market Model
lead to a decrease in its value relative to the other country's currency D) BOP Model
C. Interest rates have no effect on exchange rates 43. Which model of exchange rate determination assumes that exchange rates are
D. Higher interest rates in one country always lead to higher exchange rates determined by the expectations of market participants about future economic
relative to other currencies conditions and policies?
32. How do terms of trade affect exchange rates? A) PPP Model
A. A country with improved terms of trade may have a stronger currency, while a B) IRP Model
country with declining terms of trade may have a weaker currency C) Asset Market Model
B. Terms of trade have no effect on exchange rates D) BOP Model
C. A country with improved terms of trade will always have a stronger currency 44. Which of the following best describes the difference between a free trade
relative to other currencies agreement and a customs union?
D. A country with declining terms of trade will always have a weaker currency a) A free trade agreement allows for the free movement of goods but a customs
relative to other currencies union also allows for the free movement of people.
33. How do expectations of future exchange rate movements affect current exchange b) A free trade agreement eliminates tariffs but a customs union also establishes a
rates? common external tariff.
A. Expectations of future exchange rate movements have no effect on current c) A free trade agreement establishes a common currency but a customs union
exchange rates does not.
B. Expectations of a currency appreciating in the future can increase demand for d) A free trade agreement establishes a common monetary policy but a customs
that currency and lead to an increase in its value in the present union does not.
C. Expectations of a currency depreciating in the future can decrease demand for 45. Which of the following is an example of an economic union?
that currency and lead to a decrease in its value in the present a) EU
D. Expectations of future exchange rate movements can only be influenced by b) APEC
government intervention. c) ASEAN
34. How do changes in commodity prices affect exchange rates? d) BRICS
A. Countries that are net exporters of commodities may have stronger currencies 46. Which of the following best describes the difference between a common market
when commodity prices are high, while countries that are net importers of and a customs union?
commodities may have weaker currencies when commodity prices are high a) A common market allows for the free movement of goods, services, capital, and
B. Changes in commodity prices have no effect on exchange rates people, but a customs union only allows for the free movement of goods.
C. Countries that are net importers of commodities may have stronger currencies b) A common market establishes a common external tariff, but a customs union
when commodity prices are high, while countries that are net exporters of does not.
commodities may have weaker currencies when commodity prices are high c) A common market establishes a common currency, but a customs union does
D. Changes in commodity prices affect exchange rates in a predictable and not.
uniform manner across all countries d) A common market establishes a common monetary policy, but a customs union
35. Which of the following is an example of government intervention in currency does not.
markets? 47. Which of the following is not a benefit of economic integration?
A. A central bank lowering interest rates to stimulate economic growth a) Increased trade and investment flows
B. A country's government imposing trade barriers to protect domestic industries b) Greater economies of scale
C. A country's government increasing taxes to reduce budget deficits c) Reduced competition among participating countries
D. A company buying or selling foreign currency to finance international d) Increased specialization and efficiency
transactions 48. Which of the following best describes the concept of comparative advantage?
36. Which model of exchange rate determination assumes that exchange rates are a) The ability of a country to produce a good or service at a lower opportunity cost
determined by the supply and demand for financial assets? than another country
A) Purchasing Power Parity (PPP) Model b) The ability of a country to produce a good or service at a lower monetary cost
B) Interest Rate Parity (IRP) Model than another country
C) Asset Market Model c) The ability of a country to produce a good or service at a higher opportunity cost
D) Balance of Payments (BOP) Model than another country
37. Which model of exchange rate determination assumes that in the long run, d) The ability of a country to produce a good or service at a higher monetary cost
exchange rates should adjust to equalize the prices of identical goods and than another country
services in different countries? 49. Which of the following is a potential drawback of economic integration?
A) PPP Model a) Reduced trade and investment flows
B) IRP Model b) Increased competition among participating countries
C) Asset Market Model c) Reduced efficiency and specialization
D) BOP Model d) Increased trade barriers and regulatory restrictions.
38. Which model of exchange rate determination assumes that exchange rates are 50. Which of the following is an example of a trade bloc?
determined by the difference in interest rates between two countries? a) The World Trade Organization (WTO)
A) PPP Model b) The Organization for Economic Cooperation and Development (OECD)
B) IRP Model c) The Association of Southeast Asian Nations (ASEAN)
C) Asset Market Model d) The United Nations (UN)
D) BOP Model 51. Which of the following types of FDI involves a company investing in a business
39. Which model of exchange rate determination assumes that exchange rates are that is unrelated to its existing operations?
determined by the supply and demand for goods and services in international a) Horizontal FDI
trade? b) Vertical FDI
A) PPP Model c) Conglomerate FDI
B) IRP Model d) Platform FDI
C) Asset Market Model 52. Which of the following types of FDI involves a company investing in a foreign
D) BOP Model country to produce goods or services that are primarily intended for export to other
40. Which model of exchange rate determination assumes that exchange rates are countries?
determined by a combination of economic fundamentals and market sentiment? a) Horizontal FDI
A) PPP Model b) Vertical FDI
B) IRP Model c) Conglomerate FDI
C) Asset Market Model d) Export-oriented FDI
D) BOP Model 53. Which of the following types of FDI involves a company investing in a business
41. Which model of exchange rate determination assumes that exchange rates are that is in the same industry as its existing operations in its home country?
determined by the balance of payments between two countries? a) Horizontal FDI
A) PPP Model b) Vertical FDI
B) IRP Model c) Conglomerate FDI
C) Asset Market Model d) Platform FDI
D) BOP Model
 INTERNATIONAL BUSINESS AND TRADE
FINAL EXAM
Name: __________________________________ Score: ____________________

54. Which of the following types of FDI involves a company investing in a business
that is a part of its supply chain or value chain?
a) Horizontal FDI
b) Vertical FDI
c) Conglomerate FDI
d) Export-oriented FDI
55. Which of the following types of FDI involves a company establishing a subsidiary
or branch in a foreign country as a base to serve other markets in the region?
a) Horizontal FDI
b) Vertical FDI
c) Conglomerate FDI
d) Platform FDI
56. Which of the following is NOT a reason why companies engage in FDI?
a) To access new markets and customers
b) To access lower-cost inputs and resources
c) To gain access to foreign technology and knowledge
d) To reduce the risk of exchange rate fluctuations
57. Which of the following is an example of FDI?
a) A U.S. company exporting goods to a French company
b) A French company investing in a U.S. company's stocks and bonds
c) A Japanese company establishing a subsidiary in Mexico to produce cars for
the North American market
d) A Chinese company licensing its technology to a Russian company
58. Which of the following is a potential cultural issue that may arise in a collaborative
venture?
a. Differences in legal systems
b. Differences in time zones
c. Differences in ethical standards
d. Differences in language
59. What is the primary purpose of a licensing agreement in a collaborative venture?
a. To establish a joint venture
b. To transfer technology or intellectual property
c. To share research data
d. To provide training and capacity building
60. What is the primary purpose of a research and development collaboration in a
collaborative venture?
a. To establish a joint venture
b. To transfer technology or intellectual property
c. To share research data
d. To develop new technologies or improve existing ones
61. Which of the following is a disadvantage of using the net present value (NPV)
method for capital budgeting in an international context?
a) It does not account for exchange rate risk.
b) It is not applicable for long-term projects.
c) It assumes a fixed rate of return.
d) It does not consider the time value of money.
62. Which of the following best describes the payback period for a project?
a) The period of time required to recover the initial investment.
b) The period of time required to generate positive net income.
c) The period of time required to achieve the target rate of return.
d) The period of time required to achieve the break-even point.
63. Which of the following statements is true regarding capital structure for an
international firm?
a) The use of debt is not affected by exchange rate risk.
b) International firms have a higher cost of equity compared to domestic firms.
c) International firms tend to use more debt financing than equity financing.
d) International firms do not need to consider the tax implications of their capital
structure.
64. Which of the following best describes the Eurocurrency market?
a) A market where the Euro is used as the currency for international trade.
b) A market where European companies trade stocks and bonds.
c) A market where banks lend and borrow funds denominated in currencies other
than the currency of the country where the bank is located.
d) A market where European governments issue bonds to raise fund
65. Which of the following is not a strategy for working capital and cash flow
management for international firms?
a) Matching currency cash inflows and outflows.
b) Centralizing cash management.
c) Hedging against exchange rate risk.
d) Maintaining a high level of inventory.
66. Which of the following is an important consideration when conducting capital
budgeting for an international firm?
a) Exchange rate risk.
b) Domestic tax laws only.
c) Only considering the initial investment cost.
d) Discounting cash flows using a fixed rate of return.
67. Which of the following is a disadvantage of using the net present value (NPV)
method for capital budgeting in an international context?
a) It does not account for exchange rate risk.
b) It is not applicable for long-term projects.
c) It assumes a fixed rate of return.
d) It does not consider the time value of money.
68. Which of the following best describes the payback period for a project?
a) The period of time required to recover the initial investment.
b) The period of time required to generate positive net income.
c) The period of time required to achieve the target rate of return.
d) The period of time required to achieve the break-even point.
69. Which of the following is not an advantage of using the Eurocurrency market for
borrowing and lending?
a. Reduced regulation compared to domestic banking markets
b. Access to a larger pool of funds from international lenders
c. Lower interest rates compared to domestic banking markets
d. Guaranteed repayment of loans by the European Central Bank
70. A company is considering investing in a project that will generate cash flows of
$100,000 per year for 5 years. The initial investment is $300,000. If the cost of
capital is 10%, what is the net present value (NPV) of the project?
a. $50,000
b. $27,271
c. -$50,000
d. -$27,271
71. Which of the following is not a potential problem with working capital management
for international firms?
a. Currency risk associated with foreign accounts receivable and payable
b. Inefficient use of cash due to differences in payment systems and collection
procedures across countries
c. Higher transaction costs associated with international payments and transfers
d. Limited access to short-term financing in foreign currencies
72. A multinational company is considering investing in a project in a foreign country.
The project requires an initial investment of $500,000 and is expected to generate
cash flows of $150,000 per year for 5 years. The cost of capital is 8%. What is the
profitability index (PI) of the project?
a. 0.8
b. 1.0
c. 1.2
d. 1.5
73. A company is considering investing in a project that will generate cash flows of
$100,000 per year for 5 years. The initial investment is $300,000. If the payback
period is 3 years, what is the cash flow in year 3?
a. $100,000
b. $150,000
c. $200,000
d. $250,000
74. Which of the following is a strategy for managing exchange rate risk?
a. Hedging with forward contracts
b. Speculating on future exchange rate movements
c. Ignoring exchange rate risk
d. Reducing foreign currency exposure by not doing business with foreign
customers
75. Which of the following is a potential disadvantage of using debt financing for
international firms?
a. Higher interest rates compared to equity financing
b. Increased financial flexibility
c. Reduced agency costs due to alignment of interests between managers and
shareholders
d. Limited exposure to credit risk
76. What is the primary goal of capital budgeting?
a. To minimize expenses
b. To maximize revenue
c. To maximize shareholder value
d. To increase market share
77. What is the formula for calculating net present value (NPV)?
a. NPV = Initial investment / Cash flow
b. NPV = (Cash flow / Initial investment) x 100
c. NPV = Sum of discounted cash flows - Initial investment
d. NPV = Sum of cash flows - Initial investment
78. What is capital structure?
a. The amount of capital a company has available for investment
b. The mix of debt and equity financing used to fund a company's operations
c. The percentage of profits reinvested in the company
d. The cost of capital for the company
79. What is the cost of capital?
a. The interest rate on a company's debt financing
b. The rate of return that investors expect from the company
c. The amount of money a company has available for investment
d. The percentage of profits reinvested in the company
80. What is the capital asset pricing model (CAPM)?
a. A model used to calculate the cost of equity financing
b. A model used to calculate the cost of debt financing
c. A model used to calculate the payback period for an investment
d. A model used to calculate the internal rate of return for an investment
 INTERNATIONAL BUSINESS AND TRADE
FINAL EXAM
Name: __________________________________ Score: ____________________

PART II – PROBLEM-SOLVING (Present your answer w/ solution)

1. Suppose the current spot exchange rate between the Euro (EUR) and the
Japanese Yen (JPY) is 130 JPY/EUR. The interest rate in the Eurozone is 2% and
the interest rate in Japan is 0.5%. Using the Interest Rate Parity (IRP) Model, what
is the expected exchange rate between EUR and JPY in one year?

2. Suppose the current spot exchange rate between the US dollar (USD) and the
Swiss franc (CHF) is 0.92 CHF/USD. The US economy is expected to grow by 2%
and the Swiss economy is expected to grow by 1.5% in the next year. Using the
Asset Market Model, what is the expected exchange rate between USD and CHF
in one year if the expected rate of return on Swiss assets is 4% and the expected
rate of return on US assets is 2.5%?

3. A company is considering a project that requires an initial investment of $100,000.

The expected cash flows for the project are $30,000 in year 1, $40,000 in year 2,
$50,000 in year 3, and $60,000 in year 4. The required rate of return for the project
is 10%. What is the NPV of the project?

4. A company is evaluating two mutually exclusive projects. Project A requires an

initial investment of $500,000 and has expected cash flows of $200,000 per year
for the next 5 years. Project B requires an initial investment of $600,000 and has
expected cash flows of $250,000 per year for the next 5 years. The required rate
of return for both projects is 12%. Which project should the company choose
based on the profitability index?

5. A company is considering an investment in a project that requires an initial

investment of $500,000. The project is expected to generate cash flows of
$100,000 in year 1, $200,000 in year 2, $250,000 in year 3, and $300,000 in year
4. What is the payback period for the project?