(Test Bank) International Financial Management

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Inter national Financial Manage ment T est B ank Inter national Financial Manage ment T est B ank ch1 Student: The first two columns give the maximum daily amounts of beer and whiskey that Southern Ireland and Northern Ireland can produce when they completely specialize in one or other product. The last two columns give each country's consumption without trade. 1. Is Northern Ireland better off when it trades with Southern Ireland? True False 2. Now suppose that Southern workers receive a raise to €2 per day. Will trade be possible at the exchange rate you found in the last question? True False 3. Now suppose that Southern workers are paid €1 per day but the Northern workers receive a raise to £2 per day. Will trade be possible at the exchange rate you found in the question before the last question? True False 4. What major dimension sets apart international finance from domestic finance? A. Foreign exchange and political risks B. Market imperfections C. Expanded opportunity set D. All of the above 5. An example of a political risk is A. expropriation of assets. B. adverse change in tax rules. C. the opposition party being elected. D. both answers a) and b) are correct. 6. Production of goods and services has become globalized to a large extent as a result of A. natural resources being depleted in one country after another. B. skilled labor being highly mobile. C. multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher. D. common tastes worldwide for the same goods and services. 7. Recently, financial markets have become highly integrated. This development A. allows investors to diversify their portfolios internationally. B. allows minority investors to buy and sell stocks. C. has increased the cost of capital for firms. D. answers a) and c) are both correct. Inter national Financial Manage ment T est B ank 8. Japan has experienced large trade surpluses. Japanese investors have responded to this by A. liquidating their positions in stocks to buy dollar denominated bonds. B. investing heavily in U.S. and other foreign financial markets. C. lobbying the U.S. government to depreciate its currency. D. lobbying the Japanese government to allow the yen to appreciate. 9. Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of A. exchange rate risk. B. political risk. C. market imperfections. D. none of the above, s ince $100,000 = €80,000 × $1.25/ €1.00 10. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and excha nge your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of A. exchange rate risk. B. political risk. C. market imperfections. D. weakness in the dollar. 11. Suppose that Great Britain is a major export market f or your firm, a U.S. -based MNC. If the British pound depreciates against the U.S. dollar, A. your firm will be able to charge more in dollar terms while keeping pound prices stable. B. your firm may be priced out of the U.K. market, to the extent that your dolla r costs stay constant and your pound prices will rise. C. to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same. D. both b) and c) are correct 12. Suppose Mexico is a major export market for your U.S. -based company and the Mexican peso appreciates drastically against the U.S. dollar. This means A your company's products can be priced out of the Mexican market, as the peso price of American . imports will rise following the peso's fall. B. your firm will be able to charge more in dollar terms while keeping peso prices stable. C. your domestic competitors will enjoy a period of facing lessened price competition from Mexican imports. D. both b) and c) are correct 13. Suppose Mexico is a major export market for your U.S .-based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means A your company's products can be priced out of the Mexican market, as the peso price of American . imports will rise following the peso's fall. B. your firm will be able to charge more in dollar terms while keeping peso prices stable. C. your domestic competitors will enjoy a period of facing little price competition from Mexican imports. D. both b) and c) are correct 14. Suppose that you are a U. S. producer of a commodity good competing with foreign producers. Your inputs of production are priced in dollars and you sell your output in dollars. If the U.S. currency depreciates against the currencies of our trading partners, A. your competitive positio n is likely improved. B. your competitive position is likely worsened. C. your competitive position is unchanged. Inter national Financial Manage ment T est B ank 15. Undoubtedly, we are now living in a world where all the major economic functions —consumption, production, and investment A. are still inherently local . B. are still regional in nature. C. are slowly becoming globalized. D. are highly globalized. 16. Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to the free movement of labor is an example of A. information asymmetry. B. excessive transactions costs. C. racial discrimination. D. a market imperfection. 17. Although the world economy is much more integrated today than was the case 10 or 20 years ago, a variety of barriers still hamper free movements of people, goods, service s, and capital across national boundaries. These barriers include A. legal restrictions. B. excessive transportation costs. C. information asymmetry. D. all of the above 18. The Japanese automobile company Honda decided to establish production facilities in Ohio, mainly to A. circumvent trade barriers. B. reduce transportation costs. C. reduce transactions costs. D. both a) and b) 19. When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally, A. they trade one market imperfection, information asymmetry, for another, exchange rate risk. B. they benefit from an expanded opportunity set. C. they should not bother to read or to understand the prospectus, since it's probably written in a foreign language. D. they should invest only in dollars or euros. 20. The Nestlé Corporation, a well -known Swiss MNC, used to issue two different classes of common stock, bearer shares and registered shares, and foreigners were allowed to hold only A. registered shares. B. bearer shares. C. voting shares. D. convertible shares. 21. Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments. Examples of these innovative instruments include A. currency futures and options, foreign stock index futures and options. B. multicurrency bonds. C. international mutual funds, country funds, exchange traded funds. D. all of the above 22. Nestlé, a well-known Swiss corporation, A. has been a paragon of virtue in its opposit ion to all forms of political risk. B at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, the . total market value of the firm fell. Cat one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, . there was a major transfer of wealth from foreign shareholders to Swiss shareholders. Inter national Financial Manage ment T est B ank D. none of the above Inter national Financial Manage ment T est B ank 23. The goal of shareholder wealth maximization A. is not appropriate for non-U.S. business firms. B means that all busin ess decisions and investments that a firm makes are done for the purpose of making . the owners of the firm better off financially. C. is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met. D. is in confl ict with the privatization process taking place in third -world countries. 24. As capital markets are becoming more integrated, the goal of shareholder wealth maximization A. has been altered to include other goals as well. B. has lost out to other goals, even in the U.S. C. has been given increasing importance by managers in Europe. D. has been shown to be a deterrent to raising funds abroad. 25. Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat A. show that managers might be tempted to purs ue their own private interests at the expense of shareholders. B. show that Italian shareholders are better at monitoring managerial behavior than U.S. shareholders. C. show that white -collar criminals hardly ever get punished. D. show that socialism is a better way to go than capitalism. 26. While the corporate governance problem is not confined to the United States, A it can be a much more serious problem in many other parts of the world, where legal protection of . shareholders is weak or nonexistent. B. it has reached its high point in the United States. C. the U.S. legal system, with lawsuits used only as a last resort, ensured that any conflicts of interest will soon be a thing of the past. D. none of the above 27. The owners of a business are the A. taxpayers. B. workers. C. suppliers. D. shareholders. 28. The massive privatization that is currently taking place in formerly socialist countries, will likely A. eventually enhance the standard of living to these countries' citizens. B. depend on private investment. C. increase the opportunity set facing these countries' citizens. D. all of the above 29. A firm with concentrated ownership A. may give rise to conflicts of interest between dominant shareholders and small outside shareholders. B. may enjoy more accounting transparency than firms with diffuse ownership structures. C. is a partnership, never a corporation. D. tends to exist overseas but not in the U.S. 30. The ultimate guardians of shareholder interest in a corporation, are the A. rank and file workers. B. senior management. C. boards of directors. D. all of the above. Inter national Financial Manage ment T est B ank 31. In countri es like France and Germany, A. managers have often made business decisions with regard to maximizing market share to the exclusion of other goals. B managers have often viewed shareholders as one of the "stakeholders" of the firm, others being . employees, customers, suppliers, banks and so forth. C.managers have often regarded the prosperity and growth of their combines , or families of related firms, as their critical goal. D. managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal. 32. When corporate governance breaks down A. shareholders are unlikely to receive fair returns on their investments. B. managers may be tempted to enrich themselves at shareholder expense. C. the board of directors is not doing its job. D. all of the above 33. Privatization refers to the process of A. having government operate businesses for the betterment of the public sector. B. government allowing the operation of privately owned business. C. prohibiting government operated enterprises. D.a country divesting itself of the ownership and operation of a business venture by turning it over to the free market system. 34. Deregulation of world financial markets A. provided a natural environment for financial innovations, like currency futures and options. B. has promoted competitio n among market participants. C has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing . foreigners to directly invest in their financial markets. D. all of the above 35. The emergence of global financial markets is due in no small part to A. advances in computer and telecommunications technology. B. enforcement of the Soviet system of state ownership of resources of production. C. government regulation and protection of infant industries. D. none of the above 36. The common monetary policy for the euro zone is now formulated by A. the Bundesbank in Germany. B. the Federal Reserve Bank. C. the World Bank. D. the European Central Bank. 37. Since the end of World War I, the dominant global currency has been the A. British pound. B. Japanese yen. C. Euro. D. U.S. dollar . 38. Since the end of World War I, the U.S. dollar has played the role of the dominant global currency, displacing the A. German mark. B. French Franc. C. Japanese Yen. D. British pound. Inter national Financial Manage ment T est B ank 39. The ascendance of the dollar the dominant global currency reflects several key factors such as A. the size of the U.S. population. B. the mature and open capital markets of the U.S. economy. C. exchange rate stability. D. all of the above. 40. The euro A. is the common currency of Europe. B. is divisible into 100 cents, just like the U.S. dollar. C. may eventual ly have a transaction domain larger than the U.S. dollar. D. all of the above. 41. Since its inception the euro has brought about revolutionary changes in European finance. For example, Aby redenominating corporate bonds and stocks from 12 different currencies into one common currency, . the euro has precipitated the emergence of continent wide capital markets in Europe that are comparable to U.S. markets in depth and liquidity. B. Swiss bank accounts are all denominated in euro. C. the European banking sector has becom e much more important as a source of financing for European firms. D. there have actually not been any revolutionary changes. 42. In David Ricardo's theory of comparative advantage, A. international trade is a zero -sum game in which one trading partner's gain comes at the expense of another's loss. B. liberalization of international trade will enhance the welfare of the world's citizens. C. is a short -run argument, not a long-run argument. D. has been superseded by the now-orthodox view of mercantilism. 43. Under the theory of comparative advantage, liberalization of international trade will A. enhance the welfare of the world's citizens. B. create unemployment and displacement of workers permanently. C. result in higher prices in the long run as monopolists are able to charge higher price s after eliminating their competitors. D. all of the above 44. Privatization is often seen as a cure for bureaucratic inefficiency and waste; some economists estimate that privatization improves efficiency and reduces operating costs by as much as A. 5 percent. B. 10 percent. C. 15 percent. D. 20 percent. 45. The World Trade Organization, WTO, A. has the power to enforce the rules of international trade. B. covers agriculture and physical goods, but not services or intellectual property rights. C. recently expelled China for human rights violations. D. ruled that NAFTA is to be the model for world trade integration. 46. Privatization A. has spurred a tremendous increase in cross -border investment. B. has allowed many governments to have the funds to nationalize important industries. C. has guaranteed that new ownership will be limited to the local citizens. D. has generally decreased the efficiency of the enterprise. Inter national Financial Manage ment T est B ank 47. The theory of comparative advantage A. claims that economic well -being is enhanced if each country's citizens produce only a single product. Bclai ms that economic well-being is enhanced when all countries compare commodity prices after . adjusting for exchange rate differences in order to standardize the prices charged all countries. Cclaims that economic well-being is enhanced if each country's citizens produce that which they . have a comparative advantage in producing relative to the citizens of other countries, and then trade production. D. claims that no country has an absolute advantage over another country in the production of any good or service. 48. A multinational firm can be defined as a firm that A. invests short -term cash inflows in more than one currency. B. has sales affiliates in several countries. C. is incorporated in more than one country. D. incorporated in one country that has production and sales operations in several other countries. 49. An MNC may gain from its global presence by A. spreading R&D expenditures and advertising costs over their global sales. B. pooling global purchasing power over suppliers. C. utilizing their technological and managerial know -how globally with minimum additional costs. D. all of the above are potential gains 50. MNCs can use their global presence to A. take advantage of underpriced labor services available in certain developing countries. B. gain access to special R&D capabilities residing in advanced foreign counties. C. boost profit margins and create shareholder value. D. all of the above 51. Foreign -owned manufacturing companies in the world's most highly developed countries A. generally are more productive and pay their workers more than do compara ble locally -owned businesses. B. generally are less productive and therefore pay their workers less than do comparable locally -owned businesses. C. tend to specialize in different articles of manufacture than they produce in their home countries. D. usually do not build their own production facilities but simply buy existing domestic manufacturing firms. 52. A purely domestic firm sources its products, sells its products, and raises its funds domestically Acan face stiff competition from a multinational corporation that can source its products in one country, . sell them in several countries, and raise its funds in a third country. B. can be more competitive than an MNC on its home turf due to superior knowledge of the local market. C. can still face exchange rate risk, just like an MNC. D. all of the above are true 53. MNC stands for A. Multinational Corporation. B. Multi Nationalized Corporation. C. Military National Cooperation. 54. Which is growing at a faster rate, foreign direct investment by MNCs or international trade? A. FDI by MNCs. B. Interna tional trade. C. Since they are linked, they grow at the same rate. D. None of the above. Inter national Financial Manage ment T est B ank 55. A true MNC, with operations in dozens of different countries A. must effectively manage foreign exchange risk. B. can ignore foreign exchange risk since it is diversified. C. will pay taxes in only its home county. D. none of the above 56. An MNC can A. be a factor that increases the opportunities of the citizens of less developed countries. B. be a factor that increases the opportunity set of domestic investors. C. increase economic efficiency. D. all of the above 57. Today for an MNC to produce merchandise in one country on capital equipment financed by funds raised in a number of different currencies through issuing securities to investors in many countries and then selling the finished product to custo mers in yet other countries is A. not uncommon. B. extremely common. C. uncommon. D. the norm. 58. A corporation that can source its products in one country, sell them in another country, and raise the funds in a third country A. is a multinational corporation. B. is a domestic firm if all of the shareholders are from the same country. C. enjoys a built-in hedge against exchange rate risk. D. enjoys a built-in hedge against political risk. 59. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Compute the opportunity cost of producing one additional unit of food instead of textiles. A. 1 yard of textiles per 1.67 pounds of food B. 1 pound of food per 1.67 yards of textiles C. 1 yard of textiles per .6 pounds of food D. 1 pound of food per .6 yards of textiles 60. The gains f rom trade A. are likely realized in the long run when workers and firms have had the time to adjust to the new competitive environment. B. are immediately realized in the short run, when governments drop protectionist policies. C. are smaller than the costs of adjustment. D. none of the above 61. Restrictions or impediments to free trade include such things as A. import quotas. B. import tariffs. C. costly transportation. D. all of the above 62. Suppose that country A is twice as good at producing widgets as country B. If the currency of B is twice as valuable as the currency of A, A. the comparative advantage will be canceled out. B. trade will be an improved outcome for both A and B. C. the comparative advantage could possible be canceled out depending on how much it costs to produce the widget i n country B. D. none of the above Inter national Financial Manage ment T est B ank 63. Comparative advantage A. is also known as relative efficiency. B. can lead to trade even in the face of absolute efficiency. C. exists when one party can produce a good or service at a lower opportunity cost than another party. D. all of the above 64. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input. A. Country A is relatively more efficient than Country B in the production of food. B. Country B is relatively more efficient than Country A in the production of textiles. C. Country A has an absolute advantage over Country B in the production of food and textiles. D. Country B has an absolute advantage over Country A in the production of food and textiles. 65. Underlying the theory of comparative advantage are assumptions regarding A. free trade between nations. B. that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile . C. that the factors of production (land , labor, capital, and entrepreneurial ability) are relatively mobile. D. a) and b) 66. If one country is twice the size of another country and is better at making almost everything than the benighted citizens of the smaller county, A. the bigger country enjoys an absolute advantage. B. the bigger country enjoys a relative advantage. C. the bigger country enjoys a comparative advantage. D. there is not enough information to make a determination. 67. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input. A. Country A is relatively more efficient than Country B in the production of food. B. Country B is relatively more efficient than Country A in the production of textiles. C. Country A has an absolute advantage over Country B in the production of food and textiles. D. Answers b) and c) are both correct 68. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input. A. Country A is relatively more efficient than Country B in the production of textiles. B. Country B is relatively more efficient than Country A in the production of food. C. Country A has an absolute advantage over Country B in the producti on of food and textiles. D. all of the above Inter national Financial Manage ment T est B ank 69. Consider the no-trade input/output situation presented in the following table and graph for countries A and B. Assuming that free trade is legal; develop a scenario that will benefit the citizens of both countries . A. Country B should make all the textiles and trade with Country A for food. B. Country A should make nothing but textiles and trade with Country B for food. C. Country B should make all the textiles and Country A should make all the food. D. Country B should make nothing but textiles and trade with Country A for food. 70. Countries A and B currently consume 400 units of food and 400 units of textiles each and currently do not trade with one another. The citizens of country A have to give up one unit of food to gain two units of textiles, while the citizens of country B have to give up one unit of textiles to gain two units of food. Their production possibilities curves are shown. Under the theory of comparative advantage A. The citizens of country A should make food and trade with the citizens of country B for textiles. B. The citizens of country A should make textiles and trade with the citizens of country B for food. C. There are no gains from trade in this example. D. A is twice as good as B at making food and B is twice as good as A at making textiles. Inter national Financial Manage ment T est B ank 71. Counties A and B currently consume 400 units of food and 400 units of textiles each and currently do not trade with one another. The citizens of country A have to give up one unit of food to gain two units of textiles, while the citizens of country B have to give up one unit of textiles to gain two units of food. Their production possibilities curves are shown. Under the theory of comparative advantage, if free trade is allowed, the market clearing price (or exchange rate if y ou will) between food and textiles will be A. one unit of food for one unit of textiles. B. somewhere between one unit of food for two units of textiles and two units of food for one unit of textiles. C. one unit of food for two units of textiles. D. two units of food for one unit of textiles. 72. Countries A and B currently consume 400 units of food and 400 units of textiles each and currently do not trade with one another. The citizens of country A have to give up one unit of food to gain two units of textiles, while th e citizens of country B have to give up one unit of textiles to gain two units of food. Their production possibilities curves are shown. Suppose that trade is allowed and that the international exchange rate between food and textiles is one - for-one. The i ncreased consumption following trade will be A. an increase of 400 units of food and 400 units of textiles. B. an increase of 1,200 units of food and 1,200 units of textiles. C. an increase of 800 units of food and 800 units of textiles. D. there are no gains from trade in this example. Inter national Financial Manage ment T est B ank 73. In modern times, it is not a country per se but rather a controller of capital and know -how that gives the country in which it is domiciled a comparative advantage over another country. These controllers of capital and technology are A. the state. B. the multinational corporations (MNCs). C. portfolio managers of international mutual funds. D. none of the above 74. International trade is A. a "zero -sum" game in which one country benefits at the expense of another country. B. an "increasing -sum" game at which all players become winners. C. none of the above 75. The doctrine of comparative advantage was first put forth by A. Adam Smith. B. Adam Sandler. C. David Ricardo. D. Ricky Ricardo. E. none of the above 76. The comparative advantage argument in free trade A. ignores the cost of readj ustment. B. is a short -run argument. C. only works for two goods at a time. D. none of the above 77. If you can make a good at a low opportunity cost, A. you would be well served to produce that good and trade for other goods. B. you should make something else that has a higher value. C. you should make something else that has a higher opportunity cost. D. none of the above 78. A country like North Korea A. probably rejects the notion of increased opportunity presented by free trade. B. engages in free trade. C. lies on a production possibiliti es curve superior to South Korea, since North Korea protects its domestic producers. D. none of the above The table below shows the bushels of wheat and the bottles of beer that North and South Dakota can produce per day of labor under two different hypothet ical situations (Cases I and II). 79. Which state has an absolute advantage in producing wheat in Case I? A. South Dakota B. North Dakota C. Neither state 80. Which state has an absolute advantage in producing beer in Case I? A. South Dakota B. North Dakota C. Neither state Inter national Financial Manage ment T est B ank 81. Which state has an absolute advantage in producing beer in Case II? A. South Dakota B. North Dakota C. Neither state 82. Which state has a comparative advantage in producing wine in Case II? A. South Dakota B. North Dakota C. Neither state 83. Which state has a comparative advantage in wheat production in Case I? A. South Dakota B. North Dakota C. Neither state 84. Which state has a comparative advantage in wheat production in Case II? A. South Dakota B. North Dakota C. Neither state 85. What is the relative price of wheat in North Dakota prior to trade in Case II? A. 2 bushels of wheat = ½ bottle of beer B. ½ bushel of wheat = 2 bottles of beer C. 1 bushel of wheat = ½ bottle of beer D. 1 bushel of wheat = 2 bottles of beer 86. For case II, in what range must the "international" price of wheat fall? i.e. if North and South Dakot a trade only with each other, what is the range of prices possible? A. Between 1 bushel of wheat = 4/3 bottles of beer and 1 bushel of wheat = 2 bottles of beer B. Between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = 2 bottles of beer C. Between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = ½ bottles of beer D. None of the above 87. For case II, let the international price be 1 bottle = 1 bushel. Derive South Dakota's "trading possibilities curve." A. Option a B. Option b C. Option c D. Option d