Chapter 1

4) 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.

1) 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

3) Production of goods and services has become globalized to a large extent as a result of

a) Skilled labor being highly mobile

b) Natural resources being depleted in one country after another

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

2) An example of a political risk is

a) Expropriation of assets

b) Adverse change in tax rules

c) The opposition party being elected

d) a) and b) are both correct

5) 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

6) 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, since $100,000 = €80,000×$1.25/€1.00

7) Suppose that Great Britain is a major export market for 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 dollar 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) b) and c) are both correct.

8) 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

9) 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 its probably written in a foreign language

d) They should invest only in dollars or euros.

10) Nestlé, a well-known Swiss corporation,

a) Has been a paragon of virtue in its opposition 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.

c) At 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.

d) None of the above

11) The goal of shareholder wealth maximization

a) is not appropriate for non-U.S. business firms

b) means that all business 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 conflict with the privatization process taking place in third-world countries

12) 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.

13) Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat

a) Show that managers might be tempted to pursue 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.

14) 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

15) The owners of a business are the

a) Taxpayers

b) Workers

c) Suppliers

d) Shareholders

16) 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

17) 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.

18) 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

19) In countries like France and Germany,

a) Managers have often made business decisions with regard 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.

20) 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

21) Privatization refers to 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

22) Deregulation of world financial markets

a) Provided a natural environment for financial innovations, like currency futures and options.

b) Has promoted competition 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

23) The emergence of global financial markets is due in no small part to

a) Advances in computer and telecommunications technology

b) Rigorous 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.

24) The euro

a) is the common currency of Europe

b) is divisible into 100 cents, just like the U.S. dollar

c) may eventually have a transaction domain larger than the U.S. dollar

d) All of the above.

25) Since its inception the euro has brought about revolutionary changes in European finance. For example

a) By 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 become much more important as a source of financing for European firms.

d) There have actually not been any revolutionary changes.

26) 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

27) 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.

28) 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.

29) 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.

30) The theory of comparative advantage:

a) Claims that economic well-being is enhanced if each country’s citizens produce only a single product

b) Claims 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

c) Claims 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.

31) A multinational firm can be defined as

a) A firm that invests short-term cash inflows in more than one currency

b) A firm that has sales affiliates in several countries

c) A firm that is incorporated in more than one country

d) A firm that incorporated in one country that has production and sales operations in several other countries.

32) A 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.

33) 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.

34) Foreign-owned manufacturing companies

a) Generally are more productive and pay their workers more than do comparable locally-owned businesses, in the world’s most highly developed countries.

b) Generally are more productive and pay their workers less than do comparable locally-owned businesses, in the world’s most least developed countries.

c) Tend to specialize in articles of manufacture that are illegal in their home countries.

d) Gain from their global presence by paying their workers in shoes.

35) A purely domestic firm sources its products, sells its products, and raises its funds domestically

a) Can 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 a MNC on its home turf due to superior knowledge of the local market

c) Can still face exchange rate risk, just like a MNC

d) All of the above are true.

36) MNC stands for

a) Multinational Corporation

b) Mostly National Corporation

c) Messy National Corporation

d) Military National Cooperation

37) Which is growing at a faster rate, foreign direct investment by MNCs or international trade?

a) FDI by MNCs

b) International trade

c) Since they are linked, they grow at the same rate

d) None of the above

38) 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.

39) A 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.

40) 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

41) Country A can produce 10 yards of textiles and 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

42) The gains from 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.

43) 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

44) Country A can produce 10 yards of textiles and 6 pounds of food per unit of input.

Country B can produce 8 yards of textiles and 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

45) 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)

46) 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 county enjoys an absolute advantage

b) The bigger county enjoys an relative advantage

c) The bigger county enjoys an comparative advantage

d) There is not enough information to make a determination

47) Country A can produce 10 yards of textiles and 6 pounds of food per unit of input.

Country B can produce 8 yards of textiles and 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 production of food

and textiles

d) All of the above

48) 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.

50) Consider a dentist and a 14-year old boy. The dentist can make $100 per hour drilling

teeth and the 14-year old boy can make $2 per hour picking up used aluminum cans.

The dentist is a manly man and can mow his half-acre lot in one hour. The 14-year old

boy can mow the lawn in two hours. If the dentist hires the boy to mow his lawn at

any price less than $100, but more than $4

a) Both he and the boy are better off

b) The dentist would be exploiting the boy

c) The boy would be exploiting the dentist

d) All of the above