MULTIPLE CHOICE - Choose the one alternative that best completes the statement or
answers the question.
1) What major dimension sets apart international finance from domestic finance?
International Financial Management 9th Edition
, A) Foreign exchange and political risks
B) Market imperfections
C) Expanded opportunity set
D) all of the options
2) An example(s) of a political risk is
A) expropriation of assets.
B) adverse change in tax rules.
C) the opposition party being elected.
D) both the expropriation of assets and adverse changes in tax rules are correct.
3) 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.
4) Recently, financial markets have become highly integrated. This development
International Financial Management 9th Edition
, 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) none of the options
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 options, since $100,000 = €80,000 × $1.25/€1.00.
International Financial Management 9th Edition
,7) 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 exchange your £60 for dollars, you only get $45 since the poundhas 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.
8) 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 goodsto
keep the pound price the same.
D) 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, and 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.
9) 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
International Financial Management 9th Edition
, 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) your firm will be able to charge more in dollar terms while keeping peso prices stableand
your domestic competitors will enjoy a period of facing lessened price competition from Mexican
imports.
10) 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 that
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) none of the options
11) 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,
International Financial Management 9th Edition
, A) your competitive position is likely improved.
B) your competitive position is likely worsened.
C) your competitive position is unchanged.
D) none of the options
12) 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.
13) 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.
14) 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, services, and capital
across national boundaries. These barriers include
International Financial Management 9th Edition
, A) legal restrictions.
B) excessive transportation costs.
C) information asymmetry.
D) all of the options
15) 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) all of the options
16) 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.
International Financial Management 9th Edition
,17) 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.
18) 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 options
19) 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 domestic
shareholders.
D) none of the options
International Financial Management 9th Edition
,20) 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.
21) 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.
22) Corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat
International Financial Management 9th Edition
, 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.
23) While the corporate governance problem is not confined to the United States,
A) it can actually be a much more serious problem in other parts of the world, where the
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 would soon be a thing of the past.
D) none of the options
24) The owners of a business are the
A) taxpayers.
B) workers.
C) suppliers.
D) shareholders.
International Financial Management 9th Edition
