FINMAN 3

Final Requirement

Multiple Choice. Identify the letter of the choice that best completes the statement or answers the question.

1. Translation exposure reflects [A] The exposure of a firm's international contractual transactions to exchange rate
fluctuations. [B] The exposure of a firm's local currency value to transactions between foreign exchange traders. [C]
The exposure of a firm's financial statements to exchange rate fluctuations. [D] The exposure of a firm's cash flows
to exchange rate fluctuations.
2. Assume that Subsidiaries X and Y often trade with each other. Assume that Subsidiary X has excess cash while
Subsidiary Y is short on cash. How can Subsidiary X help out Subsidiary Y? [A] X should lag its payments sent to Y to
pay for imports from Y. [B] X should request that Y lead its payments to be sent for goods that Y sent to X. [C] A and
B. [D] None of the above.
3. Netting can achieve all but one of the following [A] Cross border transactions between subsidiaries are reduced. [B]
Transactions costs are reduced. [C] Currency conversion costs are reduced. [D] Transaction exposure is eliminated.
4. The most useful measure of an MNC's liquidity is its [A] Cash balance. [B] Amount of securities held as investments.
[C] Political risk rating. [D] Potential access to funds.
5. A common purpose of inter-subsidiary leading or lagging strategies is to [A] Allow subsidiaries with excess funds to
provide financing to subsidiaries with deficient funds. [B] Assure that the inventory levels at subsidiaries are
maintained within tolerable ranges. [C] Change the prices a high-tax rate subsidiary charges a low-tax rate
subsidiary. [D] Measure the performance of subsidiaries according to how quickly subsidiaries remit dividend
payments to the parent.
6. MNCs may be able to lock in a lower cost from financing in a low interest rate foreign currency if they [A] Have
future cash inflows in that foreign currency. [B] Have future cash outflows in that foreign currency. [C] Have
offsetting future cash inflows and outflows in that foreign currency. [D] Have no other cash flows in that foreign
currency.
7. A firm without any exposure to foreign exchange rates would likely increase this exposure the most by [A] Borrowing
domestically. [B] Borrowing a portfolio of foreign currencies that are not highly correlated. [C] Borrowing a portfolio
of foreign currencies that are highly correlated. [D] Borrowing two foreign currencies that are negatively correlated.
8. If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase
of the currency borrowed will result in an effective financing rate that is [A] Less than the domestic interest rate. [B]
Greater than the domestic interest rate. [C] Equal to the domestic interest rate. [D] Greater than the domestic
interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate
exhibits a discount.
9. Assume that interest rates of most industrialized countries are similar to the U.S. interest rate. In the last few
months, the currencies of all industrialized countries weakened substantially against the U.S. dollar. If non-U.S. firms
based in these countries financed with U.S. dollars during this period (even when they had no receivables in dollars),
their effective financing rate would have been [A] Negative. [B] Zero. [C] Positive, but lower than the interest rate of
their respective countries. [D] Higher than the interest rate of their respective countries.
10. MNCs can use short-term foreign financing to reduce their exposure to exchange rate fluctuations. For example, if
an American-based MNC has ____ in euros, it could borrow ____, resulting in an offsetting effect. [A] Payables;
euros. [B] Receivables; euros. [C] Payables; dollars. [D] Receivables; dollars.
11. If an MNC financed with a currency different from its invoice currency, it would prefer that the loan be denominated
in a currency that [A] Exhibits a low interest rate and is expected to appreciate. [B] Exhibits a low interest rate and is
expected to depreciate. [C] Exhibits a high interest rate and is expected to depreciate. [D] Exhibits a high interest
rate and is expected to appreciate.
12. A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate risk by [A] Invoicing its
exports in U.S. dollars. [B] Requesting that any imports ordered by the firm be invoiced in U.S. dollars. [C] Invoicing
its exports in euros. [D] Requesting that any imports ordered by the firm be invoiced in the currency denominating
the bonds.
13. Kimberly Co. conducts pays for many imports denominated in Canadian dollars. It is a major exporter to France, and
invoices the exports in euros. It also has much business in U.S. dollars. It has no other international business and
does not hedge its transactions. It is about to obtain a small loan. It could reduce its exchange rate risk if its loan is
denominated in [A] U.S. dollars. [B] Euros. [C] Canadian dollars. [D] None of the above.
14. When a U.S.-based MNC has a subsidiary in Mexico that needs financing, the MNC's exposure to exchange rate risk
can be minimized if [A] The parent issues dollar-denominated equity and provides the proceeds to the subsidiary. [B]
The parent provides its retained earnings to the Mexican subsidiary. [C] The subsidiary obtains a dollar-denominated
loan from a financial institution. [D] The subsidiary obtains a peso-denominated loan from a financial institution.
15. A U.S. firm has received a large amount of cash inflows periodically in Swiss francs as a result of exporting goods to
Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by [A]
Issuing Swiss franc-denominated bonds. [B] Purchasing Swiss franc-denominated bonds. [C] Purchasing U.S. dollar-
denominated bonds. [D] Issuing U.S. dollar-denominated bonds.
1
 FINMAN 3
Final Requirement

16. A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It
also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business, and needs a
small loan. The firm could best reduce its exposure to exchange rate risk by borrowing [A] U.S. dollars. [B] Canadian
dollars. [C] Chinese yuan. [D] A combination of Canadian dollars and Chinese yuan.
17. An interest rate swap is commonly used by an issuer of fixed-rate bonds to [A] Convert to floating-rate debt. [B]
Hedge exchange rate risk. [C] Lock in the interest payments on debt. [D] Remove the default risk of its debt.
18. Economic exposure refers to [A] The exposure of a firm's international contractual transactions to exchange rate
fluctuations. [B] The exposure of a firm's local currency value to transactions between foreign exchange traders. [C]
The exposure of a firm's financial statements to exchange rate fluctuations. [D] The exposure of a firm's cash flows
to exchange rate fluctuations. [E] The exposure of a country's economy (specifically GNP) to exchange rate
fluctuations.
19. Which of the following is not a form of exposure to exchange rate fluctuations? [A] Transaction exposure. [B] Credit
exposure. [C] Economic exposure. [D] Translation exposure. [E] None of the above.
20. Walmart Co. is a U.S.-based MNC with net cash inflows of euros and net cash inflows of Swiss francs. These two
currencies are highly correlated in their movements against the dollar. Stanley Co. is a U.S.-based MNC that has the
same level of net cash flows in these currencies as Walmart Co. except that its euros represent net cash outflows.
Which firm has a higher exposure to exchange rate risk? [A] Walmart Co. [B] Stanley Co. [C] The firms have about the
same level of exposure. [D] Neither firm has any exposure.
21. Which of the following operations benefits from appreciation of the firm's local currency? [A] Borrowing in a foreign
currency and converting the funds to the local currency prior to the appreciation. [B] Receiving earnings dividends
from foreign subsidiaries. [C] Purchasing supplies locally rather than overseas. [D] Exporting to foreign countries.
22. When the dollar strengthens, the reported consolidated earnings of U.S.-based MNCs are ____ affected by
translation exposure. When the dollar weakens, the reported consolidated earnings are ____ affected. [A]
Favorably; favorably affected but by a smaller degree. [B] Favorably; favorably affected by a higher degree. [C]
Unfavorably; favorably affected. [D] Favorably; unfavorably affected.
23. If only one good is traded between two countries and the price of the good is the same in both countries when
expressed in units of the same currency, then [A] People have rational expectations. [B] Both countries have the
same monetary policy. [C] There is interest-rate parity. [D] The law of one price holds. [E] None of the above.
24. A firm produces goods for which substitute goods are produced in all countries. Appreciation of the firm's local
currency should [A] Increase local sales as it reduces foreign competition in local markets. [B] Increase the firm's
exports denominated in the local currency. [C] Increase the returns earned on the firm's foreign bank deposits. [D]
Increase the firm's cash outflow required to pay for imported supplies denominated in a foreign currency. [E] None
of the above.
25. If the nominal exchange rate is 5 French francs per U.S. dollar, then the exchange rate can also be written as [A] 5
dollars per franc. [B] 0.5 dollars per franc. [C] 0.25 dollars per franc. [D] 0.2 dollars per franc. [E] None of the above.
26. Suppose the only good traded between Mexico, the U.S., and Brazil is beef, which is produced by all three countries.
If the cost of producing a pound of beef is 5 pesos in Mexico, 2 dollars in the U.S., and 1 real in Brazil, the exchange
rates based on the law of one price would be: ____ pesos per dollar and ____ dollars per real. [A] 2.5; 2. [B] 2.5; 0.5.
[C] 0.4; 0.5. [D] 0.4; 2. [E] None of the above.
27. Why might a financial manager prefer using option contracts instead of futures or forward contracts to hedge? [A]
Futures and forwards require a premium be paid up front, while options do not. [B] Options provide protection
against adverse price movements but allow the user to profit if the price of the underlying asset moves favorably. [C]
Options create an obligation to perform, while futures and forwards do not. [D] Futures and forwards all have
greater default risk than options. [E] None of the above.
28. Which of the following is NOT a motivation for hedging? [A] Reducing the costs of financial distress. [B] Enhancing
the ability to evaluate managers. [C] Offsetting the costs of insurance. [D] Reducing the firm’s expected tax liability.
[E] None of the above.
29. Which of the following is a (are) key difference(s) a manager should note in choosing between forward and futures
contracts? [A] Exchange trading makes forward contracts more liquid. [B] Futures contracts carry standardized
terms, while forward contracts can be tailored to meet specific needs. [C] Futures contracts have greater default risk
than forward contracts. [D] Forward contracts require initial margin deposits and daily marking to market, while
futures do not. [E] None of the above.
30. You are a financial manager with Kimberly Co. and you have used a forward contract to hedge a yen 100,000,000
payment the company expects in 90 days. Your contract calls for you to deliver yen at 111.25 yen per U.S. dollar.
Suppose the spot rate at that time is 109.75 yen per U.S. dollar. Did you gain or lose on the hedge and how much?
[A] Gain, $12,285.33. [B] Loss, $12,285.33. [C] Gain, $66,666.67. [D] Loss, $66,666.67. [E] None of the above.
31. Kimberly, Inc. expects a payment from a French customer in thirty days. To hedge its currency exposure, Kimberly
should [A] Sell euros forward thirty days. [B] Buy euros forward thirty days. [C] Sell dollars forward thirty days. [D]
Do nothing as there is no foreign exchange rate exposure for a thirty day time horizon. [E] None of the above.
2
 FINMAN 3
Final Requirement

32. The average price at which a futures contract sell at the end of the trading day is called the [A] Opening price. [B]
Closing price. [C] Settlement price. [D] Lifetime price. [E] All of the above.
33. The minimum dollar amount required by an investor when taking a position in a futures contract is called the [A]
Initial margin. [B] Maintenance margin. [C] Margin account. [D] None of the above. [E] All of the above.
34. A call option on interest rates is called an [A] Interest rate collar. [B] Interest rate floor. [C] Interest rate cap. [D]
Interest rate swap. [E] None of the above.
35. The option that gives the owner the right to buy an asset at a fixed price at or before a certain date is called a [A] Put
option. [B] Call option. [C] Parity option. [D] Swaption. [E] None of the above.
36. An investor who purchases a put option [A] Has the right to buy a given stock at a specified price during a designated
time period. [B] Has the right to sell a given stock at a specified price during a designated time period. [C] Has the
obligation to buy a given stock at a specified price during a designated time period. [D] Has the obligation to sell a
given stock at a specified price during a designated time period. [E] None of the above.
37. The price at which the owner of an option can buy or sell the underlying asset is called the [A] Market price. [B]
Liquidation value. [C] Strike price. [D] Intrinsic value.
38. The cash price is also called the [A] Delivery price. [B] Settlement price. [C] Spot price. [D] Bid price.
39. When a call option’s strike price is less than the current price of the underlying asset, the call is said to be [A] At the
money. [B] In the money. [C] Out of the money. [D] Worthless.
40. One of the main reasons for the name “derivatives” is that [A] The value of the underlying instrument derives its
value from the derivative instrument. [B] The instruments derive their value from the value of other instruments. [C]
Calculus is required to convert their market price to a dollar price. [D] None of the above.
41. If you purchase the right to sell a share of IBM stock for a set price for a fixed period of time, then you have [A] Sold
a call option. [B] Purchased a call option. [C] Purchased a put option. [D] Sold a put option.
42. Which of the following will increase in price as the value of the underlying asset decreases in price, from the option
holder’s perspective? [A] Call option. [B] Put option. [C] A long future position. [D] None of the above.
43. Which of the following is issued by the firm that grants investors the right to buy shares of stock at a fixed price, for
a given period of time? [A] Stock futures. [B] Put options. [C] Warrants. [D] None of the above.
44. Futures trades occur in an area called a(n) [A] Arena. [B] Ring. [C] Pit. [D] Box.
45. The money a futures buyer puts down is called all of the following EXCEPT [A] Premium. [B] Good faith deposit. [C]
Margin. [D] Performance bond.
46. People who seek to reduce risk using futures contracts are [A] Speculators. [B] Investors. [C] Gamblers. [D] Hedgers.
47. Someone who routinely maintains a futures position overnight is likely to be any of the following EXCEPT [A] Scalper.
[B] Position trader. [C] Speculator. [D] Hedger.
48. Hedgers in the futures market [A] Often seek to leverage their position to get extra expected return. [B] Primarily sell
risk to speculators. [C] Trim their holdings to the highest expected returns securities. [D] Diversify their investments
to maximize expected return while reducing risk.
49. Options are _____; futures are _____. [A] Rights, promises. [B] Securities, contracts. [C] Paid for, margined. [D] All of
the above.
50. A(n) ____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at
a specified price and date. [A] Option contract. [B] Brokerage contract. [C] Financial futures contract. [D] Margin call.
51. ____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices. [A]
Hedgers. [B] Day traders. [C] Position traders. [D] None of the above.
52. The use of financial leverage [A] Magnifies the positive returns of futures contracts. [B] Magnifies losses of futures
contracts. [C] Both A and B. [D] None of the above.
53. According to the text, when a financial institution sells futures contracts on securities in order to hedge against a
change in interest rates, this is referred to as [A] A long hedge. [B] A short hedge. [C] A closed out position. [D] Basis
trading.
54. According to the text, a futures contract on one financial instrument to protect a position in a different financial
instrument is known as [A] Cross-hedging. [B] Ratio hedging. [C] Basis hedging. [D] Liquid hedging.
55. The net gain or loss on a futures contract for a stock index that is not closed out is based on the difference between
the futures price when the initial position was created and the futures price at [A] The settlement date. [B] The date
at which the futures price reaches its maximum. [C] The date at which the futures price reaches its minimum. [D]
The date three months beyond the date when the initial position was taken.
56. The risk that the position being hedged by a futures position is not affected in the same manner as the instrument
underlying the financial futures contract, is referred to as [A] Market risk. [B] Liquidity risk. [C] Default risk. [D] Basis
risk.
57. Speculators in futures contracts that normally close out their futures positions on the same day that the positions
were initiated are referred to as [A] Day traders. [B] Hedgers. [C] Closed-end traders. [D] Position traders.
58. Which of the following statements is most correct? [A] Financial futures contracts on stock indexes are referred to as
interest rate futures. [B] Financial futures contracts are rarely sold over the counter. [C] Purchasers of financial
3
 FINMAN 3
Final Requirement

futures contracts usually know who the sellers are, and vice versa. [D] The futures price is mainly a function of the
prevailing price of the underlying security plus an expected adjustment in that price by the settlement date.
59. Which of the following statements is most correct? [A] Purchasers of currency futures contracts are required to hold
the contract until the settlement date and accept delivery of the foreign currency at that time. [B] Futures exchanges
take buy or sell positions on futures contracts. [C] Fundamental forecasting has been found to be consistently
superior to the other forecasting techniques. [D] The pegged exchange rate system is no longer used by any
countries. [E] A speculator who expects a foreign currency to appreciate could purchase the currency forward and,
when received, sell it in the spot market.
60. Which of the following statements is incorrect regarding organized futures exchanges? [A] Organized exchanges
establish and enforce rules for the trading of financial futures contracts. [B] Organized exchanges serve as market
makers for futures contracts by taking positions in futures. [C] Organized exchanges clear, settle, and guarantee all
transactions that occur on their exchanges. [D] The operations of financial futures exchanges are regulated by the
Commodity Futures Trading Commission (CFTC). [E] All of the above are correct.
61. At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it. [A]
Higher than. [B] Lower than. [C] The same as. [D] None of the above.
62. Which of the following is most likely to provide currency forward contracts to their customers? [A] Commercial
banks. [B] International mutual funds. [C] Brokerage firms. [D] Insurance companies.
63. A system whereby exchange rates are market determined without boundaries but subject to government
intervention is called [A] A dirty float. [B] A free float. [C] The gold standard. [D] The Bretton Woods era.
64. If the demand for British pounds ____, the pound will ____, other things being equal. [A] Increases; appreciate. [B]
Decreases; appreciate. [C] Increases; depreciate. [D] B and C.
65. If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a
____ position in dollars. [A] Short; short. [B] Long; short. [C] Short; long. [D] Long; long.
66. Currency futures contracts differ from forward contracts in that they [A] Are an obligation. [B] Are not an obligation.
[C] Are standardized. [D] Can specify any amount and maturity date.
67. If a firm planning to hedge receivables is certain of the future direction a spot rate will move, and requires a tailor-
made hedge in terms of amount and maturity date, it should use a [A] Call options contract traded on an exchange.
[B] Futures contract traded on an exchange. [C] Forward contract. [D] Put options contract traded on an exchange.
68. ____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to
accommodate customers. [A] Pension funds. [B] International mutual funds. [C] Insurance companies. [D]
Commercial banks. [E] None of the above.
69. In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.65. The Australian dollar (A$) is
quoted for $0.60. What is the value of the Australian dollar in British pounds? [A] A$2.75. [B] A$0.36. [C] £2.75. [D]
£0.36. [E] None of the above.
70. Which of the following statements is most correct? [A] Financial institutions rarely use the forward market. [B] The
indirect exchange rate specifies the value of the currency in U.S. dollars. [C] The forward rate premium is dictated by
the national income differential of the two currencies. [D] The potential benefits from using foreign exchange
derivatives are independent of the expected exchange rate movements. [E] The primary advantage of currency
options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a
particular currency at a specified price within a given period.
71. Which of the following statement is correct? Statement 1. Centralized cash management is more complicated when
the MNC uses multiple currencies. Statement 2. In general, exchange rate fluctuations cause cash flows to be more
volatile and uncertain. Statement 3. True Since each subsidiary may be more concerned with its own operations
than with the overall operations of the MNC, a centralized management group may need to monitor the parent-
subsidiary and intersubsidiary cash flows. [A] Statement 1 only. [B] Statement 2 only. [C] Statement 3 only. [D] All of
the above.
72. Which of the following statements is correct? Statement 1. A currency portfolio's variability depends on the
standard deviations and paired correlations of effective yields of the individual currencies within the portfolio.
Statement 2. An MNC has determined that the degree of appreciation for the Singapore dollar that equates the
foreign and domestic yield is 2%. If the Singapore dollar appreciates by less than 2%, the investment in Singapore
will be more attractive. Statement 3. When investing in a portfolio of foreign currencies, the currencies represented
within the portfolio are ideally highly positively correlated if the goal is to reduce exchange rate risk. [A] Statement 1
only. [B] Statement 2 only. [C] Statement 3 only. [D] All of the above.
73. ____ may complicate cash flow optimization. [A] The use of a zero-balance account. [B] Government restrictions. [C]
Leading and lagging. [D] None of the above.
74. To ____, MNCs can use preauthorized payments. [A] Accelerate cash inflows. [B] Minimize currency conversion
costs. [C] Manage blocked funds. [D] Manage intersubsidiary cash transfers.
75. MNCs often use ____ to invest excess cash while retaining liquidity. [A] International bond markets. [B] International
equity markets. [C] International money markets. [D] The market for acquisitions.
4
 FINMAN 3
Final Requirement

76. Do you want that your previous assignments will be presented and complied with in this manner? [A] Yes. [B] No.