MULTINATIONAL FINANCIAL MANAGEMENT

Question 1

is a firm that operates in an integrated fashion in a number of countries.

Answer 1

Multinational (Global) Corporation

Question 2

is the framework within which exchange rates are determined.

It is also the blueprint for international trade and capital flows.

Answer 2

The international monetary system

Question 2

is the number of units of a given currency that can be purchased for one unit of another currency.

Answer 2

Exchange Rate

Question 3

is the quoted price for a unit of foreign currency to be delivered “on the spot,” or within a very short period of time.

Answer 3

Spot Exchange Rate

Question 4

is the quoted price for a unit of foreign currency to be delivered at a specified date in the future.

Answer 4

Forward Exchange Rate

Question 5

is set by the government and allowed to fluctuate only slightly (if at all) around the desired rate, called the par value.

Answer 5

Fixed Exchange Rate

Question 6

is one that is not regulated by the government, so supply and demand in the market determine the currency’s value.

Answer 6

Floating or Flexible Exchange Rate

Question 7

is the technical term referring to the decrease or increase in the par value of a currency whose value is fixed. This decision is made by the government, usually without warning.

Answer 7

Devaluation or Revaluation of a currency

Question 8

refers to a decrease or increase in the foreign exchange value of a floating currency. These changes are caused by market forces rather than by governments.

Answer 8

Depreciation or Appreciation of a currency

Question 9

is one that is expected to depreciate against most other currencies or else is being artificially maintained at an unrealistically high fixed rate by the government through open market purchases.

Answer 9

Soft or Weak Currency

Question 10

is expected to appreciate against most other currencies or else is being artificially maintained by the government at an unrealistically low fixed rate.

Answer 10

Hard or Strong Currency

Question 11

occurs when the exchange rate is determined by supply and demand for the currency.

Answer 11

Freely-Floating Regime

Floating rate regime:

Question 12

most extreme position for the country is to have no local currency of its own.

Answer 12

No local currency

Fixed exchange rate regimes:

Question 13

occurs when there is significant government intervention to control the exchange rate via manipulation of the currency’s supply and demand.

Answer 13

Managed-Float Regime

Floating rate regime:

Question 14

occurs when a country has its own currency but commits to exchange it for a specified foreign money unit at a fixed exchange rate and legislates domestic currency restrictions, unless it has the foreign currency reserves to cover requested exchanges.

Answer 14

Currency Board Arrangement

Fixed exchange rate regimes:

Question 15

occurs when a country locks its currency to a specific currency or basket of currencies at a fixed exchange rate. The exchange rate is allowed to vary only within 1 percent of the target rate.

Answer 15

Fixed Peg Arrangement

Fixed exchange rate regimes:

Question 15

is a foreign exchange rate quotation that represents the number of American dollars that can be bought with one unit of local currency.

Answer 15

American Terms

Foreign Exchange rate Quoations

Question 16

is a foreign exchange rate quotation that represents the units of local currency that can be bought with one U.S. dollar. “European” is
intended as a generic term that applies globally.

Answer 16

European Terms

Foreign Exchange rate Quoations

Question 17

is the home currency price of one unit of the foreign currency.

Answer 17

Direct Quotation

Foreign Exchange rate Quoations

Question 18

is the foreign currency price of one unit of the home currency.

Answer 18

Indirect Quotation

Foreign Exchange rate Quoations

Question 19

is the exchange rate between any two currencies. It involves two
foreign currencies and is derived from their rates against a third currency

Answer 19

Cross Rate

Foreign Exchange rate Quoations

Question 19

is the effective exchange rate of a foreign currency for delivery on (approximately) the current day or “on the spot”.

Answer 19

Spot Rate

Question 20

is an agreed-upon price at which two currencies will be exchanged at some future date.

Answer 20

Forward Rate

Question 21

is the situation when the spot rate is less than the forward rate.

Answer 21

Discount on Forward Rate

Question 22

is the situation when the spot rate is greater than the forward rate.

Answer 22

Premium on Forward Rate

Question 23

It specifies that investors should expect to earn the same return in all countries after adjusting for risk. A principle that holds the relationship between spot and forward exchange rates and interest rates.

Answer 23

Interest Rate Parity

Question 24

is the relationship in which the same products cost roughly the same amount in different countries after taking into account the exchange rate.

Answer 24

Purchasing Power Parity (PPP) | Sometimes referred to as the law of one price

Question 25

Countries with higher inflation generally have higher interest rates to compensate lenders for the declining purchasing power of money.

Answer 25

Higher Inflation:

Question 26

Countries with lower inflation typically have lower interest rates, as there is less need to compensate for depreciation in purchasing power.

Answer 26

Lower Inflation:

Question 26

Currencies of countries with higher inflation than the U.S. will likely depreciate over time against the dollar.

Answer 26

Higher Inflation Rates:

Question 27

Currencies of countries with lower inflation than the U.S. tend to appreciate over time against the dollar.

Answer 27

Lower Inflation Rates:

Question 28

Certificates representing ownership of foreign stock held in trust.

Answer 28

American Depository Receipts (ADRs)

Question 28

are known as **portfolio investments**, and they are distinguished from direct investments in physical assets by U.S. corporations.

Answer 28

Security investments

Question 29

is a floating-rate bank loans, available in most major trading currencies, that are tied to LIBOR.

Answer 29

1. Eurocredits | 3 Major Types ## Footnote International Credit Markets

Question 30

is an international bond underwritten by an international syndicate of banks and sold to investors in countries other than the one in whose money unit the bond is denominated.

Answer 30

Eurobond | 3 Major Types ## Footnote International Credit Markets

Question 30

is a U.S. dollar deposited in a bank outside the United States.

Answer 30

Eurodollar | 3 Major Types ## Footnote International Credit Markets

Question 31

is the interest rate offered by the largest and strongest London-based banks on large deposits.

Answer 31

LIBOR

Question 32

is a type of international bond issued in the domestic capital market of the country in whose currency the bond is denominated, and underwritten by investment banks from the same country.

Answer 32

Foreign Bond