Seminar 4 MCQs

Question 1

The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an:

A) Affiliated party.
B) Unaffiliated unknown.
C) Unaffiliated known.
D) Any of the above.

Answer 1

Unaffiliated unknown.

Question 2

Which of the following is NOT a financial instrument that may be included in an international trade transaction?

A) Order bill of lading.
B) Letter of credit.
C) Sight draft.
D) Federal funds transaction.

Answer 2

Federal funds transaction.

Question 3

The risk of non completion is most important:

A) When the relationship is between countries whose currencies are considered strong.
B) When the international trade is recurrent in nature.
C) When there is a sustained relationship between the buyer and seller.
D) With an outstanding agreement for recurring shipments.

Answer 3

When the relationship is between countries whose currencies are considered strong.

Question 4

The risk of default on the part of the importer-risk of non-completion- is present as soon as:

A) A price quote is given.
B) The export contract is signed.
C) Goods are received.
D) The financing period begins.

Answer 4

The financing period begins.

Question 5

Which of the following is NOT true regarding a letter of credit?

A) The importer’s bank cuts a sales contract based on its assessment of the creditworthiness of the importer.
B) The importer applies to its local bank for the issuance of a letter of credit.
C) The exporter applies to its local bank for the issuance of a letter of credit.
D) The importer and exporter agree on a transaction.

Answer 5

The exporter applies to its local bank for the issuance of a letter of credit.

Question 6

A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of _________.

A) Exporter’s; blocked foreign exchange.
B) Exporter’s; portfolio risk.
C) Importer’s; blocked foreign exchange.
D) None of the above.

Answer 6

Exporter’s; blocked foreign exchange.

Question 7

The ________ is the instrument normally used to actually effect payment in international commerce.

A) Bill of lading.
B) Bill of exchange.
C) Letter of credit.
D) Banker’s acceptance.

Answer 7

Bill of exchange.

Question 8

Which of the following purposes is NOT served by the bill of lading?

A) It acts as a document of title.
B) It acts as a receipt.
C) It acts as a contract.
D) It acts as all of the above.

Answer 8

It acts as all of the above.

Question 9

In a typical trade transaction, the order of activity would be which of the following?

A) The foreign buyer places an order; the manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; the domestic manufacturer ships to the buyer; the buyer’s bank submits payment to the manufacturer’s bank.
B) The foreign buyer places an order; the domestic manufacturer ships to the buyer; the manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; the buyer’s bank submits payment to the manufacturer’s bank.
C) The domestic manufacturer ships to the buyer; the buyer’s bank presents a draft and documents to the buyer’s bank for acceptance; the foreign buyer places an order; the buyer’s bank submits payment to the manufacturer’s bank.
D) The domestic manufacturer ships to the buyer; the buyer’s bank submits payment to the manufacturer’s bank; the foreign buyer places an order; the domestic manufacturer ships to the buyer; the manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance.

Answer 9

B. The foreign buyer places an order; the domestic manufacturer ships to the buyer; the manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; the buyer’s bank submits payment to the manufacturer’s bank.

Question 10

The Export-Import Bank is an independent agency of the US government established in 1934 to:

A) Import agricultural products during the recession.
B) Facilitate and stimulate foreign trade of the US.
C) Ship money abroad.
D) None of the above.

Answer 10

Facilitate and stimulate foreign trade of the US.

Question 11

The Eximbank does all of the following EXCEPT:

A) Finances the cost involved in the preparation of feasibility studies for non-US clients.
B) Supplies counselling for exporters in finding financing for US goods.
C) Guarantees lease transactions.
D) Provides letters of credit for US exporters.

Answer 11

Provides letters of credit for US exporters.

Question 12

Export receivables are normally sold at discount. The size of the discount depends on the following factors EXCEPT:

A) Cost of credit insurance.
B) Collection risk.
C) Overdraft fees.
D) Size of financing and services fees.

Answer 12

Overdraft fees.

Question 13

Financial derivatives are powerful tools that can be used by management for purposes of:

A) Speculation.
B) Hedging.
C) Human resource management.
D) A and B above.

Answer 13

A and B above.

Question 14

A foreign currency _________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

A) Swap.
B) Futures.
C) Option.
D) Forward.

Answer 14

Futures.

Question 15

Which of the following of NOT a contract specification for currency futures trading on an organised exchange?

A) Maturity date.
B) Size of the contract.
C) Last trading day.
D) All of the above are specified.

Answer 15

All of the above are specified.

Question 16

A speculator in the futures market wishing to lock in price at which they could _______ a foreign currency will ________ a futures contract.

A) Buy; sell.
B) Buy; buy.
C) Sell; buy.
D) None of the above.

Answer 16

Buy; buy.

Question 17

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

A) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year.
B) A futures contracts is a standardised amount per currency whereas the forward contact is for any size desired.
C) Futures contracts trade on organised exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.
D) All of the above are true.

Answer 17

All of the above are true.

Question 18

Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might change because of changes in exchange rates.

A) Operating; transaction.
B) Transaction; operating.
C) Operating; translation.
D) None of the above.

Answer 18

Transaction; operating.

Question 19

Losses from _______ Exposure generally reduce taxable income in the year they are realised. ________ exposure losses are not cash losses and therefore, are not tax deductible.

A) Accounting; operating.
B) Transaction; operating.
C) Transaction; translation.
D) Accounting; transaction.

Answer 19

Transaction; translation.

Question 20

Which of the following is NOT cited as a good reason for hedging currency exposures?

A) Management is in a better position is assess firm currency risk than individual investors.
B) Reduced risk of future cash flows is a good planning tool.
C) Currency risk management increases the expected cash flows to the firm.
D) Reduced risk of future cash flows reduces the probability that the firm may not meet require cash flows.

Answer 20

Currency risk management increases the expected cash flows to the firm.

Question 21

Which of the following is cited as a good reason for NOT hedging currency exposures?

A) Currency risk management through hedging does not increase expected cash flows.
B) Shareholders are more capable of diversifying risk than management.
C) Hedging activities are often of greater benefit to management than to shareholders.
D) All of the above are cited as reasons NOT to hedge.

Answer 21

All of the above are cited as reasons NOT to hedge.

Question 22

The stages in the life of a transaction exposure can be broken into three distinct time periods. The first time period is the time between quoting a price and reaching an actual sale agreement or contract. The next time period is the time lag between taking an order and actually filling or delivering it. Finally, the time it takes to get paid after delivering the product, In order, these stages of transaction exposure may be identified as:

A) Quotation, billing, and backlog exposure.
B) Backlog, quotation, and billing exposure.
C) Billing, backlog, and quotation exposure.
D) Quotation, backlog, and billing exposure.

Answer 22

Quotation, backlog, and billing exposure.

Question 23

_________ is NOT a commonly used contractual hedge against foreign exchange transaction exposure.

A) Options market hedge.
B) Forward market hedge.
C) Money market hedge.
D) All of the above are contractual hedges.

Answer 23

All of the above are contractual hedges.

Question 24

Translation exposure measures:

A) The potential for an increase or decrease in the parent company’s net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations.
B) An unexpected change in exchange rates impact on short run expected cash flows.
C) Changes in the value of outstanding financial obligations incurred prior to a change in exchange rates.
D) None of the above.

Answer 24

The potential for an increase or decrease in the parent company’s net worth and reported net income caused by a change in exchange rates since the last consolidation of international operations.

Question 25

Generally speaking, translation methods by country define the translation process as a function of what two factors? A) Size; location. B) Foreign subsidiary independence; a firm's functional currency. C) A firm's functional currency; location. D) Location; foreign subsidiary independence.

Answer 25

Foreign subsidiary independence; a firm's functional currency.

Question 26

The two basic methods for the translation of foreign subsidiary financial statements are the _______ method and the ________ method. A) Current rate; temporal. B) Current rate; future rate. C) Temporal; proper timing. D) Monetary; current rate.

Answer 26

Current rate; temporal.

Question 27

The basic advantage of the _______ method of foreign currency translation is that foreign non monetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the _______ method is that the gain or loss from translation does not pass through the income statement. A) Temporal; current rate. B) Temporal; monetary. C) Current rate; temporal. D) Monetary; current rate.

Answer 27

Temporal; current rate.

Question 28

If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method, then: A) The net exposed position is called monetary balance. B) The change is value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction. C) Both A and B are true. D) None of the above.

Answer 28

Both A and B are true.

Question 29

If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency, this will ______ exposure but each subsidiary would have _______ exposure. A) Eliminate translation; transaction. B) Eliminate transaction; translation. C) Maximise transaction; no translation. D) Maximise translation; no transaction.

Answer 29

Eliminate translation; transaction.

Question 30

What type of international risk exposure measures the change in present value of a firm resulting from changes in future operating cash flows caused by ant unexpected change in exchange rates? A) Accounting exposure. B) Operating exposure. C) Transaction exposure. D) Translation exposure.

Answer 30

Operating exposure.

Question 31

Which of the following is NOT an example of a financial cash flow? A) Payment for goods and services. B) Intrafirm principal payments. C) Parent invested equity capital. D) Interest on intrafirm lending.

Answer 31

Payment for goods and services.

Question 32

________ exposure is far more important for the long-run health of a business than changes caused by _______ or ________ exposure. A) Transaction; operating; translation. B) Operating; translation; transaction. C) Accounting; translation; transaction. D) Translation; operating; transaction.

Answer 32

Operating; translation; transaction.

Question 33

Recently the British Pound suffered an unexpected depreciation in value. Which of the following actions being considered by Coventry Furniture of London, a purely domestic furniture manufacturer and retailer, would be considered a highly unlikely response to the depreciation of the pound? A) Coventry might try to lower domestic prices because competing imports are now priced higher in England. B) Coventry might try to raise domestic prices because competing imports are not priced higher in England. C) Coventry might choose to maintain its domestic sales prices constant in pound terms. D) None of the above.

Answer 33

Coventry might try to lower domestic prices because competing imports are now priced higher in England.

Question 34

For a firm that competes internationally to sell its products, a depreciation of its domestic currency relative to markets where the firm exports goods, should eventually result in _______ sales at home and _______ sales abroad, other things equal. A) Fewer; fewer. B) Greater; fewer. C) Greater; greater. D) Fewer; greater.

Answer 34

Greater; greater.

Question 35

When considering the phases of adjustment and response to operating exposure in the LONG RUN, price changes tend to be _______ and volume changes tend to be _______. A) Completely flexible; completely flexible. B) Fixed/ contracted; completely flexible. C) Fixed/ contracted; contracted. D) Completely flexible; contracted.

Answer 35

Completely flexible; completely fixable.

Question 36

Which of the following is NOT an example of diversifying operations? A) Sourcing raw materials in more than one country. B) Raising funds in more than one country. C) Diversifying location of operations. D) Diversifying sales.

Answer 36

Raising funds in more than one country.

Question 37

Which of the following is NOT an example of diversification in financing? A) Diversifying sales. B) Raising funds in more than one market. C) Raising funds in more than one country. D) All of the above qualify.

Answer 37

Diversifying sales.

Question 38

When disequilibria in international markets occur, management can take advantage by: A) Recognising disequilibria faster than purely domestic competitors. B) Doing nothing if they are already diversified and able to realise beneficial portfolio effects. C) Shifting operational of financing activities to take advantage of the disequilibria. D) All of the above.

Answer 38

All of the above.

Question 39

Which of following is NOT an example of a form of political risk that might be avoided or reduced by foreign exchange risk management? A) Unfavourable legal changes. B) Destruction of raw materials through natural disaster. C) War. D) Expropriation of assets.

Answer 39

Destruction of raw materials through natural disaster.

Question 40

Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency? A) Lend money in the foreign currency in question. B) Rely on the Federal Reserve Board to enact monetary policy favourable to your exposure risk. C) Borrow money in the foreign currency in question. D) None of the above.

Answer 40

Lend money in the foreign currency in question.