1. Which of the following statements about Multinational financial management is
ID: 2718289 • Letter: 1
Question
1. Which of the following statements about Multinational financial management is FALSE:
a. The effects of changing currency values must be included in financial analyses.
b. Legal and economic differences must be considered in financial decisions.
c. Political risk must be included from multinational corporate financial analyses.
d. It is illegal and discriminatory to consider cultural differences when considering firm goals and employee management.
2. ______________ occurs if a firm has assets or liabilities in foreign countries.
a) Translation Exposure
b) Transaction Exposure
c) Economic Exposure
d) Political Exposure
3. _______________ says that the ratio of forward exchange rates to spot exchange rates must also equal the ratio of nominal risk free rates.
a) Fisher Effect
b) Interest Rate Parity
c) Purchasing Power Parity
d) Inflation Parity
4. Which statement is FALSE?
a The United States has a large current account deficit in its balance of payments
b A Eurodollar is a US dollar deposited in a bank outside of the US
c American Depository Receipts represent ownership of stock of foreign companies
d An Interest Rate Swap is when banks lend to each other
5. In the currency markets, 1 U.S. dollar = 0.6 British pound and 1 U.S. dollar equals 1.1 euros. Wolverine Cola produces cherry cola in England at a cost of 0.55 British pound per unit. The product is sold in France for 1.25 euros. In terms of U.S. dollars, how much profit is Wolverine realizing on each unit sold?
a. $0.78 b. $0.46 c. $0.35 d. $0.11
Explanation / Answer
Answer for 1) It is option d). It is absolutely necessary and totally legal to consider the cultural differences, in today's multicultural world, while considering a firm's goals. Especially when Multinationals operate in various countries around the world, it becomes necessary to consider the cultural differences.
Answer for 2) "POLITICAL RISK" occurs if the firm has assets and liabilities in foreign counties. This is because the governments are different in foreign countries and hence the political risk arises out of different political parties, and policitcal issues previaling in that foreign country.
Answer for 3) The "INTEREST RATE PARITY" theory says that the ratio of forward exchange rates to spot exchange rates must also equal the ratio of nomnal risk free rates.
Answer for 4) The correct option is option d). An Interest Rate Swap is not the one in which banks lends to each other but it is a derivative instrument in which the Banks only agree to swap the interest rate cashflows to hedge their exposures in respective currencies where they have aseets held either in the form of loans and advances or investments or any other assets.
Answer for 5) If the Wolverine Cola company is incurring a manufacturing cost of 0.55 British Pounds, it is equivalent to 0.55 * (1/0.6) ( I am converting the British Pound costing into Dollar Costing using US Dollar British Pound Exchange Rate). It comes to USD 0.9167
The company sell the product for 1.25 Euro in France. It is equivalent to 1.25 * (1/1.1) (Again converting the Euro Sales amount to US dollar). It come to USD 1.1363
Thus the profit is USD 1.1363 - USD 0.9167 = USD 0.2196 per unit sold for the Wolverine Cola company.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.