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A U.S.-based importer, Zarb Inc., makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar. The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk. Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs. If the spot rate in 90 days is actually 1.638 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?


A) $396
B) $243
C) $0
D) $243.
E) $638

F) A) and B)
G) A) and E)

Correct Answer

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Tashakori Trucking, a U.S.-based company, is considering expanding its operations into a foreign country. The required investment at Time = 0 is $10 million. The firm forecasts total cash inflows of $4 million per year for 2 years, $6 million for the next 2 years, and then a possible terminal value of $8 million. In addition, due to political risk factors, Tashakori believes that there is a 50% chance that the gross terminal value will be only $2 million and a 50% chance that it will be $8 million. However, the government of the host country will block 20% of all cash flows. Thus, cash flows that can be repatriated are 80% of those projected. Tashakori's cost of capital is 15%, but it adds one percentage point to all foreign projects to account for exchange rate risk. Under these conditions, what is the project's NPV?


A) $1.01 million
B) $2.77 million
C) $3.09 million
D) $5.96 million
E) $7.39 million

F) B) and E)
G) B) and D)

Correct Answer

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A foreign currency will, on average, depreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

A) True
B) False

Correct Answer

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Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?


A) 155.5 yen
B) 144.0 yen
C) 133.5 yen
D) 78.0 yen
E) 72.0 yen

F) B) and D)
G) B) and C)

Correct Answer

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When the value of the U.S. dollar appreciates against another country's currency, we may purchase more of the foreign currency with a dollar.

A) True
B) False

Correct Answer

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Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

A) True
B) False

Correct Answer

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The cash flows relevant for a foreign investment should, from the parent company's perspective, include the financial cash flows that the subsidiary can legally send back to the parent company plus the cash flows that must remain in the foreign country.

A) True
B) False

Correct Answer

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Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

A) True
B) False

Correct Answer

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Which of the following is NOT a reason why companies move into international operations?


A) to develop new markets for the firm's products.
B) to better serve their primary customers.
C) because important raw materials are located abroad.
D) to increase their inventory levels.
E) to take advantage of lower production costs in regions where labor costs are relatively low.

F) A) and B)
G) A) and E)

Correct Answer

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