13 International Finance

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Question 1 - ICMA 13.P2.036 - International Finance
Suppose that Swiss wrist watches priced in Swiss Francs become very popular among U.S. consumers while at the
same time Britain experiences relatively higher inflation than the United States. Assuming that all other economic
parameters remain constant, which one of the following statements is most accurate?
A. The U.S. dollar will appreciate relative to the Swiss Franc and depreciate relative to the British pound.
B. The U.S. dollar will depreciate relative to the Swiss Franc and appreciate relative to the British pound.
C. The U.S. dollar will appreciate relative to both the Swiss Franc and the British pound.
D. The U.S. dollar will depreciate relative to both the Swiss Franc and the British pound.
Country R's currency would tend to depreciate relative to Country T's currency when
A. Country R has a rate of inflation that is lower than the rate of inflation in Country T.
B. Country T has a rapid rate of growth in income that causes imports to lag behind exports.
C. Country R has real interest rates that are lower than real interest rates in Country T.
D. Country R switches to a more restrictive monetary policy.
Question 3 - CMA 1287 1.28 - International Finance
If the value of the U.S. dollar in foreign currency markets changes from $1 = 1.15 Swiss francs to $1 = 0.95 Swiss
francs,
A. U.S. exports to Switzerland should decrease.

B. Swiss imported products in the U.S. will become more expensive.
C. U.S. tourists in Switzerland will find their dollars will buy more Swiss products.
D. The Swiss franc has depreciated against the dollar.
Which of the following economic policies would not tend to correct a balance of payments deficit in the U.S.?
A. More effective use of monetary and fiscal policies to reduce inflation.

B. A reduction in the economic aid and humanitarian aid provided to other nations.
C. Increase value of U.S. currency in relation to foreign currencies.
D. Increase productivity in the manufacturing of U.S. exports.
The purchasing-power parity exchange rate
A. results in an undervalued currency of countries that are net importers.

B. holds constant the relative price levels in two countries when measured in a common currency.
C. is a fixed (pegged) exchange rate.
D. is always equal to the market exchange rate.
(c) HOCK international, page 1

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D. is always equal to the market exchange rate.
Given a spot rate of $1.8655 and a 90-day forward rate of $1.8723, the pound sterling in the forward market is:
A. Being quoted at a discount.

B. Being quoted at a premium.
C. Undervalued.
D. Overvalued.
If the U.S. dollar declines in value relative to the currencies of many of the U.S. trading partners, the likely result is that
A. U.S. imports will tend to increase.

B. The U.S. balance of payments deficit will become worse.
C. Foreign currencies will depreciate against the dollar.
D. U.S. exports will tend to increase.
Question 8 - CIA 592 IV.70 - International Finance
A short-term speculative rise in the world-wide value of domestic currency could be moderated by a central bank
decision to
A. Buy domestic currency in the foreign exchange market.

B. Increase domestic interest rates.
C. Sell foreign currency in the foreign exchange market.
D. Sell domestic currency in the foreign exchange market.
Given a spot exchange rate for the U.S. dollar against the pound sterling of 1.4925 and a 90-day forward rate of
1.4775:
A. The pound sterling is selling at a premium against the dollar and is overvalued in the forward market.
B. The pound sterling is selling at a discount against the dollar and is undervalued in the forward market.
C. The forward pound sterling is selling at a discount against the dollar in the forward market.
D. The forward pound sterling is selling at a premium against the dollar in the forward market.
Country A's currency would tend to appreciate relative to Country B's currency when
A. Country B has real interest rates that are greater than real interest rates in Country A.
B. Country A has a slower rate of growth in (c) HOCK
income thatinternational, page to
causes its imports 2 lag behind its exports.
C. Country B switches to a more restrictive monetary policy.
D. Country A has a higher rate of inflation than Country B.
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A. Country B has real interest rates that are greater than real interest rates in Country A.
B. Country A has a slower rate of growth in income that causes its imports to lag behind its exports.
C. Country B switches to a more restrictive monetary policy.
D. Country A has a higher rate of inflation than Country B.
Countries sometimes privatize their state-owned enterprises. U.S. firms considering investing in these formerly
state-owned enterprises must consider many factors prior to making investments in these countries. Which one of the
following is of least importance to U.S. investors when considering the acquisition of one of these former state-owned
enterprises?
A. Political stability of the country.

B. Stability of the foreign currency.
C. Transfer of technology back to the U.S.
D. Restrictions on capital flows out of the foreign country.
In foreign currency markets, the phrase "managed float" refers to the
A. Necessity of maintaining a highly liquid asset, such as gold, to conduct international trade.
B. Fact that actual exchange rates are set by private business people in trading nations.
C. Discretionary buying and selling of currencies by central banks.
D. Tendency for most currencies to depreciate in value.
When the U.S. dollar is expected to rise in value against foreign currencies, a U.S. company with foreign currency
denominated receivables and payables should
A. Slow down collections and speed up payments.

B. Speed up collections and slow down payments.
C. Slow down collections and slow down payments.
D. Speed up collections and speed up payments.
The value of the U.S. dollar in relation to other foreign currencies is
A. Determined by the forces of supply and demand on the foreign exchange markets.
B. Set along with the value of other currencies held by the International Monetary Fund.
C. Set by the U.S. government in consultation with other foreign governments.
D. Determined directly by the price of gold because the value of the U.S. dollar is tied to the price of gold.
Question 15 - CMA 695 1.24 - International(c) HOCK international, page 3

Finance
Assuming exchange rates are allowed to fluctuate freely, which one of the following factors would likely cause a
nation's currency to appreciate on the foreign exchange market?
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Assuming exchange rates are allowed to fluctuate freely, which one of the following factors would likely cause a
nation's currency to appreciate on the foreign exchange market?
A. A high rate of inflation relative to other countries.

B. Domestic real interest rates that are lower than real interest rates abroad.
C. A relatively rapid rate of growth in income that stimulates imports.
D. A slower rate of growth in income than in other countries, which causes imports to lag behind exports.
One U.S. dollar is being quoted at 120 Japanese yen on the spot market and at 123 Japanese yen on the 90-day
forward market; hence, the annual effect in the forward market is that the
A. U.S. dollar is at a premium of 10%.

B. U.S. dollar is at a premium of 2.5%.
C. U.S. dollar is at a premium of 0.025%.
D. U.S. dollar is at a discount of 10%.
Under a floating exchange rate system, which one of the following should result in a depreciation of the British pound
sterling?
A. U.S. inflation declines relative to British inflation.

B. British interest rates rise relative to the U.S. rates.
C. Decrease in outflows of British capital to the U.S.
D. U.S. income levels improve relative to the British.
The dominant reason countries devalue their currencies is to:
A. Discourage exports without having to impose controls.

B. Improve the balance of payments.
C. Curb inflation by increasing imports.
D. Slow what is regarded as too rapid an accumulation of international reserves.
Caroline Brown, the product manager for a U.S. computer manufacturer, is being asked to quote prices of desktop
computers to be used in Kuwait. The Kuwaiti government wants the price in British pounds, for delivery next year.
Brown knows that the general price level in the United States will increase by 3%. Her banker forecasts that the British
pound will depreciate about 5% this year with respect to the U.S. dollar. If Brown is able to quote 700 pounds for
immediate delivery, the price that should be quoted for delivery to Kuwait next year is about
A. £757. (c) HOCK international, page 4

B. £759.
C. £737.
D. £721.
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immediate delivery, the price that should be quoted for delivery to Kuwait next year is about
A. £757.
B. £759.
C. £737.
D. £721.
One may characterize the current international monetary system developed by the industrialized countries as a
A. managed or dirty float. Central banks intervene in the foreign exchange market to influence the exchange rates.
B. gold-based system.
C. stable-rate system.
D. clean float. Freely floating exchange rates are determined solely by the forces of demand and supply.
If consumers in Japan decide they would like to increase their purchases of consumer products made in the United
States, in foreign currency markets there will be a tendency for:
A. The supply of dollars to increase.

B. The demand for dollars to increase.
C. The Japanese yen to appreciate relative to the U.S. dollar.
D. The supply of dollars to decrease.
Consider a world consisting of only two countries, Canada and the United Kingdom. Inflation in Canada in 1 year was
5%, and in the United Kingdom it was 10%. Which one of the following statements about the Canadian exchange rate
(rounded) with the U.K. pound sterling during that year will be true?
A. The Canadian dollar will depreciate by 15% against the pound sterling.
B. Inflation has no affect on the exchange rates.
C. The Canadian dollar will appreciate by 5% against the pound sterling.
D. The Canadian dollar will depreciate by 5% against the pound sterling.
A U.S. company has an account payable it must pay in six months with one Japanese company, and an account
receivable to be received in six months with another Japanese company. The U.S. company would not have
transaction exposure if
A. both the account payable and the account receivable are denominated in Japanese Yen and the Yen account
receivable is greater than the Yen account payable.
B. both the account payable and account receivable are denominated in U.S. dollars.
C. the account payable is denominated in dollars and the account receivable is denominated in Yen.
D. both the account payable and the account receivable are denominated in Japanese Yen and the Yen account
receivable is less than the Yen account payable.
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C. the account payable is denominated in dollars and the account receivable is denominated in Yen.
D. both the account payable and the account receivable are denominated in Japanese Yen and the Yen account
receivable is less than the Yen account payable.
The U.S. dollar has a free-floating exchange rate. When the dollar has fallen considerably in relation to other
currencies, the
A. Capital account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating
exchange rates.
B. Cheaper dollar helps U.S. exporters of domestically produced goods.
C. Trade account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating
exchange rates.
D. Fall in the dollar's value cannot be expected to have any effect on the U.S. trade balance.
If the central bank of a country raises interest rates sharply, the country's currency will most likely
A. Decrease sharply in value at first and then return to its initial value.
B. Remain unchanged in value.
C. Decrease in relative value.
D. Increase in relative value.
FreezeIt Inc. is a manufacturer of refrigeration systems based out of the United States with one subsidiary in Canada.
The Canadian subsidiary exports all of its manufactured products to the United States and does not currently sell any
of its manufactured products in Canada. The Canadian subsidiary incurs all of its expenses in Canadian dollars and all
of its revenues are in U.S. dollars. The U.S. operations are conducted only in U.S. dollars. What financial impact will a
rise in the Canadian dollar against the U.S. dollar have on the Canadian subsidiary assuming no operational changes?
A. A reduction in expenses.
B. An increase in cash flows.
C. A reduction in revenues.
D. An increase in profit margins.
If the U.S. dollar appreciated against the British pound, other things being equal, we would expect that
A. trade between the U.S. and Britain would decrease.

B. U.S. demand for British products would increase.
C. U.S. demand for British products would decrease.
D. the British demand for U.S. products would increase.
Question 28 - CMA Sample Q4.3 - International Finance
Polar Company sells refrigeration components both in the U.S. and to a subsidiary located in France. One of the
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Polar Company sells refrigeration components both in the U.S. and to a subsidiary located in France. One of the
components, Part No. 456, has a variable manufacturing cost of $30. The part can be sold domestically or shipped to
the French subsidiary for use in the manufacture of a residential subassembly. Relevant data with regard to Part No.
456 are shown below.
Part No. 456
Domestic selling price $65
Shipping charges to France $15
Cost of acquiring Part No. 456 in France $75
French residential subassembly sales price $170
Other variable manufacturing costs in France for residential subassembly $55
Units shipped to France 150,000*
*If deemed preferable, these units could be sold in the U.S.
Polar's applicable income tax rates are 40% in the U.S. and 70% in France.
Polar will transfer Part No. 456 to the French subsidiary at either variable manufacturing cost or the domestic market
price. On the basis of this information, which one of the following strategies should be recommended to Polar's
management?
A. Sell 150,000 units in the U.S. and the French subsidiary obtains Part No. 456 in France.
B. Transfer 150,000 units at $65 and have the U.S. company absorb the shipping costs.
C. Transfer 150,000 units at $30 and the French subsidiary pays the shipping costs.
D. Transfer 150,000 units at $65 and the French subsidiary pays the shipping costs.
A company has a foreign-currency-denominated trade payable, due in 60 days. In order to eliminate the foreign
currency exchange-rate risk associated with the payable, the company could
A. Sell foreign currency forward today.

B. Buy foreign currency forward today.
C. Wait 60 days and pay the invoice by purchasing foreign currency in the spot market at that time.
D. Borrow foreign currency today, convert it to domestic currency on the spot market, and invest the funds in a
domestic bank deposit until the invoice payment date.
If the exchange rate has changed from 1 U.S. dollar being worth 0.75 euro to a rate of 1 U.S. dollar being worth 0.90
euro,
A. The euro has appreciated by 10%.

B. The euro has depreciated by 10%.
C. The U.S. dollar has appreciated by 20%.
D. The U.S. dollar has depreciated by 20%.

A bill of lading is a document that

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A bill of lading is a document that
A. Is used to transfer responsibility for goods between the seller of goods and a common carrier.
B. Summarizes data relating to a disbursement and represents final authorization for payment.
C. Reduces a customer's account for goods returned to the seller.
D. Is sent with the goods giving a listing of the quantities of items included in the shipment.
An American importer of English clothing has contracted to pay an amount fixed in British pounds three months from
now. If the importer worries that the U.S. dollar may depreciate sharply against the British pound in the interim, it would
be well advised to:
A. Buy pounds in the forward exchange market.

B. Buy dollars in the forward exchange market.
C. Sell dollars in the forward exchange market.
D. Sell pounds in the forward exchange market.
Which one of the following is least likely to be a reason why U.S. multinational corporations utilize the foreign
exchange market?
A. To hedge the currency risk of accounts receivable transactions in foreign currencies.

B. To offset accounts payable transaction exposure to foreign firms.
C. To counter some of the currency risk of dividend payments from foreign subsidiaries to the U.S. parent.
D. To improve the return on investments of a foreign subsidiary.
If risk is purposely undertaken in the foreign currency market, the investor in foreign currency then becomes
A. An arbitrageur.
B. An exporter.
C. A speculator.
D. Involved in hedging.
A U.S. company has an account receivable from a Swiss company for 100,000 Swiss Francs (CHF) due in three
months. At the time of contract, the exchange rate was 1.0 CHF = 1.0 USD. The U.S. company wishes to manage its
foreign exchange exposure and therefore
A. sells Swiss Franc futures.

B. buys Swiss Franc futures. (c) HOCK international, page 8
C. sells a Swiss Franc interest rate swap.
D. buys a currency swap.
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A. sells Swiss Franc futures.

B. buys Swiss Franc futures.
C. sells a Swiss Franc interest rate swap.
D. buys a currency swap.
A.
The U.S. dollar will depreciate relative to the Swiss franc, not appreciate. The increased demand in the U.S. for Swiss
watches will create an increased demand for Swiss francs purchased with U.S. dollars on foreign exchange markets.
The result will be that the Swiss franc will appreciate relative to the U.S. dollar and at the same time, the U.S. dollar will
depreciate relative to the Swiss franc.
The U.S. dollar will appreciate relative to the British pound, not depreciate. U.S. dollars will be able to buy fewer goods
and services from Britain due to the inflation in Britain that is greater than inflation in the U.S. That will cause demand
in the U.S. for British goods and services to decrease. The decrease in demand for British goods and services will
cause demand for British pounds purchased in U.S. dollars to decrease. The decrease in demand for the British pound
will cause the British pound to depreciate relative to the U.S. dollar. At the same time, the U.S. dollar will appreciate
relative to the British pound.
B.
The increased demand in the U.S. for Swiss watches will create an increased demand for Swiss francs
purchased with U.S. dollars on foreign exchange markets. The result of the increased demand will be that the
Swiss franc will appreciate relative to the U.S. dollar. At the same time, the increased supply of U.S. dollars on
foreign exchange markets will cause the U.S. dollar to depreciate relative to the Swiss franc.
U.S. dollars will be able to buy fewer goods and services from Britain due to the inflation in Britain that is
greater than inflation in the U.S. That will cause demand in the U.S. for British goods and services to
decrease. The decrease in demand for British goods and services will cause demand for British pounds
purchased in U.S. dollars to decrease. The decrease in demand for the British pound will cause the British
pound to depreciate relative to the U.S. dollar. At the same time, the U.S. dollar will appreciate relative to the
British pound.
C. The U.S. dollar will depreciate relative to the Swiss franc, not appreciate. The increased demand in the U.S. for
Swiss watches will create an increased demand for Swiss francs purchased with U.S. dollars on foreign exchange
markets. The result will be that the Swiss franc will appreciate relative to the U.S. dollar and at the same time, the U.S.
dollar will depreciate relative to the Swiss franc.
D. The U.S. dollar will appreciate relative to the British pound, not depreciate. U.S. dollars will be able to buy fewer
goods and services from Britain due to the inflation in Britain that is greater than inflation in the U.S. That will cause
demand in the U.S. for British goods and services to decrease. The decrease in demand for British goods and services
will cause demand for British pounds purchased in U.S. dollars to decrease. The decrease in demand for the British
pound will cause the British pound to depreciate relative to the U.S. dollar. At the same time, the U.S. dollar will
appreciate relative to the British pound.
A. If inflation in Country R is lower than inflation in Country T, more people in Country T will want to buy Country R’s
goods, because they will cost relatively less. The increased demand for Country R's goods will lead to increased
demand for its currency. The increased demand for its currency will lead to appreciation of Country R's currency
relative to Country T's currency, not depreciation.
(c)THOCK
B. A rapid rate of growth in income in Country would international, pageto9lag behind exports. It would cause the
not cause imports
opposite – imports into Country T would be greater than Country T’s exports. The increased demand for imports from
Country R would cause Country R's currency to appreciate relative to Country T's currency, not depreciate.
C. If real interest rates are higher in Country T than in Country R, more people will want to invest in Country T.
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A.
The U.S. dollar will depreciate relative to the Swiss franc, not appreciate. The increased demand in the U.S. for Swiss
watches will create an increased demand for Swiss francs purchased with U.S. dollars on foreign exchange markets.
The result will be that the Swiss franc will appreciate relative to the U.S. dollar and at the same time, the U.S. dollar will
depreciate relative to the Swiss franc.
The U.S. dollar will appreciate relative to the British pound, not depreciate. U.S. dollars will be able to buy fewer goods
and services from Britain due to the inflation in Britain that is greater than inflation in the U.S. That will cause demand
in the U.S. for British goods and services to decrease. The decrease in demand for British goods and services will
cause demand for British pounds purchased in U.S. dollars to decrease. The decrease in demand for the British pound
will cause the British pound to depreciate relative to the U.S. dollar. At the same time, the U.S. dollar will appreciate
relative to the British pound.
B.
The increased demand in the U.S. for Swiss watches will create an increased demand for Swiss francs
purchased with U.S. dollars on foreign exchange markets. The result of the increased demand will be that the
Swiss franc will appreciate relative to the U.S. dollar. At the same time, the increased supply of U.S. dollars on
foreign exchange markets will cause the U.S. dollar to depreciate relative to the Swiss franc.
U.S. dollars will be able to buy fewer goods and services from Britain due to the inflation in Britain that is
greater than inflation in the U.S. That will cause demand in the U.S. for British goods and services to
decrease. The decrease in demand for British goods and services will cause demand for British pounds
purchased in U.S. dollars to decrease. The decrease in demand for the British pound will cause the British
pound to depreciate relative to the U.S. dollar. At the same time, the U.S. dollar will appreciate relative to the
British pound.
C. The U.S. dollar will depreciate relative to the Swiss franc, not appreciate. The increased demand in the U.S. for
Swiss watches will create an increased demand for Swiss francs purchased with U.S. dollars on foreign exchange
markets. The result will be that the Swiss franc will appreciate relative to the U.S. dollar and at the same time, the U.S.
dollar will depreciate relative to the Swiss franc.
D. The U.S. dollar will appreciate relative to the British pound, not depreciate. U.S. dollars will be able to buy fewer
goods and services from Britain due to the inflation in Britain that is greater than inflation in the U.S. That will cause
demand in the U.S. for British goods and services to decrease. The decrease in demand for British goods and services
will cause demand for British pounds purchased in U.S. dollars to decrease. The decrease in demand for the British
pound will cause the British pound to depreciate relative to the U.S. dollar. At the same time, the U.S. dollar will
appreciate relative to the British pound.
A. If inflation in Country R is lower than inflation in Country T, more people in Country T will want to buy Country R’s
goods, because they will cost relatively less. The increased demand for Country R's goods will lead to increased
demand for its currency. The increased demand for its currency will lead to appreciation of Country R's currency
relative to Country T's currency, not depreciation.
B. A rapid rate of growth in income in Country T would not cause imports to lag behind exports. It would cause the
opposite – imports into Country T would be greater than Country T’s exports. The increased demand for imports from
Country R would cause Country R's currency to appreciate relative to Country T's currency, not depreciate.
C. If real interest rates are higher in Country T than in Country R, more people will want to invest in Country T.
This will cause the demand for Country T's currency to increase, and that will lead to appreciation of Country
T's currency relative to Country R's currency. When Country T's currency appreciates relative to Country R's
currency, Country R's currency depreciates (c) HOCK international,
relative page
to Country T's 10
currency.
D. A more restrictive monetary policy in Country R will cause economic growth in Country R to slow. This will cause
people in Country R to purchase fewer imports from Country T. The decreased demand for Country T’s currency will
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This will cause the demand for Country T's currency to increase, and that will lead to appreciation of Country
T's currency relative to Country R's currency. When Country T's currency appreciates relative to Country R's
currency, Country R's currency depreciates relative to Country T's currency.
D. A more restrictive monetary policy in Country R will cause economic growth in Country R to slow. This will cause
people in Country R to purchase fewer imports from Country T. The decreased demand for Country T’s currency will
cause Country T’s currency to depreciate relative to Country R's currency, and, at the same time, Country R's currency
will appreciate relative to Country T's currency, not depreciate.
A. Because the Swiss franc now buys more dollars, U.S. exports to Switzerland will increase as the prices of U.S.
exported goods to Switzerland decrease.
B. Because one dollar now buys fewer francs, the price of Swiss products in the U.S. will increase. This is
because a U.S. consumer needs to spend more dollars to buy the required number of francs to purchase the
good.
C. Because one dollar now buys fewer francs, U.S. tourists in Switzerland will be able to buy less with their dollars.
D. The Swiss franc has appreciated against the dollar as it takes fewer francs to buy one dollar.
A. A reduction of inflation will lower U.S. goods prices relative to foreign prices. As a result, U.S. exports will increase,
reducing the balance of payments deficit.
B. A reduction of economic and humanitarian aid is a reduction of unilateral transfers out of the U.S., thus reducing the
balance of payments deficit.
C. An increase in the value of U.S. currency will raise the comparative price of U.S. products. This will reduce
the volume of U.S. exports and increase imports as the relative price of U.S. goods increases. Thus the
balance of payments deficit will increase, not decrease, if the value of the U.S. currency increases.
D. Increased productivity in the manufacture of U.S. exports would reduce the relative price of U.S. export goods
compared to other goods. This would decrease a balance of payments deficit.
A. The purchasing power parity exchange rate is the exchange rate that would ensure that goods are sold at the same
relative price in different countries. This rate does not lead to undervalued currency in net importing countries.
B. The purchasing power parity exchange rate is the exchange rate that would ensure that goods are sold at
the same relative price in different countries. This means that if the PPP exchange rate is in effect and you are
able to purchase something in country A for $20, you could take $20 to country B, exchange the $20 into the
local currency and buy the same good in country B with the $20 you changed. Note that this is a theoretical
rate.
C. The purchasing power parity exchange rate is the exchange rate that would ensure that goods are sold at the same
relative price in different countries. This rate is not fixed rate.
D. The purchasing power parity exchange rate (c) HOCK international,

is the exchange page
rate that 11 ensure that goods are sold at the same
would
relative price in different countries. This rate does not always equal the market rate.
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relative price in different countries. This rate is not fixed rate.
D. The purchasing power parity exchange rate is the exchange rate that would ensure that goods are sold at the same
relative price in different countries. This rate does not always equal the market rate.
A. By definition, if the spot rate is less than the forward rate, the currency is said to be selling at a premium in the
forward market.
B. By definition, if the spot rate is less than the forward rate, the currency is said to be selling at a premium in
the forward market.
C. By definition, if the spot rate is less than the forward rate, the currency is said to be selling at a premium in the
forward market. This does not necessarily indicate anything about the value of the currency.
D. By definition, if the spot rate is less than the forward rate, the currency is said to be selling at a premium in the
forward market. This does not necessarily indicate anything about the value of the currency.
A. The decrease in the value of the dollar makes U.S. goods relatively less expensive relative to foreign produced
goods and this will increase U.S. exports. Similarly, the decline in the value of the dollar will make foreign goods
relatively more expensive in the U.S. and this will decrease imports.
B. The decrease in the value of the dollar makes U.S. goods relatively less expensive relative to foreign produced
goods and this will increase U.S. exports. This will improve the U.S. balance of payments deficit.
C. If the U.S. dollar declines in value (depreciates) relative to the currencies, the foreign currencies must appreciate
against the dollar.
D. The decrease in the value of the dollar makes U.S. goods relatively less expensive relative to foreign
produced goods and this will increase U.S. exports. This will improve the U.S. balance of payments deficit.
A. Currency exchange rates are subject to the law of supply and demand. A speculative rise in the value of the
domestic currency is caused by an increased demand for the domestic currency. If the central bank buys the domestic
currency this will further increase the demand and further drive up the price of the currency.
B. Currency exchange rates are subject to the law of supply and demand. A speculative rise in the value of the
domestic currency is caused by an increased demand for the domestic currency. Increasing interest rates will cause
the demand for domestic currency to rise even more as more funds enter the domestic economy to take advantage of
the higher interest rates.
C.
A speculative rise in the value of the domestic currency is caused by an increased demand for the domestic currency.
If the central bank sells foreign currency in the foreign exchange market, it must buy some other currency at the same
time (because it must receive some currency as payment for the currency it has sold). If the other currency it buys is its
own domestic currency, the result will be a further rise in the market value of the domestic currency because currency
(c) HOCK
exchange rates are subject to the law of supply international, page 12
and demand.
If the central bank sells one foreign currency and buys another foreign currency at the same time, the transaction by
the central bank will not impact the value of the domestic currency.
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time (because it must receive some currency as payment for the currency it has sold). If the other currency it buys is its
own domestic currency, the result will be a further rise in the market value of the domestic currency because currency
exchange rates are subject to the law of supply and demand.
If the central bank sells one foreign currency and buys another foreign currency at the same time, the transaction by
the central bank will not impact the value of the domestic currency.
D. Currency exchange rates are subject to the law of supply and demand. A speculative rise in the value of the
domestic currency is caused by an increased demand for the domestic currency. The sale of domestic
currency in foreign exchange markets will increase the supply of the domestic currency in the foreign
exchange markets, which will lower the price of the domestic currency.
A. If the spot rate is greater than the forward rate, the currency is said to be selling at a discount in the forward market.
However, that does not necessarily indicate anything about the value of the currency.
B. If the spot rate is greater than the forward rate, the currency is said to be selling at a discount in the forward market.
However, that does not necessarily indicate anything about the value of the currency.
C.
If the spot rate is greater than the forward rate, the currency is said to be selling at a discount in the forward
market. The 1.4925 and 1.4775 are the prices of one British pound in U.S. dollars on the spot and forward
markets. Because the price of the British pound in U.S. dollars is lower on the forward market than on the spot
market, the pound sterling is selling at a discount in the forward market.
To determine which currency has the value of 1 unit in an exchange rate quote, we need to know the
convention used in quoting exchange rates on currency exchanges. The convention is the order in which the
two currencies are listed, and the currency listed first has the value of 1 unit. The order is:
EUR - GBP - AUD - NZD - USD - ANY OTHER CURRENCY
An exchange rate between the British pound and the U.S. dollar is quoted as GBP/USD, with the British pound
coming first. Therefore, the British pound has the value of 1 unit in this exchange rate quote.
D. If the spot rate is greater than the forward rate, the currency is said to be selling at a discount, not a premium, in the
forward market.
A. The country that has lower real interest rates will experience a depreciation of their currency. This is because there
will be a higher demand for the currency of the country that has higher interest rates.
B. The increase in exports by Country A will lead to increased demand for Country A's currency on currency
markets (in order to purchase its exports). The increased demand for its currency will lead to appreciation of
Country A's currency.
C. A more restrictive monetary policy in Country B will cause economic growth in Country B to slow. This will cause
people in Country B to purchase fewer imports from Country A. The decreased demand for Country A's currency will
cause Country A's currency to depreciate relative to Country B’s currency, not to appreciate.
D. The country that has a higher inflation rate will experience a depreciation of their currency relative to a country with a
lower inflation rate. If Country A has a higher inflation rate, the currency of Country A will depreciate. This is because
the inflation makes each unit of the currency(c)less
HOCK international, page 13
valuable.
Part 2 : 01/14/19 11:31:33
D. The country that has a higher inflation rate will experience a depreciation of their currency relative to a country with a
lower inflation rate. If Country A has a higher inflation rate, the currency of Country A will depreciate. This is because
the inflation makes each unit of the currency less valuable.
A. There are many risks for a company making an investment in a foreign country. One of these is the risk of political
instability. Political risks include the risk of government seizure of private property, war, blockage of funds transfers,
government regulations, local corruption, and differences in culture.
B. There are many risks for a company making an investment in a foreign country. One of these is the risk of instability
of the foreign currency. An unstable foreign currency may make it difficult to do business, may create large risks for the
company and is a risk of investing in foreign countries.
C. The transfer of technology back to the US is one of the reasons for a company to invest in other countries.
This is not a risk for the investing company.
D. There are many risks for a company making an investment in a foreign country. One of these is the risk of
restrictions on capital flows out of the foreign country. This restriction may make it difficult, expensive or even
impossible to get the profits out of the country and back to the home country.
A. Under the managed float system, the exchange rates are determined by the market, but the government also sells
and buys currency in order to influence the exchange rate. This does not require a nation to maintain highly liquid
assets.
B. Under the managed float system, the exchange rates are determined by the market, but the government also sells
and buys currency in order to influence the exchange rate.
C. Under the managed float system, the exchange rates are determined by the market, but the government
also sells and buys currency through its central bank in order to influence the exchange rate.
D. Under the managed float system, the exchange rates are determined by the market, but the government also sells
and buys currency in order to influence the exchange rate. This does not mean that most currencies will depreciate.
A. If the U.S. dollar rises in value in the future, U.S. dollars will be worth more relative to foreign currency and the
foreign currency is worth less compared to the dollar. Therefore the company will want to get as many dollars as
possible now so that they will increase in value while they are being held and the company will want to keep the dollars
that they have to use to pay the foreign denominated payables when the dollar is stronger. Therefore, they should
speed up collections and slow down payments.
B. If the U.S. dollar rises in value in the future, U.S. dollars will be worth more relative to foreign currency and
the foreign currency is worth less compared to the dollar. Therefore the company will want to get as many
dollars as possible now so that they will increase in value while they are being held and the company will want
to keep the dollars that they have to use to pay the foreign denominated payables when the dollar is stronger.
Therefore, they should speed up collections and slow down payments.
C. If the U.S. dollar rises in value in the future, U.S. dollars will be worth more relative to foreign currency and the
foreign currency is worth less compared to (c) theHOCK
dollar. international, page 14 will want to get as many dollars as
Therefore the company
Part 2 : 01/14/19 11:31:33
C. If the U.S. dollar rises in value in the future, U.S. dollars will be worth more relative to foreign currency and the
D. If the U.S. dollar rises in value in the future, U.S. dollars will be worth more relative to foreign currency and the
A. The U.S. exchange rates in relation to other currencies are floating rates determined by the forces of supply
and demand.
B. This is the characteristic of a fixed exchange rate. The U.S. exchange rates in relation to other currencies are
floating rates determined by the forces of supply and demand.
C. This is the characteristic of a fixed exchange rate. The U.S. exchange rates in relation to other currencies are
floating rates determined by the forces of supply and demand.
D. The value of the U.S. dollar is not tied to the price of gold, but is rather a floating exchange rate.
A. A higher rate of inflation raises the price of domestic goods, which decreases exports and the demand for the
domestic currency. As a result, the domestic currency depreciates.
B. Lower real interest rates make domestic assets less attractive, thus causing the demand for domestic currency to
fall. This causes the domestic currency to depreciate.
C. Increasing the amount of imports increases the demand for foreign currency, which causes a depreciation in the
value of the domestic currency.
D. If imports lag behind exports there will be increased demand for the domestic currency as foreigners need
the currency to buy the exports. This causes the domestic currency to appreciate.
A.
Because the price of the U.S. dollar in the forward market is higher than the price in the spot market, the U.S.
dollar is selling at a premium in the forward market.
Since the rates given are for 90 days forward, in order to calculate the annual effect, we will need to calculate
the effect for 90 days and then multiply that result by 4.
In annual terms, the premium is calculated as: [((123-120)/120) × 4] = 0.10. This represents a 10% premium of
the U.S. dollar in the forward market.
B. This answer is the effect on the 90-day period given in the two rates. In order to calculate the annual effect, we will
need to multiply this by 4.
Part 2 : 01/14/19 11:31:33
In annual terms, the premium is calculated as: [((123-120)/120) × 4] = 0.10. This represents a 10% premium of
the U.S. dollar in the forward market.
B. This answer is the effect on the 90-day period given in the two rates. In order to calculate the annual effect, we will
need to multiply this by 4.
C.
This answer results from two errors: (a) (123-120)/120) equals 0.025, which expressed as a percentage is 2.5%, not
0.025%. And (b) since the rates given are for 90 days forward, in order to calculate the annual effect, we will need to
calculate the effect for 90 days and then multiply that result by 4.
D. Because the price of the U.S. dollar in the forward market is higher than the price in the spot market, the U.S. dollar
is selling at a premium in the forward market.
A. If British inflation is higher than U.S. inflation, fewer U.S. people will want to buy British products, because
they will have become comparatively more expensive than U.S. made products. This will lead to a decreased
demand for the British pound sterling on currency markets, which will lead to a depreciation of the British
pound sterling.
B. If British interest rates rise, more people will want to purchase investments denominated in British pounds.
Therefore, the higher demand for British pounds will lead to the appreciation of the British pound.
C. A decrease in the outflows of British capital to the U.S. will cause a lower level of supply of British pounds. This
lower supply of British pounds will cause the British pound to appreciate.
D. If U.S. income levels improve relative to British income levels, people in the U.S. will be able to buy more British
imports. The increased demand for the British pound sterling (to pay for the British imports) will cause the pound to
appreciate, not depreciate.
A. The devaluation of a country's currency encourages exports because the domestically produced goods are now
cheaper when compared to foreign produced goods. This will increase exports.
B. The devaluation of a country's currency improves its balance of payments by making domestic products
more attractive to foreign consumers through lower relative prices. When the currency is overvalued
domestically produced goods are more expensive in the world market (reducing exports) and foreign
produced goods are cheaper (increasing imports).
C. The devaluation of a country's currency will decrease imports because it will take more of the local currency to
purchase foreign produced goods.
D.
When a country is maintaining a fixed exchange rate that is lower than the market rate (the country's currency has
been devalued on currency markets), the country will have a trade surplus. Because its currency is too cheap, or is
undervalued, foreigners will buy a large amount of the country's goods. However, imports will be relatively low because
citizens of the country with the devalued currency will not want to buy goods of other countries because they will be too
expensive. Therefore the citizens of the country with the devalued currency will not be selling their currency in the
currency markets to buy other countries' currencies. As a result, if the exchange rate were allowed to freely adjust, the
currency of the country with the devalued currency would become more expensive and it would no longer be cheap or
devalued. (c) HOCK international, page 16
In order to maintain the undervalued fixed exchange rate, the government of the country will need to sell its own
currency in the currency markets and buy other currencies. The result will be an increased accumulation of
international reserves by the country with the devalued currency, which is the opposite of what this answer choice
Part 2 : 01/14/19 11:31:33
currency markets to buy other countries' currencies. As a result, if the exchange rate were allowed to freely adjust, the
currency of the country with the devalued currency would become more expensive and it would no longer be cheap or
devalued.
In order to maintain the undervalued fixed exchange rate, the government of the country will need to sell its own
currency in the currency markets and buy other currencies. The result will be an increased accumulation of
international reserves by the country with the devalued currency, which is the opposite of what this answer choice
states.
A.
This is £700 × 1.03 × 1.05. Instead of multiplying by 1.05, we need to divide by 0.95 (1 − 0.05). See the correct answer
for a complete explanation.
B.
In order to determine the price to quote, Caroline needs to take into account the price level increase in the U.S.
and also the depreciation of the pound. Both of these will increase the number of pounds that need to be
quoted in the price. The price to be quoted is calculated as follows: £700 × <(1 + 0.03) × [1 / (1 − 0.05)]> or £700
× (1.03 / 0.95) = £758.95 or £759.
To look at this another way:
Let's assume that today, the exchange rate between the British pound and the U.S. dollar is £1 = $1.6094 US.
So £700 today would be equal to $1,126.58 US (700 × 1.6094).
Inflation in the U.S. is expected to be 3%. Therefore, $1,126.58 today = $1,160.38 one year from now ($1,126.58
× 1.03).
The British pound is expected to depreciate 5% this year with respect to the U.S. dollar. That means the British
pound will buy 5% less in U.S. dollars one year from now. If £1 today buys $1.6094 US, 5% less than that is
$1.52893 ($1.6094 × 0.95).
The amount of British pounds the company will need to receive one year from today in order to be able to
convert it into $1,160.38 US at the exchange rate of £1 = $1.52893 US is £758.95 ($1,160.38 / $1.52893).
C. This answer takes into account only the depreciation of the pound. The increase in the price level must also be
taken into consideration.
D. This answer takes into account only the increase in the price level. The depreciation of the pound must also be
taken into consideration.
A. Industrialized nations use a managed float. Under the managed float system, the exchange rates are
determined by the market, but the government also sells and buys currency in order to influence the exchange
rate.
B. Industrialized nations use a managed float. Under the managed float system, the exchange rates are determined by
the market, but the government also sells and buys currency in order to influence the exchange rate. In a gold-based
system the currency is backed by gold. This system has not been in use for a number of decades.
(c) HOCK
C. Industrialized nations use a managed float. international,
Under the page
managed float 17
system, the exchange rates are determined by
the market, but the government also sells and buys currency in order to influence the exchange rate. In a stable rate
system, the government would establish a fixed rate and then enter into various transactions to maintain that rate.
Part 2 : 01/14/19 11:31:33
system the currency is backed by gold. This system has not been in use for a number of decades.
C. Industrialized nations use a managed float. Under the managed float system, the exchange rates are determined by
the market, but the government also sells and buys currency in order to influence the exchange rate. In a stable rate
system, the government would establish a fixed rate and then enter into various transactions to maintain that rate.
D. Industrialized nations use a managed float. Under the managed float system, the exchange rates are determined
mainly by the market, but the government also sells and buys currency in order to influence the exchange rate. In a
clean float there is no governmental intervention.
A. The supply of dollars is unchanged as a result of this demand shift, however the quantity supplied will increase as
the dollar appreciates against the yen because there will be an increase in the price of the dollar as a result of the
increase in demand.
B. In order to purchase more goods made in the U.S., Japanese consumers will need to buy more dollars. This
will cause there to be an increase in the supply of yen on currency markets and an increase in the demand for
dollars.
C. As a result of this demand shift the quantity of dollars supplied will increase as the dollar appreciates against the yen.
D. The supply of dollars is unchanged as a result of this demand shift, however the quantity supplied will increase as
the dollar appreciates against the yen.
A. The Canadian currency has actually appreciated in value because the inflation rate in Canada was less than the
inflation rate in the U.K. The amount by which the Canadian currency has appreciated is the difference between the
inflation rates in the two countries.
B. Both of these inflation rates will affect the exchange rate between the currencies of the two countries. The
appreciation of the Canadian dollar is equal to the difference between the United Kingdom inflation rate and the
Canadian inflation rate.
C. The appreciation of the Canadian dollar is equal to the difference between the United Kingdom inflation rate
(10%) and the Canadian inflation rate (5%). Because the U.K. inflation rate was higher than the Canadian
inflation rate, the Canadian currency has kept more of its value and has appreciated against the U.K. currency.
D. The appreciation of the Canadian dollar is equal to the difference between the U.K. inflation rate and the Canadian
inflation rate. Though the difference is 5%, the Canadian currency has appreciated because the inflation in Canada
was lower than the U.K. inflation and the Canadian currency has kept more of its value.
A.
The U.S. company would have transaction exposure if both the receivable and the payable are denominated in Yen
and the receivable is greater than the payable. If the Yen depreciates against the U.S. dollar, the U.S. company will
have a net currency exchange transaction loss. If the Yen appreciates against the U.S. dollar, the U.S. company will
have a net currency exchange rate transaction gain.
Example: The exchange rate between the Yen and the USD is 1 Yen = $0.0099 US. The U.S. company has a
receivable of 100,000 Yen and a payable of 75,000 Yen. The equivalent in U.S. dollars is:
Receivable 100,000 Yen × 0.0099 = $990.00 US

Part 2 : 01/14/19 11:31:33
have a net currency exchange rate transaction gain.

Payable 75,000 Yen × 0.0099 = $742.50 US.
The net of the receivable and the payable is $247.50 US.
The Yen depreciates against the USD (1 Yen will buy fewer U.S. dollars), and now 1 Yen = $0.008 US. The U.S.
company's 100,000 Yen receivable is now equal to $800.00 US, and the U.S. company's 75,000 Yen payable is now
equal to $600.00 U.S. The net of the receivable and the payable is $200.00 US, so the U.S. company has a net
currency exchange loss of $47.50 ($200.00 minus $247.50).
If instead the Yen appreciates against the USD (1 Yen will buy more U.S. dollars) and now 1 Yen = $0.015, the U.S.
company's 100,000 Yen receivable is equal to $1,500.00 US. The U.S. company's 75,000 Yen payable is now equal to
$1,125.00 US. The net of the receivable and the payable is $375.00, and the U.S. company has a net currency
exchange gain of $127.50 ($375.00 minus $247.50).
Thus, whether the U.S. company would lose or gain on the currency exchange transactions would depend upon
whether the Japanese Yen were to depreciate or appreciate against the U.S. dollar during the holding period. But the
U.S. company would have exposure to currency exchange rate fluctuations either way.
B. If the U.S. company's account payable and account receivable are denominated in U.S. dollars, the U.S.
company would have no transaction exposure because the U.S. company would not need to make any
currency exchanges between U.S. dollars and Japanese Yen.
C.
The U.S. company would have no transaction exposure on the account payable denominated in dollars because the
U.S. company would not need to make a currency exchange between U.S. dollars and Japanese Yen to pay the
payable. However, the U.S. company would have transaction exposure on the account receivable denominated in Yen,
because when the 100,000 Yen are received, the U.S. company will need to sell the Yen and buy U.S. dollars. If the
Yen depreciates against the U.S. dollar, the U.S. company will have a currency exchange transaction loss. If the Yen
appreciates against the U.S. dollar, the U.S. company will have a currency exchange transaction gain.
receivable of 100,000 Yen. The equivalent in U.S. dollars is 100,000 Yen × 0.0099 = $990.00 US.
The Yyen depreciates against the USD (1 Yen will buy fewer U.S. dollars), and now 1 Yen = $0.008 US. The U.S.
company's 100,000 Yen receivable is now equal to $800.00 US. The receivable's value in U.S. dollars has declined,
and the U.S. company has a currency exchange loss of $190.00 ($800.00 minus $990.00).
company's 100,000 Yen receivable is equal to $1,500.00 US. The U.S. company has a currency exchange gain of
$510.00 ($1,500.00 minus $990.00).
Thus, whether the U.S. company would lose or gain on the currency exchange transaction would depend upon whether
the Japanese Yen were to depreciate or appreciate against the U.S. dollar during the holding period. But the U.S.
company would have exposure to currency exchange rate fluctuations either way.
D.
The U.S. company would have transaction exposure if both the receivable and the payable are denominated in Yen
and the payable is greater than the receivable. If the Yen depreciates against the U.S. dollar, the U.S. company will
have a net currency exchange transaction gain.
Part 2 : 01/14/19 11:31:33
and the payable is greater than the receivable. If the Yen depreciates against the U.S. dollar, the U.S. company will
have a net currency exchange transaction gain.

Payable 100,000 Yen × 0.0099 = $990.00 US.
The net of the receivable and the payable is $(247.50) US.
The Yen depreciates against the USD (1 Yen will buy fewer U.S. dollars), and now 1 Yen = $0.008 US. The U.S.
company's 75,000 Yen receivable is now equal to $600.00 US, and the U.S. company's 100,000 Yen payable is now
equal to $800.00 U.S. The net of the receivable and the payable is $(200.00) US, so the U.S. company has a net
currency exchange gain of $47.50 ([$200.00] minus $[247.50]).
company's 75,000 Yen receivable is equal to $1,125.00 US. The U.S. company's 100,000 Yen payable is now equal to
$1,500.00 US. The net of the receivable and the payable is $(375.00), and the U.S. company has a net currency
exchange loss of $127.50 ([$375.00] minus [$247.50]).
Thus, whether the U.S. company would gain or lose on the currency exchange transactions would depend upon
whether the Japanese Yen were to depreciate or appreciate against the U.S. dollar during the holding period. But the
U.S. company would have exposure to currency exchange rate fluctuations either way.
A. The capital account could be in either a deficit or surplus regardless of the value of the U.S. dollar.
B. The price of U.S. goods to buyers in other countries will fall as a result of the cheaper U.S. dollar because a
citizen of a foreign country will need fewer units of their currency to buy the necessary dollars to import the
U.S. goods. Because prices of U.S. goods are lower, the quantity demanded of U.S. exported goods will
increase.
C. The trade account could be in either a deficit or surplus regardless of the value of the U.S. dollar.
D. Since the price of U.S. goods will fall relative to foreign goods, U.S. exports will increase which will push the trade
balance toward a surplus.
A. The increase in interest rates will attract foreign funds to domestic assets. This will increase the value of the
domestic currency as demand for the currency increases.
B. The increase in interest rates will attract foreign funds to domestic assets. This will increase the value of the
domestic currency as demand for the currency increases. Any change in the interest rate by the central bank will
impact the value of the country's currency.
C. The increase in interest rates will attract foreign funds to domestic assets. This will increase the value of the
domestic currency as demand for the currency increases.
D. The increase in interest rates will attract foreign funds to domestic assets. This will increase the value of
the domestic currency as demand for the currency increases.

Part 2 : 01/14/19 11:31:33
the domestic currency as demand for the currency increases.
A.
The question asks what impact a rise in the Canadian dollar against the U.S. dollar will have on the Canadian
subsidiary. Note that it does not ask for the impact on the consolidated company. Thus there are no issues here with
currency conversion for consolidation purposes.
Since the Canadian subsidiary incurs all of its expenses in Canadian dollars, a rise in the Canadian dollar against the
U.S. dollar will have no effect on the Canadian subsidiary's reported expenses.
B.
A rise in the Canadian dollar against the U.S. dollar means that each Canadian dollar is worth more U.S. dollars. At the
same time, each U.S. dollar is worth fewer Canadian dollars.
Since the subsidiary earns all of its revenues in U.S. dollars and since a rise in the Canadian dollar against the U.S.
dollar means each U.S. dollar of revenue is worth fewer Canadian dollars, the financial impact will be a reduction in
cash inflows for the Canadian subsidiary when it exchanges the U.S. dollars for Canadian dollars.
U.S. dollar will have no effect on the Canadian subsidiary's cash outflows for operating expenses.
Since inflows will be reduced and outflows will not be affected, the net effect of the change in the exchange rate will be
a decrease in net cash flows, not an increase.
C.
The question asks what impact a rise in the Canadian dollar against the U.S. dollar will have on the Canadian
subsidiary. Note that it does not ask for the impact on the consolidated company. Thus there are no issues
here with currency conversion for consolidation purposes.
A rise in the Canadian dollar against the U.S. dollar means that each Canadian dollar is worth more U.S.
dollars. At the same time, each U.S. dollar is worth fewer Canadian dollars.
Since the subsidiary earns all of its revenues in U.S. dollars and since a rise in the Canadian dollar against the
U.S. dollar means each U.S. dollar of revenue is worth fewer Canadian dollars, the financial impact will be a
reduction in revenues for the Canadian subsidiary.
D.
A rise in the Canadian dollar against the U.S. dollar means that each Canadian dollar is worth more U.S. dollars. At the
same time, each U.S. dollar is worth fewer Canadian dollars.
Since the subsidiary earns all of its revenues in U.S. dollars and since a rise in the Canadian dollar against the U.S.
dollar means each U.S. dollar of revenue is worth fewer Canadian dollars, the financial impact will be a reduction in
revenues for the Canadian subsidiary.
U.S. dollar will have no effect on the Canadian subsidiary's reported expenses.
Reduced revenues and unchanged expenses will lead to a decrease in profit margins, not an increase.

A. The appreciation or depreciation of a currency will not cause the level of trade to increase or decrease. It may
Part 2 : 01/14/19 11:31:33
A. The appreciation or depreciation of a currency will not cause the level of trade to increase or decrease. It may
change the direction of the trade – in this case more Americans buying British goods and fewer Brits buying American
goods, but the level of trade will not be affected by this.
B. If the dollar appreciates against the pound, that means that $1 will buy more British pounds than
previously. This will make British goods comparatively cheaper for Americans and American goods
comparatively more expensive for Brits. Therefore, Americans will buy more British goods because they need
to spend fewer dollars to buy the British goods.
C. If the dollar appreciates against the pound, that means that $1 will buy more British pounds than previously. This will
make British goods comparatively cheaper for Americans and American goods comparatively more expensive for Brits.
Therefore, Americans will buy more British goods because they need to spend fewer dollars to buy the British goods.
D. If the dollar appreciates against the pound, that means that $1 will buy more British pounds than previously and £1
will buy fewer U.S. dollars than previously. This will make British goods comparatively cheaper for Americans and
American goods comparatively more expensive for Brits. Therefore, there would be a decrease, not an increase, in
British demand for American goods because a Brit needs more pounds to buy the American goods.
A.
This is the correct answer. The correct way to approach this problem is to calculate the per unit contribution
margin for both companies (U.S. and France) for each of the four alternatives, then subtract the applicable
taxes for both companies for the four alternatives and total the after-tax contribution margins for both
companies for each of the four alternatives. The highest total after-tax contribution margin is the best
alternative.
For this alternative, the schedule is as follows:

Whole
US France
Company
Selling price $65.00 $170.00
Variable costs 30.00 75.00
Other variable manufacturing costs -- 55.00
Shipping expense -- --
---------- ------------
Unit contribution margin before tax $35.00 $40.00
Tax 14.00 28.00
---------- ------------ ------------
Net incremental profit per unit $21.00 $12.00 $33.00
The answer choice "transfer 150,000 units at $30 and the French subsidiary pays the shipping costs" will
result in a net incremental profit per unit for the company as a whole of $21.00, which is lower than $33.00, as
follows:
Whole
US France
Company
Shipping expense -- 15.00
---------- ------------
Tax 0.00 49.00
---------- ------------ ------------
Part 2 : 01/14/19 11:31:33

---------- ------------
Tax 0.00 49.00
---------- ------------ ------------
The answer choice "transfer 150,000 units at $65 and the French subsidiary pays the shipping costs" will
follows:
Whole
US France
Company
---------- ------------
Tax 14.00 24.50
---------- ------------ ------------
The answer choice "transfer 150,000 units at $65 and have the U.S. company absorb the shipping costs" will
follows:
Whole
US France Company
Shipping expense 15.00 --
---------- ------------
Tax 8.00 35.00
---------- ------------ ------------
Thus, the answer choice, "sell 150,000 units in the U.S. and the French subsidiary obtains Part No. 456 in
France," at $33.00 profit per unit, provides the highest net incremental profit of the four alternatives for the
company as a whole. As long as both companies (U.S. and France) have positive after-tax contributions, the
company is generally better off if they each buy and sell separately.
B.
The correct way to approach this problem is to calculate the per unit contribution margin for both companies (U.S. and
France) for each of the four alternatives, then subtract the applicable taxes for both companies for the four alternatives
and total the after-tax contribution margins for both companies for each of the four alternatives. The highest total
after-tax contribution margin is the best alternative.

Whole
US France Company
Selling price $65.00(c)$170.00
HOCK international, page 23
Part 2 : 01/14/19 11:31:33
Whole
US France Company
---------- ------------
Tax 8.00 35.00
---------- ------------ ------------
This is not the highest possible incremental per unit profit for the company as a whole.
C.

Whole
US France
Company
---------- ------------
Tax 0.00 49.00
---------- ------------ ------------
D.

Whole
US France
Company
---------- ------------
Tax 14.00 24.50
---------- ------------ ------------

Part 2 : 01/14/19 11:31:33
A. The firm will need to buy the foreign currency in the future so that they do not need to sell foreign currency today.
B. If a firm buys a forward contract, it is in a position to buy the foreign currency when it is needed in the
future, but at the price specified today. Hence the firm's payables are covered by this fixed-cost foreign
currency as they will know the amount of the domestic currency that will be required to settle the foreign
currency denominated payable. This will eliminate the exchange rate risk of the rates moving in the wrong
direction prior to the need for the foreign currency.
C. Though this will settle the liability, it does not protect the company from the exchange rate risk. The exchange rate
risk is the risk that the exchange rate will move in the wrong direction and require more of the local currency to settle
the amount.
D. Though this will settle the liability, it does not protect the company from the exchange rate risk. The exchange rate
risk is the risk that the exchange rate will move in the wrong direction and require more of the local currency to settle
the amount.
A. Because one U.S. dollar buys more euro than previously, the euro has depreciated, not appreciated.
B. Though the euro has depreciated in value, it has not depreciated by 10%.
C. Because one U.S. dollar buys more euro than previously, the dollar has appreciated. The appreciation
amount is calculated as follows: [(0.90 − 0.75) / 0.75] = 0.20 or a 20% appreciation.
D. Because one U.S. dollar buys more euro than previously, the dollar has appreciated, not depreciated.
A. A bill of lading is a document that transfers possession of goods from the seller to a common carrier.
B. The description given is related to a payment order, not a bill of lading.
C. The description is given is that of a credit memo, not a bill of lading.
D. The description given is that of a packing slip, not a bill of lading.
A. By purchasing pounds in the forward exchange market, the American importer is able to determine now the
amount of dollars that will be required to settle that invoice when it comes due. As such, they are protected
against the situation in which the dollar depreciates against the pound. If the dollar were to depreciate and the
importer had not entered into this agreement, they would need to spend more dollars in order to settle the
invoice.
(c) HOCK
B. Buying dollars in the futures market will not help theinternational, pagethey
importer because 25 need to sell their dollars to buy pounds in
order to settle the invoice in the future.
C. This answer is somewhat correct in that the U.S. importer will need to sell dollars. However, more than the need to
sell dollars, they need to buy pounds in the forward exchange market. Since this choice makes no mention of the
Part 2 : 01/14/19 11:31:33
invoice.
B. Buying dollars in the futures market will not help the importer because they need to sell their dollars to buy pounds in
order to settle the invoice in the future.
C. This answer is somewhat correct in that the U.S. importer will need to sell dollars. However, more than the need to
sell dollars, they need to buy pounds in the forward exchange market. Since this choice makes no mention of the
purchase of pounds, it is only half correct.
D. Selling pounds in the forward exchange market will not help the importer. If the importer sells pounds in the forward
market for delivery at a later date, the importer will have to buy the British pounds (or a forward contract to buy the
British pounds) in order to fulfill the forward contract. This will do nothing to help the importer, and it will hurt the
importer if the U.S. dollar does depreciate against the British pound because it will cost more to buy the British pounds
in the future. Furthermore, the importer needs to have the British pounds in 3 months to pay the British invoice.
A. U.S. multinational companies use the foreign exchange market for many reasons. One of those reasons is so that
they can hedge their receivables that are going to be collected in a foreign currency. By using foreign currency markets
the company can reduce, or eliminate, the chance of great losses due to the fluctuation of the exchange rates
B. U.S. multinational companies use the foreign exchange market for many reasons. One of those reasons is so that
they can hedge their payables that are due in a foreign currency. By using foreign currency markets the company can
reduce, or eliminate, the chance of great losses due to the fluctuation of the exchange rates.
C. U.S. multinational companies use the foreign exchange market for many reasons. One of those reasons is to
reduce the risk of devaluation of dividend payments as a result of fluctuations of the exchange rate.
D. Though U.S. multinationals use the foreign currency market for a number of reasons, this is not one of the
reasons. The foreign currency markets will not enable the company to improve the return on the investment of
a foreign subsidiary. Assuming that the foreign subsidiary's return on investments would involve cash inflows
and outflows in the foreign subsidiary's currency only, those cash flows would not be subject to exchange
rate risk.
A. An arbitrageur is an investor who attempts to profit from price inefficiencies in the market by making simultaneous
trades that offset each other and thus earning risk-free profits. For example, arbitrageurs seek price discrepancies
between the listing of a security on one exchange and the listing of the same security on another exchange and buy
and sell the same security on the two different exchanges in order to make a small profit on the difference.
B. Speculators engage in risky trades in the hope of earning a quick, large profit. An exporter is involved in the sale of
goods or services to foreign consumers and uses the foreign exchange market to facilitate its sales.
C. By definition, speculators engage in risky trades in the hope of earning a quick, large profit.
D. Speculators engage in risky trades in the hope of earning a quick, large profit. Hedging is a way to avoid risk in the
foreign currency market.
A. (c) HOCK international, page 26
The U.S. company will be receiving 100,000 Swiss Francs that it will need to convert into U.S. dollars. The U.S.
company can enter into a futures contract to sell 125,000 Swiss Francs that expires shortly after the due date
Part 2 : 01/14/19 11:31:33
A.
The U.S. company will be receiving 100,000 Swiss Francs that it will need to convert into U.S. dollars. The U.S.
company can enter into a futures contract to sell 125,000 Swiss Francs that expires shortly after the due date
of its receivable.
When the U.S. company receives 100,000 Swiss Francs in payment of the receivable, it will close out its
futures contract by entering into a contract to buy 125,000 Swiss Francs with the same expiration date as its
original contract, and that will zero out its contract. The U.S. company will have either a gain or a loss on the
futures contract transactions. The U.S. company will then use its 100,000 Swiss Francs to buy U.S. dollars on
the spot market. The U.S. company may have a foreign currency gain or loss due to changes in the spot rate
since it first issued the invoice, but any gain or loss will be offset by a loss or gain in a similar amount on the
futures contracts. Since the receivable is for 100,000 Swiss Francs and the futures contracts are for 125,000
Swiss Francs, the offset will not be exact, but it will be close.
The futures contracts are for 125,000 Swiss Francs because that is the lowest-denominated Swiss Franc
futures contract that is available on U.S. futures exchanges such as the CME Group (formerly Chicago
Mercantile Exchange).
B. The U.S. company will be receiving 100,000 Swiss Francs that it will need to convert into U.S. dollars. Entering into
a futures contract to buy Swiss Francs would not be helpful.
C.
An interest rate swap takes place when two parties exchange interest payments, usually one at a fixed rate and one at
a floating (or variable) rate pegged to some sort of market rate of interest that changes whenever the market rate
changes. One firm exchanges its fixed rate interest payments for a series of payments on the same principal amount
based on a floating rate instead, and the other firm exchanges its floating rate interest payments for a series of
payments on the same principal amount based on a fixed rate instead.
An interest rate swap does not involve exchanges in currencies. If a firm wishes to change the currency in which its
debt is denominated, it uses a currency swap. In a currency swap principal payments are exchanged as well as interest
payments. The two parties swap principal and interest amounts that are in different currencies.
D. A currency swap would not serve as a hedge for foreign exchange exposure on an account receivable. A currency
swap is a variation on an interest rate swap. With an interest rate swap, only interest payments are exchanged,
because the principal amount is the same for both parties to the swap. However, in a currency swap principal
payments are exchanged as well as interest payments. The two parties swap principal and interest amounts that are in
different currencies. A currency swap can be used to change the the currency in which the firm's liabilities are
denominated.

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Part 2 : 01/14/19 11:31:33

Question 1 - ICMA 13.P2.036 - International Finance

Question 2 - ICMA 10.P2.195 - International Finance

Question 3 - CMA 1287 1.28 - International Finance

A. U.S. exports to Switzerland should decrease.

Question 4 - CMA 676 1.34 - International Finance

A. More effective use of monetary and fiscal policies to reduce inflation.

Question 5 - CMA 1285 1.33 - International Finance

The purchasing-power parity exchange rate

A. results in an undervalued currency of countries that are net importers.

(c) HOCK international, page 1

D. is always equal to the market exchange rate.

Question 6 - CMA 1282 1.14 - International Finance

A. Being quoted at a discount.

Question 7 - CMA 1287 1.30 - International Finance

A. U.S. imports will tend to increase.

Question 8 - CIA 592 IV.70 - International Finance

A. Buy domestic currency in the foreign exchange market.

Question 9 - CMA 1286 1.20 - International Finance

Question 10 - ICMA 10.P2.194 - International Finance

Question 11 - ICMA 08.P1.99 - International Finance

A. Political stability of the country.

Question 12 - CMA 688 1.25 - International Finance

In foreign currency markets, the phrase "managed float" refers to the

Question 13 - CMA 680 1.20 - International Finance

A. Slow down collections and speed up payments.

Question 14 - CMA 680 1.17 - International Finance

The value of the U.S. dollar in relation to other foreign currencies is

Question 15 - CMA 695 1.24 - International(c) HOCK international, page 3

Question 15 - CMA 695 1.24 - International Finance

A. A high rate of inflation relative to other countries.

Question 16 - CMA 1288 1.16 - International Finance

A. U.S. dollar is at a premium of 10%.

Question 17 - ICMA 10.P2.192 - International Finance

A. U.S. inflation declines relative to British inflation.

Question 18 - CMA 1285 1.30 - International Finance

The dominant reason countries devalue their currencies is to:

A. Discourage exports without having to impose controls.

Question 19 - CMA 1288 1.17 - International Finance

A. £757. (c) HOCK international, page 4

Question 20 - CMA 1282 1.12 - International Finance

Question 21 - CMA 1287 1.29 - International Finance

A. The supply of dollars to increase.

Question 22 - CMA 1288 1.18 - International Finance

Question 23 - ICMA 13.P2.037 - International Finance

Question 24 - CMA 1288 1.15 - International Finance

Question 25 - CMA 694 1.4 - International Finance

Question 26 - ICMA 13.P2.013 - International Finance

Question 27 - ICMA 10.P2.193 - International Finance

A. trade between the U.S. and Britain would decrease.

(c) HOCK international, page 6

Question 28 - CMA Sample Q4.3 - International Finance

Question 28 - CMA Sample Q4.3 - International Finance

*If deemed preferable, these units could be sold in the U.S.

Question 29 - CIA 1196 IV.64 - International Finance

A. Sell foreign currency forward today.

Question 30 - CIA 1196 IV.73 - International Finance

A. The euro has appreciated by 10%.

(c) HOCK international, page 7