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# Exam 2 - Coursework Example

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Summary
corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is \$.02 and the exercise price of the option is \$.50. If the spot rate at the time of maturity is \$.65, what is the total amount paid by the corporation if it acts rationally?
A…

## Extract of sample "Exam 2"

Exam 2 Question A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. Thepremium is \$.02 and the exercise price of the option is \$.50. If the spot rate at the time of maturity is \$.65, what is the total amount paid by the corporation if it acts rationally?
\$33,600
\$46,900
\$44,100
\$36,400
When exercising the option, the corporation will have to pay (\$0.5*£70000) = \$ 35,000.
Total premium paid = (\$0.02*£70000) = \$ 1400. Thus, amount of \$ paid will be (1400+35000)= \$ 36400
Question 2
A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C\$) receivable. The premium is \$.01 and the exercise price of the option is \$.75. If the spot rate at the time of maturity is \$.85, what is the net amount received by the corporation if it acts rationally?
\$74,000
\$84,000
\$75,000
\$85,000
From selling C\$ in the spot market, the corporation will receive (\$0.85*C\$100000) =\$85000. However, a premium amounting to (\$0.01*C\$100000) =\$1000 will have to be remitted for the option.
Thus, net amount received =\$(85000-1000) = \$84000
Question 3
A foreign targets expected future cash flows generally vary among different MNCs valuing the target.
True
False
Question 4
A money market hedge involves taking a money market position to cover a future payables or receivables position.
True
False
Question 5
A previously undertaken project in a foreign country may no longer be feasible because:
interest rates have declined.
the MNCs cost of capital has decreased
the host government has increased its tax rates substantially.
exchange rate projections changed from a depreciation to an appreciation of the foreign currency.
Question 6
A targets previous cash flows are typically an accurate indicator of future cash flows, especially when the targets cash flows would have to be converted into the acquirers home currency as they are remitted to the parent.
True
False
Question 7
According to the text, a firm may be able to achieve a "more efficient" project portfolio if it:
focuses solely on one product.
focuses solely on one location to market what it produces.
A and B
none of the above
Question 8
According to your text, U.S. firms pursue more international acquisitions in ____ than in other countries.
the U.K.
Mexico
Japan
Germany
France
Question 9
According to your text, all of the following are factors to be considered in an international acquisition, except
the targets willingness to be acquired.
the targets previous acquisition history.
the targets previous cash flows.
the targets local economic conditions.
Question 10
An MNC should periodically reassess its investments to determine whether to divest them.
True
False
Question 11
An acquirer based in a low-tax country may be able to generate higher cash flows from acquiring a foreign target than an acquirer based in a high-tax country.
True
False
Question 12
An advantage of using options to hedge is that the MNC can let the option expire. However, a disadvantage of using options is that a premium must be paid for it.
True
False
Question 13
An international acquisition is different from the establishment of a new subsidiary in that the MNC can immediately expand its international business since the target is already in place.
True
False
Question 14
An international acquisition may be preferable to the establishment of a new subsidiary because the firm can immediately expand its international business and benefit from existing customer relationships.
True
False
Question 15
Assume a U.S. firm initiates direct foreign investment in the U.K. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should ____. The parent may request that the subsidiary ____ in order to benefit from the expectation about the pound.
increase; postpone remitting earnings until the pound strengthens
decrease; postpone remitting earnings until the pound strengthens
decrease; remit earnings immediately before the pound strengthens
increase; remit earnings immediately before the pound strengthens
Question 16
Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates:

U.S.
Switzerland
360-day borrowing rate
7%
5%
360-day deposit rate
6%
4%
Assume the forward rate of the Swiss franc is \$.50 and the spot rate of the Swiss franc is \$.48. If Parker Company uses a money market hedge, it will receive ____ in 360 days.
\$101,904
\$101,923
\$98,769
\$96,914
\$92,307
Borrow Swiss Franc 190,476 () = SF 190,476
Thereafter, we convert the SF190, 476 to \$ (SF190, 476 *0 .48) = \$91,428.
Investing \$91,428 will generate (\$91,428 * 1.06) = \$96,914
Question 17
Assume the British pound appreciates against the dollar while the Japanese yen depreciates against the dollar. Which of the following is true?
Japanese exporters can increase American sales by shifting operations from their British subsidiaries to Japan.
British exporters can increase American sales by shifting operations from their Japanese subsidiaries to Britain.
American exporters can increase sales to Japan by shifting operations from Japanese subsidiaries to American subsidiaries.
B and C
Question 18
Consider Firm A and Firm B that both produce the same product. Firm A would more likely have more stable cash flows if its percentage of foreign sales were ____ and the number of foreign countries it sold products to was ____.
higher; large
higher; small
lower; small
higher; large
Question 19
Countries in eastern Europe are more appealing to MNCs that seek relatively low costs of land and labor than countries in western Europe.
True
False
Question 20
Direct foreign investment would typically be welcomed if:
The products to be produced are substitutes for other locally produced products.
People from the country of the companys headquarter are transferred to the foreign country to work at the subsidiary.
The products to be produced are going to be exported.
all of the above
Question 21
When a foreign currency is perceived by a firm to be undervalued, the firm may consider direct foreign investment in that country, as the initial outlay should be relatively low.
True
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