Revision

1) With regard to corporate goals, an MNC is mostly concerned with maximizing ____________, and
a purely domestic firm is mostly concerned with maximizing ____________.
A) shareholder wealth; short-term earnings
B) shareholder wealth; shareholder wealth
C) short-term earnings; sales volume
D) short-term earnings; shareholder wealth

2) Which of the following theories identifies specialization as a reason for international business?
A) theory of comparative advantage.
B) imperfect markets theory.
C) product cycle theory.
D) none of the above

3) According to the text, a disadvantage of licensing is that:

A) it prevents a firm from importing.
B) it is difficult to ensure quality control of the production process.
C) it prevents a firm from exporting.
D) none of the above

4) A centralized management style for an MNC results in relatively high agency costs.
A) true.
B) false.

5) If U.S. inflation suddenly increased while European inflation stayed the same, there would be:
A) an increased U.S. demand for euros and an increased supply of euros for sale.
B) a decreased U.S. demand for euros and an increased supply of euros for sale.
C) a decreased U.S. demand for euros and a decreased supply of euros for sale.
D) an increased U.S. demand for euros and a decreased supply of euros for sale.

6) Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not
retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for
Chilean pesos to _______ and the value of the peso to _______.
A) increase; increase
B) increase; decline
C) decline; decline
D) decline; increase

7) Assume the following bid and ask rates of the pound for two banks as shown below:
Bid Ask
Bank C $1.61 $1.63
Bank D $1.58 $1.60
 As locational arbitrage occurs:
A) the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase.
B) the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease.
C) the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease.
D) the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

8) Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest
rates on euros. Which of the following forces should result from the act of this covered interest
arbitrage?
a. downward pressure on the euro's spot rate.
b. downward pressure on the euro's forward rate.
c. downward pressure on the U.S. interest rate.
d. upward pressure on the euro's interest rate.

9) Assume that the inflation rate in Barbados is 3.20%, while the inflation rate in the U.S. is 3.00%. According to
PPP, the Barbados dollar (BBD) should ___________ by _________%.
A) appreciate; 0.1938%
B) depreciate; 0.1938%
C) appreciate; 0.1942%
D) depreciate; 0.1942%

10) Assume the following information:

Current spot rate of New Zealand dollar = $.41

Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One-year forward rate of the New Zealand dollar = $.42
Annual interest rate on New Zealand dollars = 8%
Annual interest rate on U.S. dollars = 9%

Given the information in this question, the return from covered interest arbitrage by U.S. investors with
$500,000 to invest is _______%.
A) about 11.97
B) about 9.63
C) about 11.12
D) about 11.64
E) about 10.63

11) Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid
rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what
would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up
with over and above the $1,000,000 you started with?
A) $15,385.
B) $15,625.
C) $22,136.
 D) $31,250.

12) National Bank quotes the following for the British pound and the New Zealand dollar:

Quoted Bid Price Quoted Ask Price

Value of a British pound (£) in $ $1.61 $1.62
Value of a New Zealand dollar (NZ$) in $ $.55 $.56
Value of a British pound in
New Zealand dollars NZ$2.95 NZ$2.96

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?
A) $77.64.
B) $197.53.
C) $15.43.
D) $111.80.

State whether each statement is "True" or "False", Correct the wrong statement
1) Imperfect markets represent conditions under which factors of production are immobile.

2) The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for
the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner
suggested by purchasing power parity, the new exchange rate for the yen will be $0.0063.

3) According to the international Fisher effect (IFE), the exchange rate percentage change should be
approximately equal to the differential in income levels between two countries.

4) International trade generally results in higher exposure to international political risk and higher exposure to
international economic conditions, when compared to other methods of international business.

5) The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

6) An MNC will always use the same required rate of return in the valuation of foreign projects, as it would
for its domestic projects.

7) According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflation rate
at home, home country consumers will increase their imports from the foreign country and foreign
consumers will lower their demand for home country products. These market forces cause the foreign
currency to appreciate.

8) The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in
its home country and may subsequently penetrate foreign markets via geographic or product differentiation.
Problems:
Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of
$.15 to $.14 in 10 days. The following interbank lending and borrowing rates exist:

Lending Rate Borrowing Rate

U.S. dollar 8.0% 8.3%
Mexican peso 8.5% 8.7%

Assume that Blue Demon Bank has a borrowing capacity of either $10 million or 70 million peos in
the interbank market, depending on which currency it wants to borrow.

a. How could Blue Demon Bank attempt to capitalize on its expectations without using
deposited funds? Estimate the profits that could be generated from this strategy.
b. Assume all the preceding information with this exception: Blue Demon Bank expects the
peso to appreciate from its present spot rate of $.15 to $.17 in 30 days. How could it attempt
to capitalize on its expectations without using deposited funds? Estimate the profits that
could be generated from this strategy.