1. It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.
True
False
2. ________ is measured by an MNE’s ability to exercise effective control over its operations within a country's legal and political environment.
a. Interest rate risk
b. Governance risk
c. Political risk
d. Portfolio risk
3. The Stakeholder Capitalism Model (SCM):
a. is the Anglo-American model of corporate governance.
b. clearly places shareholders as the primary stakeholder.
c. has financial profit as its goal and is often termed impatient capital.
d. combines the interests and inputs of shareholders, creditors, management, employees, and society.
4. Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars from a manufacturer in Germany for euro 3,000,000. The purchase was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in euros rather than dollars, CVT is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information. The spot exchange rate is $1.250/euro. The six month forward rate is $1.22/euro. CVT's cost of capital is 11%. The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months). The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months). The U.S. 6-month borrowing rate is 8% (or 4% for 6 months). The U.S. 6-month lending rate is 6% (or 3% for 6 months). December call options for euro 750,000; strike price $1.28, premium price is 1.5%. CVT's forecast for 6-month spot rates is $1.27/euro. The budget rate, or the highest acceptable purchase price for this project, is $3,900,000 or $1.30/euro. CVT would be ________ by an amount equal to ________ with a forward hedge than if they had NOT hedged and their predicted exchange rate for 6 months had been correct.
a. worse off; $150,000
b. worse off; €150,000
c. better off; $150,000
d. better off; €150,000
5. In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets.
a. dealers; brokers
b. central banks; treasuries
c. speculators; arbitrageurs
d. wholesalers; retailers