CFC International Financial Management 3

Question 1

Covered Interest Rate Parity (CIRP) implies that:

Accepted Answer

The forward premium or discount on a currency equals the interest rate differential

Answer

CIRP states that the difference between forward and spot rates should equal the interest rate differential, preventing risk-free arbitrage.

Question 2

A multinational firm uses a 'leading and lagging' strategy in intercompany payments. When expecting a foreign currency to appreciate, the firm should:

Accepted Answer

Lead payments owed in that currency and lag receipts in that currency

Answer

When a currency is expected to appreciate, accelerating (leading) payments in that currency locks in the current lower cost, while delaying (lagging) receipts awaits the higher value.

Question 3

Which political risk category refers specifically to the government's unilateral cancellation or alteration of contracts with foreign firms?

Accepted Answer

Breach of contract risk

Answer

Breach of contract risk occurs when a host government unilaterally cancels or modifies contracts, often without fair compensation.

Question 4

A US company borrows in Swiss francs at a lower interest rate than available domestically. If the Swiss franc appreciates by 3% and the interest rate advantage is 2%, the net effect is:

Accepted Answer

Net loss of 1% because currency appreciation outweighs the interest savings

Answer

When the currency borrowed appreciates, the repayment cost in domestic terms rises; if appreciation (3%) exceeds the interest savings (2%), there is a net loss.

Question 5

The Balance of Payments (BOP) accounting identity states that:

Accepted Answer

Current account + Financial account + Capital account + Official reserves account = 0

Answer

The BOP must balance to zero; any deficit in the current account must be offset by a surplus in the financial/capital accounts or changes in official reserves.

(CFC) Certified Financial Controller Practice Test

(CFC) Certified Financial Controller Practice Test

CFC International Financial Management 3