MIB Master of International Business: Multinational Financial Management 2 — Questions and Answers
Question 1: A US-based MNC has a subsidiary in Brazil that earns BRL 500,000. When translating to USD, which exchange rate is used for income statement items under ASC 830?
- Spot rate at balance sheet date
- Historical rate at transaction date
- Average exchange rate for the period (Correct answer)
- Forward rate at reporting date
Correct answer: Average exchange rate for the period
Under ASC 830, income statement items are translated using the average exchange rate for the reporting period.
Question 2: Which transfer pricing method calculates the arm's length price by starting with the resale price to an unrelated party and working backward?
- Cost Plus Method
- Comparable Uncontrolled Price
- Resale Price Method (Correct answer)
- Profit Split Method
Correct answer: Resale Price Method
The Resale Price Method determines the arm's length price by subtracting an appropriate gross margin from the price at which the product is resold to an unrelated buyer.
Question 3: A UK pound-denominated bond is issued by a US firm. If sterling appreciates against the dollar before maturity, the dollar cost of repaying principal will:
- Decrease because fewer dollars convert to sterling
- Stay the same since principal is fixed in sterling
- Increase because more dollars are needed to buy sterling (Correct answer)
- Be hedged automatically by the bond covenant
Correct answer: Increase because more dollars are needed to buy sterling
When sterling appreciates, each pound costs more in dollars, so the dollar-equivalent principal repayment rises.
Question 4: The 'J-curve effect' in international finance refers to which phenomenon?
- Bond yields rising then falling after a rate hike
- A trade deficit initially worsening after currency depreciation before improving (Correct answer)
- FDI inflows accelerating exponentially after liberalization
- Stock prices declining then recovering after political risk events
Correct answer: A trade deficit initially worsening after currency depreciation before improving
The J-curve describes how a currency depreciation first worsens the trade balance due to contracts already in place, then improves it as exports become cheaper and imports more expensive.
Question 5: Which instrument allows an MNC to lock in the exchange rate for a future transaction without obligating it to complete the trade?
- Forward contract
- Currency futures
- Currency option (Correct answer)
- Cross-currency swap
Correct answer: Currency option
Currency options grant the right but not the obligation to buy or sell currency at a specified rate, providing flexibility compared to binding forward contracts.
Question 6: In the context of international capital budgeting, the 'home currency approach' discounts which cash flows?
- Foreign currency cash flows at foreign WACC
- Foreign currency cash flows converted to home currency at expected future rates, discounted at home WACC (Correct answer)
- Nominal home currency flows at real discount rate
- Foreign currency flows at the risk-free rate plus country risk premium
Correct answer: Foreign currency cash flows converted to home currency at expected future rates, discounted at home WACC
The home currency approach converts projected foreign cash flows to the parent's currency using forecasted exchange rates, then discounts at the parent's home WACC.
Question 7: A multinational uses a 'natural hedge' to manage currency risk. Which scenario best illustrates this strategy?
- Buying put options on the foreign currency
- Matching foreign currency revenues with foreign currency costs in the same currency (Correct answer)
- Entering a currency swap with a counterparty bank
- Using leading and lagging of intercompany payments
Correct answer: Matching foreign currency revenues with foreign currency costs in the same currency
A natural hedge occurs when a firm offsets foreign currency exposures by generating revenues and incurring costs in the same foreign currency, reducing net exposure without financial instruments.
MIB Master of International Business: Multinational Financial Management 2
A US-based MNC has a subsidiary in Brazil that earns BRL 500,000.
When translating to USD, which exchange rate is used for income statement items under ASC 830?