MIB Master of International Business: Multinational Financial Management 3 — Questions and Answers
Question 1: When a foreign subsidiary's functional currency is different from the parent's reporting currency, the translation adjustment is recorded in:
- Net income on the income statement
- Other Comprehensive Income (OCI) on the balance sheet (Correct answer)
- Retained earnings directly
- Goodwill impairment account
Correct answer: Other Comprehensive Income (OCI) on the balance sheet
Under ASC 830, cumulative translation adjustments from translating a foreign subsidiary's financials flow through Other Comprehensive Income, not the income statement.
Question 2: The 'impossible trinity' (Mundell-Fleming trilemma) states that a country cannot simultaneously maintain:
- Low inflation, full employment, and a balanced budget
- A fixed exchange rate, free capital mobility, and independent monetary policy (Correct answer)
- High growth, price stability, and external balance
- Free trade, capital controls, and fiscal sovereignty
Correct answer: A fixed exchange rate, free capital mobility, and independent monetary policy
The trilemma holds that only two of three goals — fixed exchange rate, free capital flows, and autonomous monetary policy — can be achieved at the same time.
Question 3: A US MNC borrows in Japanese yen at 0.5% instead of USD at 4%. To eliminate currency risk, it should pair this with:
- A yen put option
- A fixed-for-floating interest rate swap
- A cross-currency swap converting yen payments to USD (Correct answer)
- A forward rate agreement in USD
Correct answer: A cross-currency swap converting yen payments to USD
A cross-currency swap exchanges principal and interest in yen for USD equivalents, effectively converting the low-rate yen loan into synthetic USD financing.
Question 4: Country risk premium (CRP) in international WACC estimation is typically derived from:
- The difference between domestic and foreign risk-free rates
- Sovereign bond yield spreads adjusted for relative equity market volatility (Correct answer)
- Central bank policy rate differentials only
- The OECD country risk classification score
Correct answer: Sovereign bond yield spreads adjusted for relative equity market volatility
CRP is commonly estimated as the sovereign credit default spread multiplied by the ratio of equity to bond market volatility in the target country.
Question 5: An MNC with net receivables in euros wants to hedge using the money market. Which sequence correctly describes this hedge?
- Borrow euros today, convert to USD, invest USD until receivable date (Correct answer)
- Borrow USD today, convert to euros, invest euros until receivable date
- Buy euro futures equal to the receivable amount
- Enter a forward contract to sell euros at maturity
Correct answer: Borrow euros today, convert to USD, invest USD until receivable date
To hedge a euro receivable via the money market, the firm borrows euros (matching the future inflow), converts to USD immediately, and invests the USD proceeds.
Question 6: Under IFRS 9, hedge accounting requires documentation of which of the following at hedge inception?
- The probability of the hedged item occurring and the hedge ratio only
- The hedging relationship, risk management objective, hedge ratio, and effectiveness testing method (Correct answer)
- Only the notional amount and maturity of the hedging instrument
- Board approval and auditor sign-off
Correct answer: The hedging relationship, risk management objective, hedge ratio, and effectiveness testing method
IFRS 9 requires formal documentation at hedge inception covering the hedging relationship, risk management objective and strategy, nature of the hedged risk, the hedge ratio, and the effectiveness assessment approach.
Question 7: Compared to equity financing, why might an MNC prefer internal capital markets (intercompany loans) for subsidiary funding?
- Intercompany dividends are always tax-deductible in the parent country
- Interest deductions reduce taxable income in high-tax jurisdictions (Correct answer)
- Equity capital avoids transfer pricing scrutiny
- Intercompany loans eliminate foreign exchange risk entirely
Correct answer: Interest deductions reduce taxable income in high-tax jurisdictions
By funding subsidiaries with intercompany loans rather than equity, the MNC can deduct interest payments in high-tax countries, reducing the overall global tax burden.
MIB Master of International Business: Multinational Financial Management 3
When a foreign subsidiary's functional currency is different from the parent's reporting currency, the translation adjustment is recorded in: