MIB Master of International Business: Multinational Financial Management 4

Question 1

A currency is said to be 'overvalued' according to Purchasing Power Parity (PPP) when:

Accepted Answer

Its current exchange rate exceeds the PPP-implied rate

Answer

PPP overvaluation occurs when the actual market exchange rate makes the currency stronger than warranted by relative price levels, implying goods are more expensive domestically.

Question 2

The 'bid-ask spread' in the foreign exchange market represents:

Accepted Answer

The bank's profit margin on a currency transaction

Answer

The bid-ask spread is the difference between the rate at which a market maker will buy (bid) and sell (ask) a currency, representing the dealer's transaction profit.

Question 3

An MNC discovers that EUR/USD is 1.20 in New York and 1.22 in London simultaneously. Which action exploits this arbitrage?

Accepted Answer

Buy EUR in New York at 1.20 and sell in London at 1.22

Answer

The arbitrageur buys euros cheaply in New York (1.20 USD/EUR) and simultaneously sells them at the higher London rate (1.22 USD/EUR), locking in a risk-free profit.

Question 4

A 'blocked funds' problem arises when:

Accepted Answer

A host government restricts the repatriation of profits to the parent

Answer

Blocked funds occur when host country regulations prevent a subsidiary from transferring dividends, royalties, or other cash flows back to the parent company.

Question 5

Which of the following best describes 'economic exposure' for a multinational?

Accepted Answer

The change in a firm's present value of future cash flows due to unexpected exchange rate movements

Answer

Economic exposure (also called operating exposure) measures how unexpected exchange rate changes affect the present value of a firm's future operating cash flows and competitive position.

MIB - Master of International Business Practice Test

MIB - Master of International Business Practice Test

MIB Master of International Business: Multinational Financial Management 4