International Financial Management Flashcards
7 cards from real CFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 International Financial Management flashcards as text
A US company has a €5 million payable due in 90 days. To hedge using a forward contract, the company should:
Answer: Buy euros forward
To hedge a euro payable, the company buys euros forward, locking in the exchange rate and eliminating currency risk.
The International Fisher Effect (IFE) states that:
Answer: Exchange rate changes are proportional to nominal interest rate differentials between countries
The IFE holds that currencies of countries with higher nominal interest rates will depreciate by the amount of the interest rate differential.
Which of the following best describes 'translation exposure' in multinational corporations?
Answer: Risk arising from consolidating foreign subsidiaries' financial statements into the parent's reporting currency
Translation exposure (accounting exposure) arises when consolidating foreign subsidiaries' statements into the parent company's home currency.
A country running a persistent current account deficit will most likely experience:
Answer: Currency depreciation due to excess supply of domestic currency in forex markets
A persistent current account deficit means more domestic currency is sold to buy foreign goods, creating downward pressure on the currency.
Under ASC 830 (formerly SFAS 52), which method is used to translate a foreign subsidiary that operates as a self-contained entity?
Answer: Current rate method
The current rate method translates all balance sheet items at the current exchange rate and is used when the subsidiary's functional currency differs from the parent's reporting currency.
A US exporter invoices a Japanese client in USD. Which party bears the transaction exchange rate risk?
Answer: The Japanese importer, because it must acquire USD to pay the invoice
The Japanese importer bears the risk because it must exchange yen for US dollars, and if the yen weakens, the cost increases.
The primary purpose of a currency swap is to:
Answer: Exchange principal and interest payments in one currency for those in another currency
A currency swap involves exchanging both principal and periodic interest payments in one currency for equivalent payments in another currency over a set term.