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
Covered Interest Rate Parity (CIRP) implies that:
Answer: The forward premium or discount on a currency equals the interest rate differential
CIRP states that the difference between forward and spot rates should equal the interest rate differential, preventing risk-free arbitrage.
A multinational firm uses a 'leading and lagging' strategy in intercompany payments. When expecting a foreign currency to appreciate, the firm should:
Answer: Lead payments owed in that currency and lag receipts in that currency
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.
Which political risk category refers specifically to the government's unilateral cancellation or alteration of contracts with foreign firms?
Answer: Breach of contract risk
Breach of contract risk occurs when a host government unilaterally cancels or modifies contracts, often without fair compensation.
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:
Answer: Net loss of 1% because currency appreciation outweighs the interest savings
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.
The Balance of Payments (BOP) accounting identity states that:
Answer: Current account + Financial account + Capital account + Official reserves account = 0
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.
In international capital budgeting, the 'home currency approach' requires the analyst to:
Answer: Convert all projected foreign cash flows to home currency and discount at the home currency cost of capital
The home currency approach converts projected foreign currency cash flows using expected future exchange rates, then discounts them using the parent's home currency cost of capital.
Which of the following is a primary advantage of establishing a reinvoicing center in international operations?
Answer: Centralizes currency risk management by having all intracompany invoices routed through a single entity
A reinvoicing center consolidates all intracompany currency risk in one entity, allowing centralized hedging and netting of exposures.