1. Answer the following multiple choice question. (Choose the correct answer). 1 mark each question.

1. If a foreign country's interest rate is similar to the UK rate, the forward rate premium or discount will be _________, meaning that the forward rate and spot rate will provide ________ forecasts.

1 point

1. close to zero; similar
2. close to zero; very different
3. substantial; very different
4. substantial; similar

2. Stock returns are much more correlated across countries than within a country.

1 point

1. True
2. False

3. In the 2014-2015 period, the strengthening of the U.S. dollar against the euro caused several U.S.-based MNCs operating in the European Union region to report lower incomes than they had anticipated. This event is an example of:

1 point

1. Translation exposure
2. Fundamental exposure
3. Transaction exposure
4. Economic exposure

4. Which of the following statements is NOT true?

1 point

1. PPP does not necessarily hold, and therefore the exchange rate will not necessarily change in accordance with the inflation differential between the two countries
2. Investors in MNCs can easily hedge exchange rate risk on their own
3. Translation exposure is the exposure of an MNCs consolidated financial statements to exchange rate movement
4. The greater the percentage of an MNCs business conducted by its foreign subsidiaries, the larger the percentage of a given financial statement item that is susceptible to translation exposure.