1) in which type of market can liquidity “dry up”?
a.a bull market
b.a bear market
c.a speculative bubble
d.a financial panic
2) the role of an underwriter is to
a.help negotiate terms with the borrower
b.ascertain market conditions
c.manage the issuance
d.all of the above
3) the simplest of all translation methods to apply is
a.current/noncurrent method
b.monetary/nonmonetary method
c.temporal method
d.current rate method
4) swap transactions
a.involve the simultaneous sale (or purchase) of spot foreign exchange against a
forward purchase (or sale) of approximately an equal amount of the foreign currency
b.account for about half of interbank fx trading
c.involve trades of one foreign currency for another without going through the u.s.
dollar
d.all of the above
5) the core of the international money market is
a.the eurocurrency market
b.the market for foreign exchange
c.the futures forwards and options markets on foreign exchange
d.none of the above
6) financial accounting standards board (fasb) statements 8 and 52 relate to the
translation methods. the following outlines the objectives and descriptions of the two
statements.
(i) – measure in dollars an enterprise’s assets, liabilities, revenues, or expenses that are
denominated in a foreign currency according to generally accepted accounting
principles
(ii) – is essentially the temporal method of translation (with some subtle differences)
(iii) – provide information that is generally compatible with the expected economic
effects of a rate change on an enterprise’s cash flows and equity
(iv) – reflect in consolidated statements the financial results and relationships of the
individual consolidated entities as measured in their functional currencies in conformity
with u.s. generally accepted accounting principles
the “reporting currency” is defined in fasb 52 as
a.the currency of the primary economic environment in which the entity operates
b.the currency in which the mnc prepares its consolidated financial statements
c.a currency that is not the parent firm’s home country currency
d.both a and c
7) in conversation, interbank foreign exchange traders use a shorthand abbreviation in
expressing spot currency quotations. consider a $/£ bid-ask quote of $1.9072-$1.9077.
the “big figure”, assumed to be known to all traders is _____.
a.1.9077
b.1
c.1.90
d.77
8) your firm has a british customer that is willing to place a $1 million order, but wants
to pay in pounds instead of dollars. the spot exchange rate is $1.85 = £1.00 and the
one-year forward rate is $1.90 = £1.00. the lead time on the order is such that payment
is due in one year. what is the fairest exchange rate to use?
a.$1.85 = £1.00
b.$1.8750 = £1.00
c.$1.90 = £1.00
d.none of the above
9) when interest rate parity (irp) does not hold
a.there is usually a high degree of inflation in at least one country
b.the financial markets are in equilibrium
c.there are opportunities for covered interest arbitrage
d.both b and c
10) if the interest rate rises in the u.s. while other variables remain constant
a.capital inflows into the u.s. will increase
b.capital inflows into the u.s. may not materialize
c.capital will flow out of the u.s
d.none of the above
11) the adjusted present value (apv) model that is suitable for an mnc is the basic net
present value (npv) model expanded to
a.distinguish between the market value of a levered firm and the market value of an
unlevered firm
b.discern the blocking of certain cash flows by the host country from being legally
remitted to the parent
c.consider foreign currency fluctuations or extra taxes imposed by the host country on
foreign exchange remittances
d.all of the above
12) with regard to dual-currency bonds versus comparable straight fixed-rate bonds,
a.dual currency bonds usually trade at a premium to reflect the value of the forward
contract implicit in their repayment schedule
b.the interest on dual-currency bonds is usually lower than on comparable straight
fixed-rate debt
c.the interest on dual-currency bonds is usually higher than on comparable straight
fixed-rate debt
d.none of the above
13) a minor currency is
a.anything other than the “big six”: u.s. dollar, british pound, japanese yen, euro,
canadian dollar, and swiss franc
b.any currency that trades at less than one u.s. dollar
c.any currency that is less than a $20 denomination
d.none of the above
14) investment in foreign equity markets
a.is no longer considered a “backwater” in the field of finance
b.became common practice in the 1980s as investors diversified their portfolios
c.during the 1980s was largely confined to the developed world
d.all of the above
15) simplify the following set of intra company cash flows for this u.s. firm.
use the following exchange rates.
the fewest number of intra-affiliate cash flows is
a.zero
b.one
c.two
d.three
e.four
16) zero coupon bonds
a.pay interest at zero percent
b.are sold at a discount from par value
c.are attractive to japanese investors who are not required to pay taxes on capital gains
d.both a and b
17) the capital account may be divided into three categories:
a.cross-border mergers and acquisitions, portfolio investment, and other investment
b.direct investment, portfolio investment, and cross-border mergers and acquisitions
c.direct investment, mergers and acquisitions, and other investment
d.direct investment, portfolio investment, and other investment
18) in the apv model
a.interest tax shields are discounted at i
b.operating cash flows are discounted at ku
c.depreciation tax shields are discounted at i
d.all of the above
19) under the bretton woods system, each country was responsible for maintaining its
exchange rate within 1 percent of the adopted par value by
a.buying or selling foreign exchanges as necessary
b.buying or selling gold as necessary
c.expanding or contracting the supply of loanable funds as necessary
d.increasing or decreasing their money supply as necessary
20) a u.s. firm holds an asset in great britain and faces the following scenario:
where,
p* = pound sterling price of the asset held by the u.s. firm
p = dollar price of the same asset
which of the following would be an effective hedge?
a.sell £2,500 forward at the 1-year forward rate, f1($/£), that prevails at time zero
b.buy £2,500 forward at the 1-year forward rate, f1($/£), that prevails at time zero
c.sell £25,000 forward at the 1-year forward rate, f1($/£), that prevails at time zero
d.none of the above