1) consider a fixed for fixed currency swap. the dow corporation is a u.s.-based
multinational. the jones corporation is a u.k.-based multinational. dow wants to finance
a £2 million expansion in great britain. jones wants to finance a $4 million expansion in
the u.s. the spot exchange rate is £1.00 = $2.00. dow can borrow dollars at $10% and
pounds sterling at 12%. jones can borrow dollars at 9% and pounds sterling at 10%.
assuming that the swap bank is willing to take on exchange rate risk, but the other
counterparties are not, which of the following swaps is mutually beneficial to each
party and meets their financing needs?
a.dow should borrow $4 million in dollars externally at $10%; pay £11% in pounds to
the swap bank on a notational principal of £2 million; receive $10% from the swap
bank on a notational principal of $4million. jones, borrows £2 million pounds
externally at £10%; pays $8% to the swap bank on a notational principal of $4 million
and receives £10% in pounds from the swap bank on a notational principal of £2
million
b.dow should borrow $4 million in dollars externally at $10%; pay £11 % in pounds to
the swap bank on a notational principal of £2 million; receive $10% from the swap
bank on a notational principal of $4 million. jones, borrows £2 million pounds
externally at £10%; pays $8% to the swap bank on a notational principal of $4 million
and receives £10% in pounds from the swap bank on a notational principal of £2
million
c.dow should borrow $4 million in dollars externally at $10%; pay £11% in pounds to
the swap bank on a notational principal of £2 million; receive $8% from the swap bank
on a notational principal of $4 million. jones, borrows £2 million pounds externally at
£10%; pays $10% to the swap bank on a notational principal of $4 million and receives
£11% in pounds from the swap bank on a notational principal of £2 million
d.there is no swap that is possible
2) straight fixed-rate bond issues have
a.a designated maturity date at which the principal of the bond issue is promised to be
repaid. during the life of the bond, fixed coupon payments, which are a percentage of
the face value, are paid as interest to the bondholders
b.a designated maturity date at which the principal of the bond issue is promised to be
repaid. during the life of the bond, coupon payments, which are a percentage of the face
value, are computed according to a fixed formula
c.a fixed payment, which amortizes the debt, like a house payment or car payment
d.none of the above
3) company x and company y have mirror-image financing needs (they both want to
borrow equivalent amounts for the same amount of time. company x has a aaa credit
rating, but company y’s credit standing is considerably lower.
a.company x should demand most of the qsd in any swap with y as compensation for
default risk
b.since y has a poor credit rating, it would not be a participant in the swap market
c.company x should more readily agree to a swap involving y if there is also a swap
bank providing credit risk intermediation
d.both a and c
4) on the nyse, limit order prices receive preference in establishing the posted bid and
ask prices if they are more favorable than the specialist’s. therefore
a.a specialist must fill a limit order, if possible, from his own account before trading the
flow of public orders
b.specialists must fill a limit order, if possible, from the flow of public orders before
trading for his own account
c.a specialist must change his posted bid and ask prices to reflect the available limit
orders
5) what is the expected return on equity for a tax-free firm with a 15% expected return
on assets that pays 12% on its debt, which totals 25% of assets?
a.24%
b.15.60%
c.16%
d.20%
e.15.75%
6) the underlying principle of the temporal method is
a.assets and liabilities should be translated based on their maturity
b.monetary balance sheet accounts should be translated at the spot rate; nonmonetary
accounts are translated at the historical rate in effect when the account was first
recorded
c.monetary accounts are translated at the current exchange rate; other accounts are
translated at the current exchange rate if they are carried on the books at current value;
items carried at historical cost are translated at historic exchange rates
d.all balance sheet accounts are translated at the current exchange rate, except
stockholder equity
7) in any year, the eurobond segment of the international bond market accounts for
approximately what percent of new bond offering?
a.10%
b.25%
c.50%
d.80%
8) when money can move freely across borders, policy makers must choose between
a.exchange-rate stability and an economic growth
b.exchange-rate stability and inflation
c.exchange-rate stability and an independent monetary policy
d.exchange-rate stability and capital controls
9) which of the following is a translation method where a “plug” equity account called
cumulative translation adjustment is used?
a.current/noncurrent method
b.current rate method
c.current/future method
d.short/long term method
10) the owners of a business are the
a.taxpayers
b.workers
c.suppliers
d.shareholders
11) your firm is a swiss importer of bicycles. you have placed an order with a british
firm for £1,000,000 worth of bicycles. payment (in pounds sterling) is due in 12
months. detail a strategy using futures contracts that will hedge your exchange rate risk.
have an estimate of how many contracts of what type and maturity.
a.go short 100 12-month pound futures contracts; and long 200 12-month sfr. futures
contracts
b.go long 100 12-month pound futures contracts; and short 200 12-month sfr. futures
contracts
c.go short 100 12-month pound futures contracts
d.go long 100 12-month pound futures contracts; and long 200 12-month sfr. futures
contracts
e.none of the above
12) the market capitalization of the developing world
a.is about 80 percent of the market capitalization of the entire world
b.is about 60 percent of the market capitalization of the entire world
c.is about 40 percent of the market capitalization of the entire world
d.is about 20 percent of the market capitalization of the entire world
13) when cross-hedging,
a.try to find one asset that has a positive correlation with another asset
b.the main thing is to find one asset that covaries with another asset in some predictable
way
c.try to find one asset that has a negative correlation with another asset
d.none of the above
14) since the balance of payments is presented as a system of double-entry
bookkeeping,
a.every credit in the account is balanced by a matching debit
b.every debit in the account is balanced by a matching credit
c.answers a and b are both true
d.none of the above
15) your firm is a u.k.-based exporter of bicycles. you have sold an order to a french
firm for 1,000,000 worth of bicycles. payment from the french firm (in euro) is due in
12 months. detail a strategy using futures contracts that will hedge your exchange rate
risk. have an estimate of how many contracts of what type and maturity.
a.go short 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts
b.go long 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts
c.go long 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts
d.go short 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts
e.none of the above
16) assume that the balance-of-payments accounts for a country are recorded correctly.
balance on the current account = bca = $130 billion
balance on the capital account = bka = -$86 billion
balance on the reserves account = bra = ?
the balance on the reserves account (bra), under the pure flexible exchange regime is
a.-$44 billion
b.$44 billion
c.$216 billion
d.none of the above