1) under a gold standard, if britain exported more to france than france exported to great
britain,
a.such international imbalances of payment will be corrected automatically
b.this type of imbalance will not be able to persist indefinitely
c.net export from britain will be accompanied by a net flow of gold in the opposite
direction
d.all of the above
2) advantages of investing in mutual funds known as country funds include:
a.speculation in a single foreign market at minimum cost
b.using them as building blocks of a personal international portfolio
c.diversification into emerging markets that are otherwise practically inaccessible
d.all of the above
3) the key requirements of the cadbury code of best practice state that
a.the compensation, nominating, and audit committees to be entirely composed of
independent directors.
b.the positions of ceo and chairman of the board should not reside in the same
individual
c.listed companies to have boards of directors with a majority of independents
d.none of the above
4) with regard to estimates of “world beta” measures of the sensitivity of a national
market to world market movements,
a.the japanese stock market is the most sensitive to world market movements
b.the u.s. stock market is the least sensitive to world market movements
c.both a and b
d.none of the above
5) the current account includes
a.the export and import of goods and services
b.all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses
c.all purchases and sales of international reserve assets such as dollars, foreign
exchanges, gold, and special drawing rights (sdrs)
d.none of the above
6) a buy-back transaction
a.is also called a bilateral clearing agreement
b.involves a technology transfer via the sale of a manufacturing plant: as part of the
terms, the seller of the plant agrees to purchase a certain portion of the plant output
c.involves two parties agreeing to buy a specified amount of goods or services from one
another
d.all of the above
7) prior to the peso crisis, mexico depended on foreign portfolio capital to finance its
economic development. this foreign capital influx
a.caused higher domestic inflation
b.led to an overvalued peso
c.helped mexico’s trade balances
d.a and b are correct
8) suppose that the one-year interest rate is 5.0 percent in the united states; the spot
exchange rate is $1.20/; and the one-year forward exchange rate is $1.16/. what must
one-year interest rate be in the euro zone to avoid arbitrage?
a.5.0%
b.6.09%
c.8.62%
d.none of the above
9) consider a project of the cornell haul moving company, the timing and size of the
incremental after-tax cash flows (for an all-equity firm) are shown below in millions:
the firm’s tax rate is 34%; the firm’s bonds trade with a yield to maturity of 8%; the
current and target debt-equity ratio is 3; if the firm were financed entirely with equity,
the required return would be 10%
using the apv method, what is the value of this project to an all-equity firm?
a.-$46,502,288.10
b.$12,494,643.75
c.$36,580,767.55
d.-$67,163,445.12
e.$59,459,301.03
10) a bond market index
a.is a reference rate, like libor, that adjustable rate bonds use to set the coupon
b.is analogous to a stock market index, but with bond price data instead of stock price
data
c.represents a price-weighted average of all bonds that exist
d.none of the above
11) the balance of payments identity is given by bca + bka + bra = 0. rearrange the
identity to solve for the statistical discrepancy.
a.the statistical discrepancy = (bca + bka) – bra
b.the statistical discrepancy = bca – bka + bra
c.the statistical discrepancy = bca – bka – bra
d.the statistical discrepancy = bca + bka + bra
12) find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of .
a.1
b.2
c.3
d.4
e.5
13) economic exposure refers to
a.the sensitivity of realized domestic currency values of the firm’s contractual cash
flows denominated in foreign currencies to unexpected exchange rate changes
b.the extent to which the value of the firm would be affected by unanticipated changes
in exchange rate
c.the potential that the firm’s consolidated financial statement can be affected by
changes in exchange rates
d.ex post and ex ante currency exposures
14) by far the most important international finance centers are
a.new york and london
b.new york, london, and tokyo
c.new york, london, tokyo, paris, and zurich
d.new york, london, tokyo, paris, zurich, and frankfurt
15) as a measure of “liquidity”,
a.generally, the lower the turnover, the greater the liquidity of a secondary stock market
b.generally, the higher the turnover, the greater the liquidity of a secondary stock
market
c.the more a financial asset gurgles when shook the greater the liquidity
d.none of the above
16) in evaluating the pros and cons of corporate risk management, “market
imperfections” refer to
a.information asymmetry, differential transaction costs, default costs, and progressive
corporate taxes
b.leading and lagging, receivables and payables, and diversification costs
c.economic costs, noneconomic costs, arbitrage costs, and hedging costs
d.management costs, corporate costs, liquidity costs, and trading costs
17) suppose a bank customer with 1,000,000 wishes to trade out of euro and into
japanese yen. the dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-yen
exchange rate is quoted at $1.00 = ¥120. how many yen will the customer get?
a.¥192,000,000
b.¥5,208,333
c.¥75,000,000
d.¥5,208.33
18) which statement is false?
a.active income is defined as income that results from production by the firm or
individual or from services that have been provided
b.passive income includes dividends and interest income, and income from royalties,
patents, or copyrights paid to the taxpayer
c.a withholding tax is a tax levied on passive income earned by an individual or
corporation of one country within the tax jurisdiction of another country
d.the current marginal u.s. income tax rate is positioned towards the lower end of the
rates assessed by the majority of other countries
19) some of the factors (with selected explanations) used in calculating the basic “net
present value” and the “incremental” cash flows of a capital project are:
(i) – expected after-tax terminal value, including recapture of working capital
(ii) – net income, which belongs to the equity holders of the firm
(iii) – initial investment at inception
(iv) – depreciation, and the fact that depreciation is a noncash expense (i.e. it is removed
from the calculation of net income, for tax purposes, but added back because it did not
actually flow out of the firm)
(v) – weighted-average cost of capital
(vi) – the firm’s after-tax payment of interest to debtholders
(vii) – economic life of the capital project in years
the “incremental” cash flows of a capital project is calculated by using:
a.(i), (ii), and (iii)
b.(ii), (iv), and (vi)
c.(i), (iii), (v), and (vii)
d.(iv), (v), (vi), and (vii)
20) consider an option to buy 12,500 for £10,000. in the next period, the euro can
strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or
weaken by 20%.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
draw the tree.
21) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had 1,000,000 and traded it for usd at the spot rate, how many usd will you get?
22) the time from acceptance to maturity on a $1,000,000 banker’s acceptance is 90
days.
the importing bank’s acceptance commission is 3 percent and that the market rate for
90-day b/as is 5 percent.
determine the amount the exporter will receive if he discounts the b/a with the
importer’s bank.
23) consider an option to buy 12,500 for £10,000. in the next period, the euro can
strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or
weaken by 20%.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
if the call finishes out-of-the-money what is your portfolio cash flow?
24) the time from acceptance to maturity on a $2,000,000 banker’s acceptance is 90
days.
the importing bank’s acceptance commission is 1.25 percent and that the market rate for
90-day b/as is 6 percent.
determine the bond equivalent yield the importer’s bank will earn from discounting the
b/a with the exporter.
25) consider the situation of firm a and firm b. the current exchange rate is $2.00/£ firm
a is a u.s. mnc and wants to borrow £30 million for 2 years. firm b is a british mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
the irp 1-year and 2-year forward exchange rates are
explain how firm a could use two of the swaps offered above to hedge its exchange rate
risk.
26) find the dollar value today of a 1-period at-the-money call option on ¥300,000. the
spot exchange rate is ¥100 = $1.00. in the next period, the yen can increase in dollar
value by 15 percent or decrease by 15 percent. the risk free rate in dollars is i$ = 5%;
the risk free rate in yen is i¥ = 1%.
27)
consider the following international investment opportunity. it involves a gold mine that
can be opened at a cost, then produces a positive cash flow, but then requires
environmental clean-up:
find the dollar cash flows to compute the dollar-denominated npv of this project.
28) consider the situation of firm a and firm b. the current exchange rate is $1.50/. firm
a is a u.s. mnc and wants to borrow 40 million for 2 years. firm b is a french mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown;
both firms have aaa credit ratings.
explain how firm b could use the forward exchange markets to redenominate a 2-year
40m 5% euro loan into a 2-year usd-denominated loan.
firm b could borrow 40m today and exchange for at $60m today’s spot rate.
then they could enter a 1-year forward contract on euro agreeing to buy enough euro
with dollars to service their loan. at the 1-year forward rate of $1.5268 this will cost .05
40m $1.5268/1.00 = $3,057,142.86 in one year.
29) a french firm is considering a one-year investment in the united kingdom with a
pound-denominated rate of return of i£ = 15%. the firm’s local cost of capital is i = 10%
the project costs £1,000 and will return £1,150 at the end of one year.
the current exchange rate is 2.00 = £1.00
suppose that the bank of england is considering either tightening or loosening its
monetary policy. it is widely believed that in one year there are only two possibilities:
find the npv in euro for the french firm if they wait one year to undertake the project
after the exchange rate falls to s1(|£) = 1.80 per £.