1) value-added tax (vat) is
a.a direct national tax levied on the value added in the production of a good (or service)
as it moves through various stages of production
b.an indirect national tax levied on the value added in the production of a good (or
service) as it moves through various stages of production
c.the equivalent of imposing a national sales tax
d.both b and c
2) suppose in order to defraud the shareholders, a manager sets up an independent
company that he owns buys one of the main company’s inputs of production from this
company. he would be tempted to set the transfer price
a.below market prices
b.above market prices
c.at the market price
d.in accordance with gaap
3) if the annual inflation rate is 2.5 percent in the united states and 4 percent in the u.k.,
and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate,
assuming that ppp initially held, is _____.
a.parity
b.0.9710
c.-0.0198
d.4.5
4) the balance of payments identity is given by bca + bka + bra = 0. rearrange the
identity for a country with a pure flexible exchange rate regime
a.bca + bka + bra = 0
b.bca = -bka
c.bca + bka = -bra
d.bra = -bca
5) suppose a country is currently experiencing a trade deficit. in the long run, this could
be self correcting if
a.the deficit exists because of the import demand for capital goods
b.the deficit exists because of the import demand for consumption goods
c.the deficit exists because foreigners want to buy the country’s currency as an
investment
d.none of the above
6) the price of a mcdonald’s big mac sandwich
a.is about the same in the 120 countries that mcdonalds does business in
b.varies considerably across the world in dollar terms
c.supports ppp
d.none of the above
7) consider the supply-demand framework for the british pound relative to the u.s.
dollar shown in the nearby chart. the exchange rate is currently $1.80 = £1.00. which of
the following is correct?
a.to “fix” the exchange rate at $1.80 = £1.00, the federal reserve could use
contractionary monetary policy to shift the demand curve to the left
b.to “fix” the exchange rate at $1.80 = £1.00, the u.s. government could use
contractionary fiscal policy to shift the demand curve to the left
c.the british government could use fiscal or monetary policy to shift the supply curve to
the right to fix the exchange rate to $1.80 = £1.00
d.all of the above
8) in the u.s., the chief role of the board of directors is
a.to hire the management team
b.to decide on the annual capital budget
c.to design an effective incentive compatible compensation scheme for themselves
d.none of the above
9) a purely domestic firm that sources and sells only domestically,
a.faces exchange rate risk to the extent that it has international competitors in the
domestic market
b.faces no exchange rate risk
c.should never hedge since this could actually increase its currency exposure
d.both b and c
10) an example of forward vertical fdi
a.u.s. car makers built their own network of dealerships in japan to help sell their cars
b.u.s. car makers began to source parts in japan to lower the cost of their cars
c.u.s. car makers entered into joint partnerships with car makers in japan to help sell
their cars
d.none of the above
11)
using the table shown, what is the most current spot exchange rate shown for british
pounds? use a direct quote from a u.s. perspective.
a.$1.61 = £1.00
b.$1.60 = £1.00
c.$1.00 = £0.625
d.$1.72 = £1.00
12) the mean and standard deviation (sd) of monthly returns, over a given period of
time, for the stock markets of two countries, x and y are
assuming that the monthly risk-free interest rate is 0.25%, the sharpe performance
measures, shp(x) and shp(y), and the performance ranks, respectively, for x and y are:
a.shp(x) = 0.271, rank = 1, and shp(y) = 0.219, rank = 2
b.shp(x) = 0.271, rank = 2, and shp(y) = 0.219, rank = 1
c.shp(x) = 18.84, rank = 1, and shp(y) = 23.04, rank = 2
d.shp(x) = 23.04, rank = 2, and shp(y) = 18.84, rank = 1
13) the sf/$ spot exchange rate is sf1.25/$ and the 180 day forward premium is 8
percent. what is the outright 180 day forward exchange rate?
a.sf1.30/$
b.sf1.35/$
c.sf6.25/$
d.none of the above
14) the exposure coefficient in the regression informs
a.how much of a foreign currency to sell forward
b.the part of the variability of the dollar value of the asset that is related to random
changes in the exchange rate
c.captures the residual part of the dollar value variability that is independent of
exchange rate movements
d.how many call options to write
15) the benefit to forecasting exchange rates
a.are greatest during periods of fixed exchange rates
b.are nonexistent now that the euro and dollar are the biggest game in town
c.accrue to, and are a vital concern for, mncs formulating international sourcing,
production, financing and marketing strategies
d.all of the above
16) your firm is a u.k.-based importer of bicycles. you have placed an order with an
italian firm for 1,000,000 worth of bicycles. payment (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
17) you are a bank and your customer asks you to quote an agreed-upon rate for a 3 6
fra. you observe the following rates:
what rate should you quote?
a.5.96%
b.4.96%
c.2.48%
d.none of the above
18) your firm is a u.k.-based exporter of british bicycles. you have sold an order to an
american firm for $1,000,000 worth of bicycles. payment from the american firm (in
u.s. dollars) is due in six months. detail a strategy using futures contracts that will hedge
your exchange rate risk.
a.go short 12 six-month forward contracts; pay £555,600
b.go short 16 six-month forward contracts. pay approximately £537,600
c.go long 12 six-month forward contracts. receive approximately £549,500
d.go long 16 six-month forward contracts; raise approximately £537,600
19) if the stock market of a foreign country is consistently up when the dollar value of
the currency is down,
a.there may not be a great deal of exchange rate risk for a u.s.-based investor
b.there will be a great deal of exchange rate risk for a u.s.-based investor
c.then investors can ignore diversification
d.none of the above