1) when a currency trades at a premium in the forward market
a.the exchange rate is more than one dollar (e.g. 1.00 = $1.28)
b.the exchange rate is less than one dollar
c.the forward rate is less than the spot rate
d.the forward rate is more than the spot rate
2) with regard to the current exchange rate arrangement between italy and germany, it is
best characterized as
a.independent floating (market determined)
b.managed float
c.an exchange arrangement with no separate legal tender
d.pegged exchange rate within a horizontal band
3) libor
a.is a market rate, analogous to the u.s. federal funds rate
b.is a government set rate, like the discount rate
c.is the rate at which banks in london will accept interbank deposits
d.none of the above
4) the table below shows the bushels of wheat and the bottles of beer that north and
south dakota can produce per day of labor under two different hypothetical situations
(cases i and ii).
for case ii, in what range must the “international” price of wheat fall? i.e. if north and
south dakota trade only with each other, what is the range of prices possible?
a.between 1 bushel of wheat = 4/3 bottles of beer and 1 bushel of wheat = 2 bottles of
beer
b.between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = 2 bottles of
beer
c.between 1 bushel of wheat = 3/4 bottles of beer and 1 bushel of wheat = bottles of
beer
d.none of the above
5) the majority of publicly traded swiss corporations have up to three classes of
common stock:
1) registered stock
2) voting bearer stock
3) nonvoting bearer stock
until recently, foreigners were not allowed to buy registered stocks: in the case of nestl
this had the effect of
a.distorting the prices of registered stock downward
b.distorting the prices of registered stock upward
c.this had no effect on prices
d.none of the above
6) following the adoption of the cadbury code of best practice joint ceo/cob positions
declined
a.from 27 percent of the companies before the adoption to 15 percent afterwards
b.from 37 percent of the companies before the adoption to 15 percent afterwards
c.from 47 percent of the companies before the adoption to 15 percent afterwards
d.from 57 percent of the companies before the adoption to 15 percent afterwards
7) generating exchange rate forecasts with the fundamental approach involves
a.looking at charts of the exchange rate and extrapolating the patterns into the future
b.estimation of a structural model
c.substituting the estimated values of the independent variables into the estimated
structural model to generate the forecast
d.both b and c
8) approximately ___ of wholesale eurobank external liabilities come from fixed time
deposits, the remainder from negotiable certificates of deposit.
a.50%
b.75%
c.90%
d.none of the above
9) webs are
a.world equity benchmark shares
b.exchange-traded open-end country funds designed to closely track foreign stock
market indexes
c.both a and b
d.none of the above
10) on a recent sale, boeing allowed british airways to pay either $18 million or £10
million.
a.at the due date, british airways will be indifferent between paying dollars or pounds
since they would of course have hedged their exposure either way
b.boeing has provided british airways with a free option to buy $18 million with an
exercise price of £10 million
c.boeing has provided british airways with a free option to sell up to £10 million with
an exercise price of $18 million
d.all of the above
11) an interest-only single currency interest rate swap
a.is also known as a plain vanilla swap
b.is also known as an interest rate swap
c.is about as simple as swaps can get
d.all of the above
12) assume that you are a retail customer (i.e. you buy as the ask and sell at the bid).
please note that your answers are worth zero points if they do not include currency
symbols ($, )
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you borrowed 1,000,000 for one year, how much money would you owe at maturity?
13) your firm’s interaffiliate cash receipts and disbursements matrix is shown below
($000):
fill out the following figure with the initial situation shown in the table.
14) calculate the cumulative translation adjustment for this u.s. mnc translating the
balance sheet and income statement of a french subsidiary, which keeps its books in
euro, but that is translated into u.s. dollars using the current rate method, the reporting
currency of the u.s. mnc.
the subsidiary is at the end of its first year of operation.
the historical exchange rate is $1.60/1.00 and the most recent exchange rate is $1.50/
15)
using the table, what is the canadian dollar-euro spot cross-exchange rate?
16) 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 $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
what would be the interest rate?
17)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward exchange rate
in $ per that satisfies irp from the perspective of a customer that borrowed $1m traded
for at the spot and invested at i = 4%.
18)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward bid exchange
rate in $ per that satisfies irp from the perspective of a customer.
19) 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.
state the composition of the replicating portfolio; your answer should contain “trading
orders” of what to buy and what to sell at time zero.
20) the strik-it-rich gold mining company is contemplating expanding its operations. to
do so it will need to purchase land that its geologists believe is rich in gold.
strik-it-rich’s management believes that the expansion will allow it to mine and sell an
additional 2,000 troy ounces of gold per year. the expansion, including the cost of the
land, will cost $500,000. the current price of gold bullion is $425 per ounce and
one-year gold futures are trading at $450.50 = $425 (1.06). extraction costs are $375 per
ounce. the firm’s cost of capital is 10 percent.
strik-it-rich’s management is, however, concerned with the possibility that large sales of
gold reserves by russia and the united kingdom will drive the price of gold down to
$390 for the foreseeable future. on the other hand, management believes there is some
possibility that the world will soon return to a gold reserve international monetary
system. in the latter event, the price of gold would increase to at least $460 per ounce.
the course of the future price of gold bullion should become clear within a year.
strik-it-rich can postpone the expansion for a year by buying a purchase option on the
land for $25,000.
compute the npv at the two possible prices of gold.
21) the stock market of country a has an expected return of 8%, and standard deviation
of expected return of 5%. the stock market of country b has an expected return of 16%
and standard deviation of expected return of 10%.
find the global minimum variance portfolio.