1) suppose that you are the treasurer of ibm with an extra u.s. $1,000,000 to invest for
six months. you are considering the purchase of u.s. t-bills that yield 1.810% (that’s a
six month rate, not an annual rate by the way) and have a maturity of 26 weeks. the spot
exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. the
interest rate in japan (on an investment of comparable risk) is 13 percent. what is your
strategy?
a.take $1m, invest in u.s. t-bills
b.take $1m, translate into yen at the spot, invest in japan, and repatriate your yen
earnings back into dollars at the spot rate prevailing in six months
c.take $1m, translate into yen at the spot, invest in japan, hedge with a short position in
the forward contract
d.take $1m, translate into yen at the forward rate, invest in japan, hedge with a short
position in the spot contract
2) consider the no-trade input/output situation presented in the following table and
graph for south and north carolina. assume that free trade is legal.
suppose that the citizens of north and south carolina are currently consuming as much
butter as they care to. what is the maximum increase in the number of guns that could
occur following trade?
a.83.33 guns
b.533.33 guns
c.no increase
3) an arbitrage is best defined as
a.a legal condition imposed by the cftc
b.the act of simultaneously buying and selling the same or equivalent assets or
commodities for the purpose of making reasonable profits
c.the act of simultaneously buying and selling the same or equivalent assets or
commodities for the purpose of making guaranteed profits
d.none of the above
4) when the income tax rate in the host country is greater than the tax rate in the parent
country,
a.it is beneficial to follow a high markup policy on transferred goods and services from
the parent to a foreign affiliate
b.it is beneficial to follow a low markup policy on transferred goods and services from
the parent to a foreign affiliate
c.transfer pricing will not affect the total tax liability, net of foreign tax credit offsets
d.none of the above
5) your firm’s interaffiliate cash receipts and disbursements matrix is shown below
($000):
find the net cash flow in (out of) the u.k. affiliate.
a.$0 in or out
b.$5,000 out
c.$30,000 in
d.$30,000 out
e.none of the above
6) find an effective hedge financial hedge if a u.s. firm holds an asset in great britain
and faces the following scenario:
p* = pound sterling price of the asset held by the u.s. firm
p = dollar price of the same asset
the cfo runs a regression of the form
the regression coefficient beta is calculated as
where
the variance of the exchange rate is calculated as:
e(s) = 0.25 $2.20 + 0.50 $2.00 + 0.25 $1.80 = $.55 + $1 + $.45 = $2.00
var(s) = 0.25($2.20 – $2.00)2 + 0.50($2.00 – $2.00)2 + 0.25($1.80 – $2.00)2 = 0.01 + 0
+ 0.01
= 0.02
the expected value of the investment in u.s. dollars is:
e[p] = 0.25 $6,600 + 0.50 $5,000 + 0.25 $3,600 = $5,050
which of the following is the most effective hedge financial hedge?
a.sell £7,500 forward at the 1-year forward rate, f1($/£), that prevails at time zero
b.buy £7,500 forward at the 1-year forward rate, f1($/£), that prevails at time zero
c.sell £2,500 forward at the 1-year forward rate, f1($/£), that prevails at time zero
d.0.25 £3,000 + 0.50 £2,500 + 0.25 £2,000 = £2,500
7) if french-based affiliate a owes u.s.-based affiliate b $1,000 and affiliate b owes
affiliate a 2,000 when the exchange rate is $1.10 = 1.00. the net payment between a and
b should be
a.1,091 from b to a
b.1,091 from a to b
c.$1,200 from b to a
d.none of the above
8) the higher the transfer price
a.the higher the net profit reported by the mnc
b.the higher the gross profit of the receiving division relative to the transferring division
c.the higher the gross profit of the transferring division relative to the receiving division
d.none of the above
9) the first full-fledged gold standard
a.was not established until 1821 in great britain, when notes from the bank of england
were made fully redeemable for gold
b.was not established until 1780 in the united states, when notes from the continental
army were made fully redeemable for gold
c.was established in 986 during the han dynasty in china
d.none of the above
10) 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
the variance of the exchange rate is:
a.0.0200
b.0.101875
c.0.002
d.none of the above
11) a bank may establish a multinational operation for the reason of risk reduction. the
underlying rationale being that
a.by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government
controls can be circumvented
b.greater stability of earnings is possible with international diversification. offsetting
business and monetary policy cycles across nations reduces the country-specific risk of
any one nation
c.multinational banks are often not subject to the same regulations as domestic banks.
there may be reduced need to publish adequate financial information, lack of required
deposit insurance and reserve requirements on foreign currency deposits, and the
absence of territorial restrictions
d.multinational banking operations help a bank prevent the erosion of its traveler’s
check, tourist, and foreign business markets from foreign bank competition
12) the turnover ratio percentages for 27 equity markets of developed countries for the
five years beginning with 2002 were measured. most national equity markets had very
high turnover ratios, with the great majority in excess of
a.15 percent turnover per year
b.25 percent turnover per year
c.50 percent turnover per year
d.75 percent turnover per year
13) when using the current/noncurrent method,
a.most income statement items are translated at the average exchange rate for the
accounting period
b.revenue and expense items that are associated with noncurrent assets or liabilities are
translated at the historical rate that applies to the applicable balance sheet items
c.depreciation expense is translated at the historical rate that applies to the applicable
depreciable asset items
d.all of the above