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1) merchant banks are different from traditional commercial banks in what way(s)?
a.merchant banks can engage in investment banking activities
b.merchant banks can arrange for foreign exchange transactions
c.merchant banks can assist their clients in hedging exchange rate risk
d.all of the above
2) suppose you observe a spot exchange rate of $1.50/. if interest rates are 3% apr in the
u.s. and 5% apr in the euro zone, what is the no-arbitrage 1-year forward rate?
a.1.5291/$
b.$1.5291/
c.1.4714/$
d.$1.4714/
3) a zero-coupon french bond promises to pay 100,000 in five years. the current
exchange rate is $1.50 = 1.00 and inflation is forecast at 3% in the u.s. and 2% in the
euro zone per year for the next five years. the appropriate discount rate for a bond of
this risk would be 10% if it paid in dollars. what is the appropriate price of the bond?
a.£65,196.13 = $97,794.20
b.£62,092.13 = $93,138.20
c.none of the above
4) privatization refers to process of
a.having government operate businesses for the betterment of the public sector
b.government allowing the operation of privately owned business
c.prohibiting government operated enterprises
d.a country divesting itself of the ownership and operation of a business venture by
turning it over to the free market system
5) in theory,
a.managers are hired by the shareholders at the annual stockholders meeting. if the
managers turn in a bad year, new ones get hired
b.shareholders hire the managers to oversee the board of directors
c.managers are hired by the board of directors; the board is accountable to the
shareholders
d.none of the above
6) which of the following is correct?
a.time value = intrinsic value + option premium
b.intrinsic value = option premium + time value
c.option premium = intrinsic value - time value
d.option premium = intrinsic value + time value
7) a higher u.s. interest rate (i$ ) will result in
a.a stronger dollar
b.a lower spot exchange rate (expressed as foreign currency per u.s. dollar)
c.both a and b
d.none of the above
8) to pave the way for the european monetary union, the member countries of the
european monetary system agreed to achieve a convergence of their economies. which
of the following is not a condition of convergence:
a.keep the ratio of government budget deficits to gdp below 3 percent
b.keep gross public debts below 60 percent of gdp
c.achieve a high degree of price stability
d.maintain its currency at a fixed exchange rate to the erm
9) the black-scholes option pricing formulae
a.are used widely in practice, especially by international banks in trading otc options
b.are not widely used outside of the academic world
c.work well enough, but are not used in the real world because no one has the time to
flog their calculator for five minutes on the trading floor
d.none of the above
10) suppose that both gold and silver are used as international means of payment and
the exchange rates among currencies are determined by either their gold or silver
contents. suppose that the dollar was pegged to gold at $20 per ounce, the japanese yen
is pegged to gold at 120,000 yen per ounce and to silver at 8,000 yen per ounce of
silver, and the australian dollar is pegged to silver at $5 per ounce of silver. what would
the exchange rate between the u.s. dollar and australian dollar be under this system?
a.$1 u.s. = $1 australian
b.$1 u.s. = $2 australian
c.$1 u.s. = $3 australian
d.none of the above
11) shelf registration
a.allows the shelves in a set of bookshelves to remain level
b.allows an issuer to preregister a securities issue, and then 'shelve" the securities for
later sale
c.allows an investment bank to increase the fees they charge by charging for storage of
the 'shelved" securities
d.eliminates the information disclosure that many foreign firms found objectionable in
the foreign bond market
12) the bid price
a.is the price that the dealer has just paid for something, his historical cost of the most
recent trade
b.is the price that a dealer stands ready to pay
c.refers only to auctions like ebay, not over the counter transactions with dealers
d.is the price that a dealer stands ready to sell at
13) your firm is a u.k.-based exporter of bicycles. you have sold an order to a swiss firm
for sfr. 1,000,000 worth of bicycles. payment from the swiss firm (in swiss francs) is
due in 12 months. use a money market hedge to redenominate this one-year receivable
into a euro-denominated receivable with a one-year maturity.
the following were computed without rounding. select the answer closest to yours.
a.£500,000
b.£464,874.41
c.£446,730.77
d.£509,900.99
14) advantages of cross-listing include:
a.this decision provides their shareholders with a higher degree of protection than may
be available in the home country
b.this decision can be a signal of the company's commitment to shareholder rights
c.this may make investors both at home and abroad more willing to provide capital and
to increase the value of the pre-existing shares
d.all of the above
15) the forward market
a.involves contracting today for the future purchase of sale of foreign exchange at the
spot rate that will prevail at the maturity of the contract
b.involves contracting today for the future purchase of sale of foreign exchange at a
price agreed upon today
c.involves contracting today for the right but not obligation to the future purchase of
sale of foreign exchange at a price agreed upon today
d.none of the above
16) a u.s.-based currency dealer has good credit and can borrow $1,000,000 for one
year. the one-year interest rate in the u.s. is i$ = 2% and in the euro zone the one-year
interest rate is i = 6%. the spot exchange rate is $1.25 = 1.00 and the one-year forward
exchange rate is $1.20 = 1.00. show how to realize a certain dollar profit via covered
interest arbitrage.
a.borrow $1,000,000 at 2%. trade $1,000,000 for 800,000; invest at i = 6%; translate
proceeds back at forward rate of $1.20 = 1.00, gross proceeds = $1,017,600
b.borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the u.s. at i$ = 2%
for one year; translate 848,000 back into euro at the forward rate of $1.20 = 1.00. net
profit $2,400
c.borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the u.s. at i$ = 2%
for one year; translate 850,000 back into euro at the forward rate of $1.20 = 1.00. net
profit 2,000
d.both c and b
17) advantages of a flexible exchange rates include which of the following?
a.national policy autonomy
b.easier external adjustments
c.the government can use monetary and fiscal policies to pursue whatever economic
goals it chooses
d.all of the above
18) assume the time from acceptance to maturity on a $10,000,000 banker's acceptance
is 90 days. further assume that the importing bank's acceptance commission is 1 percent
and that the market rate for 90-day b/as is 3.0 percent. calculate the amount the exporter
will receive if he holds it to maturity.
a.$9,993,750
b.$9,999,375
c.$9,975,000
d.$9,009,375
19) if a dollar earned by a foreign affiliate is taxed under the same rules as a dollar
earned by a domestic affiliate of the mnc, then we have achieved
a.capital-export neutrality
b.capital-import neutrality
c.national neutrality
d.tax equity
20) the time from acceptance to maturity on a $6,000,000 banker's acceptance is 360
days.
the importing bank's acceptance commission is 2 percent and that the market rate for
360-day b/as is 3 percent.
calculate the amount the banker will receive if the exporter discounts the b/a with the
importer's bank.
21) 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.
devise a direct swap for a and b that has no swap bank. show their external borrowing.
answer the problem in the template provided.
22) 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.
explain how this opportunity affects which swap firm a will be willing to participate in.
23) calculate the euro-based return an italian investor would have realized by investing
10,000 into a £50 british stock. one year after investment, the stock pays a £1 dividend,
and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound,
although he sold £8,800 forward at the forward rate of 1.28 per pound.
24) the first two columns give the maximum daily amounts of beer and whiskey that
southern ireland and northern ireland can produce when they completely specialize in
one or other product. the last two columns give each country's consumption without
trade.
25) your firm's interaffiliate cash receipts and disbursements matrix is shown below
($000):
using your results to the last question, use multilateral netting to simplify.
26)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you borrowed $1,000,000 for one year, how much money would you owe at
maturity?
27) suppose that you hold a piece of land in the city of london that you may want to sell
in one year. as a u.s. resident, you are concerned with the dollar value of the land.
assume that if the british economy booms in the future, the land will be worth £2,000,
and one british pound will be worth $1.80. if the british economy slows down, on the
other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say,
$2.20/£. you feel that the british economy will experience a boom with a 60 percent
probability and a slowdown with a 40 percent probability.
discuss how you can hedge your exchange risk exposure and also examine the
consequences of hedging.
28) 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?
29) 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.
