1) a bank may establish a multinational operation for the reason of prestige. the
underlying rationale being that
a.local firms may be able to obtain from a foreign subsidiary bank operating in their
country more complete trade and financial market information about the subsidiary’s
home country than they can obtain from their own domestic banks
b.the foreign bank subsidiary can draw on the parent bank’s knowledge of personal
contacts and credit investigations for use in that foreign market
c.very large multinational banks have high perceived prestige, liquidity, and deposit
safety that can be used to attract clients abroad
d.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
2) find the black-scholes price of a six-month call option written on 100,000 with a
strike price of $1.00 = 1.00. the current exchange rate is $1.25 = 1.00; the u.s. risk-free
rate is 5% over the period and the euro-zone risk-free rate is 4%. the volatility of the
underlying asset is 10.7 percent.
a.ce = $0.63577
b.ce = $0.0998
c.ce = $1.6331
d.none of the above
3) a u.s. firm holds an asset in israel and faces the following scenario:
where,
p* = israeli shekel (is) price of the asset held by the u.s. firm
p = dollar price of the same asset
the expected value of the investment in u.s. dollars is:
a.$2,083.33
b.$762.50
c.$6,250.00
d.$6,562.50
4) the credit rating of an international borrower
a.depends on the volatility of the exchange rate
b.depends on the volatility, but not absolute level, of the exchange rate
c.is usually never higher than the rating assigned to the sovereign government of the
country in which it resides
d.is unrelated to the rating assigned to the sovereign government of the country in
which it resides
5) a recent study of mncs suggests that when a foreign subsidiary’s obligations cannot
be met with locally generated revenues,
a.parent firms bail out their subsidiaries regardless of circumstances
b.that parent firms routinely allow subsidiaries to default
c.most subsidiaries are financed almost entirely with banker’s acceptances
d.none of the above
6) many economists prefer a vat to an income tax because
a.these economists are pin heads with no real world experience
b.an income tax provides a disincentive to work, whereas a vat is a disincentive to
unnecessary consumption
c.an income tax is an incentive to work, whereas a vat is a disincentive to consumption
d.all of the above
7) the otc market
a.does not accept creditthe dealers “only take cash”
b.is a dealer market
c.includes the nasdaq in the u.s
d.both b and c
8) the forward price
a.may be higher than the spot price
b.may be the same as the spot price
c.may be less than the spot price
d.all of the above
9) a “eurobond” issue is
a.one denominated in a particular currency but sold to investors in national capital
markets other than the country that issued the denominating currency
b.usually a bearer bond
c.for example a dutch borrower issuing dollar-denominated bonds to investors in the
u.k., switzerland, and the netherlands
d.all of the above
10) solve for the weighted average cost of capital:
a.8.67%
b.8.00%
c.7.60%
d.7.33%
e.7.14%
11) suppose that the exchange rate is 1.25 = £1.00.
options (calls and puts) are available on the london exchange in units of 10,000 with
strike prices of £0.80 = 1.00.
options (calls and puts) are available on the frankfurt exchange in units of £10,000 with
strike prices of 1.25 = £1.00.
for a u.k. firm to hedge a 100,000 payable,
a.buy 10 call options on the euro with a strike in pounds sterling
b.buy 8 put options on the pound with a strike in euro
c.sell 10 call options on the euro with a strike in pounds sterling
d.sell 8 put options on the pound with a strike in euro
e.both a and b
f.both c and d
12) examples of ‘single-currency interest rate swap” and “cross-currency interest rate
swap” are:
a.fixed-for-floating rate interest rate swap, where one counterparty exchanges the
interest payments of a floating-rate debt obligations for fixed-rate interest payments of
the other counter party
b.fixed-for-fixed rate debt service (currency swap), where one counterparty exchanges
the debt service obligations of a bond denominated in one currency for the debt service
obligations of the other counter party denominated in another currency
c.both a and b
d.none of the above