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1) with regard to cash management systems in practice, studies suggest that the benefits
of a multilateral netting system include
a.the decrease in the expense associated with funds transfer, which in some cases can be
over $1,000 for a large international transfer of foreign exchange
b.the savings in administrative time
c.the reduction in intra company float, which is frequently as high as five days, even for
wire transfers
d.all of the above
2) suppose you are a euro-based investor who just sold microsoft shares that you had
bought six months ago. you had invested 10,000 to buy microsoft shares for $120 per
share; the exchange rate was $1.55 per euro. you sold the stock for $135 per share and
converted the dollar proceeds into euro at the exchange rate of $1.50 per euro. compute
the rate of return on your investment in euro terms.
a.12.50%
b.16.25%
c.28.00%
d.-9.09%
3) withholding tax rates imposed through tax treaties are
a.bilateral
b.multilateral
c.netted
d.none of the above
4) a "tax haven" country is one that has a low, or zero percent, national tax rates. some
of the countries that fall into this category are
a.bahamas, bahrain, bermuda, and the cayman islands
b.denmark, norway, switzerland, and sweden
c.bulgaria, canada, saudi arabia, and south africa
d.congo, egypt, kuwait, and zaire
5) a firm with a highly elastic demand for its products
a.will be unable to pass increased costs following unfavorable changes in the exchange
rate without significantly lowering the quantity sold
b.will be able to raise prices following unfavorable changes in the exchange rate
without significantly lowering the quantity sold
c.can easily pass increased costs on to consumers
d.will sell about the same amount of product regardless of price
6) currently, international reserve assets are comprised of
a.gold, platinum, foreign exchanges, and special drawing rights (sdrs)
b.gold, foreign exchanges, special drawing rights (sdrs), and reserve positions in the
international monetary fund (imf)
c.gold, diamonds, foreign exchanges, and special drawing rights (sdrs)
d.reserve positions in the international monetary fund (imf), only
7) when individual investors become aware of overseas investment opportunities and
are willing to diversify their portfolios internationally,
a.they trade one market imperfection, information asymmetry, for another, exchange
rate risk
b.they benefit from an expanded opportunity set
c.they should not bother to read or to understand the prospectus, since its probably
written in a foreign language
d.they should invest only in dollars or euros
8) the following is an outline of certain potential benefits as well as costs associated
with the cross-border listings of stocks:
(i) - the company can expand its potential investor base
(ii) - issues involving the disclosure and listing requirements
(iii) - creates a secondary market for the company's shares
(iv) - volatility spillover from the overseas markets
(v) - liquidity
(vi) - control of the company by foreigners
(vii) - enhances the visibility of the company's name and its products in foreign
marketplaces
which of the following represent all the potential benefits of the cross-border listings of
stocks?
a.(i), (ii), and (iii)
b.(ii), (iv), and (vi)
c.i), (iii), (v), and (vii)
d.(iv), (v), (vi), and (vii)
9) when interest rate parity (irp) does not hold
a.there is usually a high degree of inflation in at least one country
b.the financial markets are in equilibrium
c.there are opportunities for covered interest arbitrage
d.both b and c
10) the eximbank helps u.s. exporters develop and expand their overseas sales by
a.working capital guarantees
b.direct loans to foreign borrowers
c.loan guarantees
d.credit insurance
e.all of the above
11) suppose a u.s.-based mnc makes computers with parts from its subsidiary in a
low-tax east asian country. it can reduce its reported u.s. incomeand increase its
subsidiary's profitsby
a.overpaying for the computer components
b.underpaying for the computer components
c.paying an arm's length price
d.none of the above
12) including the transactions costs of the bid-ask spread, the euro-pound cross
exchange rate for a customer who wants to sell euro and buy pounds can be computed
as
a.
b.
c.
d.all of the above
13) the territorial method of declaring a national tax jurisdiction
a.is to tax national residents of the country on their worldwide income no matter in
which country it is earned
b.is to tax all income earned within the country by any taxpayer, domestic or foreign
c.is to tax foreign residents of the country on their home-country income but not
foreign-earned income
d.none of the above
14) the current exchange rate is 1.25 = £1.00 and a british firm offers a french customer
the choice of paying a £10,000 bill due in 90 days with either £10,000 or 12,500.
a.the seller has given the buyer an at-the-money put option on euro with a strike in
pounds
b.the seller has given the buyer an at-the-money put option on pounds with a strike in
euro
c.the seller has given the buyer an at-the-money call option on euro with a strike in
pounds
d.none of the above
15) if the difference between tax revenue and government expenditures is negative, it
implies that
a.tax revenue is insufficient to cover government spending
b.a government budget deficit exists
c.the government will be issuing new debt securities
d.all of the above
16) find the weighted average cost of capital for a firm that has a debt-to-equity ratio of
2, a tax rate of 40%, a levered cost of equity of 12% and an after-tax cost of debt of 9%.
a.7.6%
b.7.968%
c.10%
d.none of the above
17) consider a u.s. mnc with three subsidiaries and the following foreign exchange
transactions shown at left. use multilateral netting with a central depository to reduce
the number of foreign exchange transactions.
a.
b.
c.
d.none of the above
18) with regard to the past performance of u.s.-based closed end countryfunds
a.most investors who can invest directly in foreign markets without incurring excessive
costs are advised to do so
b.navs offer superior diversification opportunities compared to the cecfs
c.both a and b
d.none of the above
19) with regard to operational hedging versus financial hedging,
a.operational hedging provides a more stable long-term approach than does financial
hedging
b.financial hedging, when instituted on a rollover basis, is a superior long-term
approach to operational hedging
c.since they both have the same goal, stabilizing the firm's cash flows in domestic
currency, they are fungible in use
d.none of the above
20) 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
21) calculate the euro-based return an italian investor would have realized by investing
10,000 into a $50 american stock. one year after investment, the stock pays a $1
dividend, and sells for $54 the exchange rate has changed from .625 per dollar to .6875
per dollar, although he sold $16,000 forward at the forward rate of .65 per dollar.
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 $60 million for 2 years. their borrowing opportunities are as shown,
both firms have aaa credit ratings.
what are the irp 1-year and 2-year forward exchange rates?
23)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you
receive?
24) 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.
25)
using the table what is the 6-month forward pound-yen cross-exchange rate?
26) the time from acceptance to maturity on a $1,000,000 banker's acceptance is 90
days.
the importing bank's acceptance commission is 3 percent and that the market rate for
90-day b/as is 5 percent.
determine the bond equivalent yield the importer's bank will earn from discounting the
b/a with the exporter.
27) your firm is based in southern ireland (and thereby operates in euro, not pounds)
and is considering an investment in the united states.
the project involves selling widgets: you project a sales volume of 50,000 widgets per
year, sales price of $20 per widget with a contribution margin of $15 per widget.
the project will last for 5 years, require an investment of $1,000,000 at time zero (which
will be depreciated straight-line to $10,000 over the 5 years). salvage value for the
equipment is projected to be $10,000. the project will operate in rented quarters:
$300,000 rent is due at the start of each year.
the corporate tax rate is 12% in ireland and 40% in the u.s.
for simplicity, assume that taxes are paid like sales taxes: immediately.
the spot exchange rate is $1.50 = 1.00. the cost of capital to the irish firm for a domestic
project of this risk is 8%. the u.s. risk-free rate is 3%; the irish risk-free rate is 2%.
what is cf5 in dollars?
28) the time from acceptance to maturity on a $50,000 banker's acceptance is 180 days.
the importing bank's acceptance commission is 2.50 percent and that the market rate for
180-day b/as is 2 percent.
determine the amount the exporter will receive if he holds the b/a until maturity.
