1) countries with strong shareholder protection tend to have more valuable stock
markets and more companies listed on stock exchanges per capita than countries with
weak protection.
2) public traders do not trade directly with one another in a dealer market.
3) a netting center necessarily implies that the mnc has a central cash manager.
4) over half of all dollar bills in circulation are held outside american’s borders.
5) under the monetary/nonmonetary method, revenue and expense items associated with
nonmonetary accounts, such as cost of goods sold and depreciation, are translated at the
historical rate associated with the balance sheet account.
6) edge act banks are not prohibited from owning equity in business corporations,
unlike domestic commercial banks.
7) a put option on $15,000 with a strike price of 10,000 is the same thing as a call
option on 10,000 with a strike price of $15,000.
8) eurobonds sold in the united states may not be sold to u.s. citizens.
9) today’s settlement price on a chicago mercantile exchange (cme) yen futures contract
is $0.8011/¥100. your margin account currently has a balance of $2,000. the next three
days’ settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (the
contractual size of one cme yen contract is ¥12,500,000). if you have a long position in
one futures contract, the changes in the margin account from daily marking-to-market,
will result in the balance of the margin account after the third day to be
a.$1,425
b.$1,675
c.$2,000
d.$3,425
10) for european currency options written on euro with a strike price in dollars, what of
the effect of an increaser?
a.decrease the value of calls and puts ceteris paribus
b.increase the value of calls and puts ceteris paribus
c.decrease the value of calls, increase the value of puts ceteris paribus
d.increase the value of calls, decrease the value of puts ceteris paribus
11) the market risk premium
a.can be defined by the difference between the expected market return and the risk-free
rate
b.is the reward for bearing nondiversifiable risk
c.is the slope of the security market line
d.
e.all of the above are correct
12) two studies found a link between exchange rates and the stock prices of u.s. firms,
a.this suggests that exchange rate changes can systematically affect the value of the firm
by influencing its operating cash flows
b.this suggests that exchange rate changes can systematically affect the value of the
firm by influencing the domestic currency values of its assets and liabilities
c.both a and b
d.none of the above
13) find the hedge ratio for a call option on £10,000 with a strike price of 12,500.
the current exchange rate is 1.50/£1.00 and in the next period the exchange rate can
increase to 2.40/£ or decrease to 0.9375/1.00 (i.e. u = 1.6 and d = 1/u = 0.625).
the current interest rates are i = 3% and are i£ = 4%.
choose the answer closest to yours.
a.5/9
b.8/13
c.2/3
d.3/8
e.none of the above
14) the paris bourse was traditionally a call market. in a call market, an agent of the
exchange accumulates, over a period of time, a batch of orders that are periodically
executed by written or verbal auction throughout the trading day. both market and limit
orders are handled in this way. the major disadvantage of a call market is that
a.traders are not certain about the price at which their orders will transact because bid
and ask quotations are not available prior to the call
b.traders are not certain about how many shares will be able to sell or buy at the price
they quote because order volume is not available prior to the call
c.there is a lack of liquidity intercall
d.none of the above
15) if you can make a good at a low opportunity cost,
a.you would be well served to produce that good and trade for other goods
b.you should make something else that has a higher value
c.you should make something else that has a higher opportunity cost
d.none of the above
16) when a country’s currency depreciates against the currencies of major trading
partners,
a.the country’s exports tend to rise and imports fall
b.the country’s exports tend to fall and imports rise
c.the country’s exports tend to rise and imports rise
d.the country’s exports tend to fall and imports fall
17) which of the following is correct?
a.european options can be exercised early
b.american options can be exercised early
c.asian options can be exercised early
d.all of the above
18) the underlying principle of the current rate method is
a.assets and liabilities should be translated based on their maturity
b.monetary balance sheet accounts should be translated at the spot rate; nonmonetary
accounts are translated at the historical rate in effect when the account was first
recorded
c.monetary accounts are translated at the current exchange rate; other accounts are
translated at the current exchange rate if they are carried on the books at current value;
items carried at historical cost are translated at historic exchange rates
d.all balance sheet accounts are translated at the current exchange rate, except
stockholder equity
19) an exchange-traded fund (etf) is
a.the same thing as a mutual fund
b.a portfolio of financial assets in which shares representing fractional ownership of the
fund are sold and redeemed by the fund sponsor
c.a portfolio of financial assets in which shares representing fractional ownership of the
fund trade on an organized exchange
d.none of the above
20) the price-specie-flow mechanism will work only if governments are willing to play
by the rules of the game by letting the money stock rise and fall as gold flows in and
out. once the government demonetizes (neutralizes) gold, the mechanism will break
down. in addition, the effectiveness of the mechanism depends on
a.the income elasticity of the demand for imports
b.the price elasticity of the demand for imports
c.the price elasticity of the supply of imports
d.the income elasticity of the supply of imports
21) 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.
22) a french firm is considering a one-year investment in the united kingdom with a
pound-denominated rate of return of i£ = 15%. the firm’s local cost of capital is i = 10%
the project costs £1,000 and will return £1,150 at the end of one year.
the current exchange rate is 2.00 = £1.00
suppose that the bank of england is considering either tightening or loosening its
monetary policy. it is widely believed that in one year there are only two possibilities:
find the expost irr in euro for the french firm if they undertake the project today and
then the exchange rate rises to s1(|£) = 2.20 per £.
23) 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?
24) 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 the euro-denominated irr?
25) 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.
the irp 1-year and 2-year forward exchange rates are
explain how firm a could use the forward exchange markets to redenominate a 2-year
$60m 6% usd loan into a 2-year pound denominated loan.
26) consider an 8.5 percent swiss franc/u.s. dollar dual-currency bonds that pays
$666.67 at maturity per sf1,000 of par value. if the bond sells at par, what is the implicit
sf/$ exchange rate at maturity? will the investor be better or worse off at maturity if the
actual sf/$ exchange rate is sf1.35/$1.00?
a. sf1.5/$1.00; better off
b. sf1.5/$1.00; worse off
27) the united states is considered
a. a net creditor nation
b. a net debtor nation
28) 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 £10,000 forward at the forward rate of 1.28 per pound.
spot exchange rates at the start and end of the year are shown in the table.
29) consider the situation of firm a and firm b. the current exchange rate is $1.50/. firm
a is a u.s. mnc and wants to borrow 40 million for 2 years. firm b is a french mnc and
wants to borrow $60 million for 2 years. their borrowing opportunities are as shown;
both firms have aaa credit ratings.
explain how firm b could use the forward exchange markets to redenominate a 2-year
40m 5% euro loan into a 2-year usd-denominated loan.
firm b could borrow 40m today and exchange for at $60m today’s spot rate.
then they could enter a 1-year forward contract on euro agreeing to buy enough euro
with dollars to service their loan. at the 1-year forward rate of $1.5268 this will cost .05
40m $1.5268/1.00 = $3,057,142.86 in one year.