1) a centralized cash management system with a cash pool can reduce the investment
the mnc has in precautionary cash balances, saving the firm money.
2) in the early 1980s, honda, the japanese automobile company, built an assembly plant
in marysville, ohio, and began to produce cars for the north american market. as the
production capacity at the ohio plant expanded, honda began to export its
u.s.-manufactured cars to japan.
3) a centralized cash pool assists in reducing the problem of mislocated funds and in
funds mobilization.
4) in a dealer market, the broker takes the trade through the dealer, who participates in
trades as a principal by buying and selling the security for his own account.
5) over half of all dollar bills in circulation are held outside american’s borders.
6) cross-border acquisitions are generally found to be synergy-generating corporate
activities.
7) 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.
8) you are the debt manager for a u.s.-based multinational. you need to borrow
100,000,000 for five years. you can either borrow the 100,000,000 directly in germany
or borrow dollars in the u.s. and enter into a combined interest rate and currency swap
with a swap bank. one risk that you face by using the swap that you do not face by
borrowing euros directly is
a.exchange rate risk
b.sovereign risk
c.credit risk
d.interest rate risk
9) a recent survey of u.s. foreign exchange traders measured traders perceptions about
how fast news events that cause movements in exchange rates actually change the
exchange rate. the survey respondents claim that the bulk of the adjustment to economic
announcements regarding unemployment, trade deficits, inflation, gdp, and the federal
funds rate takes place within
a.ten seconds
b.one minute
c.five minutes
d.one hour
10) consider bank that has entered into a five-year swap on a notational balance of
$10,000,000 with a corporate customer who has agreed to pay a fixed payment of 10
percent in exchange for libor. as of the fourth reset date, determine the price of the swap
from the bank’s point of view assuming that the fixed-rate side of the swap has
increased to 11 percent. libor is at 5 percent.
a.$909,090.91 gain
b.$90,090.09 loss
c.no loss or no gain since maturity has not arrived
d.$90,090.09 gain
11) financial accounting standards board (fasb) statements 8 and 52 relate to the
translation methods. the following outlines the objectives and descriptions of the two
statements.
(i) – measure in dollars an enterprise’s assets, liabilities, revenues, or expenses that are
denominated in a foreign currency according to generally accepted accounting
principles
(ii) – is essentially the temporal method of translation (with some subtle differences)
(iii) – provide information that is generally compatible with the expected economic
effects of a rate change on an enterprise’s cash flows and equity
(iv) – reflect in consolidated statements the financial results and relationships of the
individual consolidated entities as measured in their functional currencies in conformity
with u.s. generally accepted accounting principles
the actual translation process prescribed by fasb 52 is
a.a two-stage process
b.a twelve step program
c.a five-step process
d.none of the above
12) if a currency futures contract (direct quote) is priced below the price implied by
interest rate parity (irp), arbitrageurs could take advantage of the mispricing by
simultaneously
a.going short in the futures contract, borrowing in the domestic currency, and going
long in the foreign currency in the spot market
b.going short in the futures contract, lending in the domestic currency, and going long
in the foreign currency in the spot market
c.going long in the futures contract, borrowing in the domestic currency, and going
short in the foreign currency in the spot market
d.going long in the futures contract, borrowing in the foreign currency, and going long
in the domestic currency, investing the proceeds at the local rate of interest
13) through its export credit insurance program, eximbank helps u.s. exporters develop
and expand their overseas sales by
a.protecting them against loss should a foreign buyer default
b.guaranteeing the loans made by private financial institutions to foreign importers
c.providing liquidity via the purchase of notes issued by eximbank to finance the loans
d.none of the above
14) an american hedge fund is considering a one-year investment in an italian
government bond with a one-year maturity and a euro-denominated rate of return of i =
5%. the bond costs 1,000 today and will return 1,050 at the end of one year without
risk. the current exchange rate is 1.00 = $1.50. u.s. dollar-denominated government
bonds currently have a yield to maturity of 4%. suppose that the european central bank
is considering either tightening or loosening its monetary policy. it is widely believed
that in one year there are only two possibilities:
following revaluation, the exchange rate is expected to remain steady for at least
another year
find the npv in dollars for the american firm if they wait one year to buy the bond after
the exchange rate rises to s1($|) = $1.80 per . assume that i doesn’t change.
15) in the notation of the book, k = (1 – )kl + (1 – )i
which of the following are correct?
a.the weighted average cost of capital for a levered firm is k
b.the tax rate is
c.the after-tax cost of debt capital is i
d.all of the above
16) american depository receipt (adrs) represent foreign stocks
a.denominated in u.s. dollars that trade on european stock exchanges
b.denominated in u.s. dollars that trade on a u.s. stock exchange
c.denominated in a foreign currency that trade on a u.s. stock exchange
d.non-registered (bearer) securities
17) suppose that the exchange rate is 1.25 = £1.00.
options (calls and puts) are available on the philadelphia exchange in units of 10,000
with strike prices of $1.60/1.00.
options (calls and puts) are available on the philadelphia exchange in units of £10,000
with strike prices of $2.00/£1.00.
for a u.s. firm to hedge a 100,000 receivable,
a.buy 10 call options on the euro with a strike in dollars
b.buy 10 put options on the pound with a strike in dollars
c.sell 10 call options on the euro with a strike in dollars
d.sell 8 put options on the pound with a strike in dollars
e.both a and b
f.both c and d
18)
using the table shown, what is the most current spot exchange rate shown for british
pounds? use a direct quote from a u.s. perspective.
a.$1.61 = £1.00
b.$1.60 = £1.00
c.$1.00 = £0.625
d.$1.72 = £1.00
19) some of the factors (with selected explanations) used in calculating the basic “net
present value” and the “incremental” cash flows of a capital project are:
(i) – expected after-tax terminal value, including recapture of working capital
(ii) – net income, which belongs to the equity holders of the firm
(iii) – initial investment at inception
(iv) – depreciation, and the fact that depreciation is a noncash expense (i.e. it is removed
from the calculation of net income, for tax purposes, but added back because it did not
actually flow out of the firm)
(v) – weighted-average cost of capital
(vi) – the firm’s after-tax payment of interest to debtholders
(vii) – economic life of the capital project in years
the “net present value” of a capital project is calculated by using:
a.(i), (ii), and (iii)
b.(ii), (iv), and (vi)
c.(i), (iii), (v), and (vii)
d.(iv), (v), (vi), and (vii)
20) true or false: floating rate notes behave differently in response to interest rate risk
than straight fixed-rate bonds.
a.true since frns experience only mild price changes between reset dates, over which
time the next period’s coupon payment is fixed (assuming, of course, that the reference
rate corresponds to the market rate applicable to the issuer)
b.false since all bonds experience an inverse price change when the market rate of
interest changes
c.none of the above
21) which country is not using the euro?
a.greece
b.italy
c.sweden
d.portugal
22) a fully diversified u.s. portfolio is about
a.75 percent as risky as a typical individual stock
b.27 percent as risky as a typical individual stock
c.12 percent as risky as a typical individual stock
d.half as risky as a fully diversified international portfolio
23) a swap bank has identified two companies with mirror-image financing needs (they
both want to borrow equivalent amounts for the same amount of time. company x has
agreed to one leg of the swap but company y is “playing hard to get”.
a.if the swap bank has already contracted one leg of the swap, they should be anxious to
offer better terms to company y to just get the deal done
b.the swap bank could just sell the company x side of the swap
c.company x should lobby y to “get on board”
d.both a and b
24) edge act banks
a.can accept foreign deposits, extend trade credit, finance foreign projects abroad, trade
foreign currencies, and engage in investment banking activities with u.s. citizens
involving foreign securities
b.are federally chartered subsidiaries of u.s. banks that are physically located in the
united states and are allowed to engage in a full range of international banking activities
c.can underwrite securities, but can only be located in states on the edge of the u.s
d.both a and b
25) when a swap bank serves as a broker:
a.the swap bank stands willing to accept either side of a swap
b.the swap bank matches counterparties but does not assume any risk of the swap
c.the swap bank receives a commission for matching buyers and sellers
d.none of the above
26) generally unfavorable evidence on ppp suggests that
a.substantial barriers to international commodity arbitrage exist
b.tariffs and quotas imposed on international trade can explain at least some of the
evidence
c.shipping costs can make it difficult to directly compare commodity prices
d.all of the above
27) find the foreign currency gain or loss for this u.s. mnc translating the balance sheet
and income statement of a french subsidiary, which keeps its books in euro, but that is
translated into u.s. dollars using the current/noncurrent method, the reporting currency
of the u.s. mnc.
the subsidiary is at the end of its first year of operation.
the historical exchange rate is $1.60/1.00 and the most recent exchange rate is $1.50/
28) simplify the following set of intra company cash flows for this swiss firm
consider the following exchange rates.
29) consider an option to buy 12,500 for £10,000. in the next period, the euro can
strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or
weaken by 20%.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
calculate the current /£ spot exchange rate.
30) is it reasonable to conclude that your portfolio is on the efficient frontier? if not,
then prove your point by finding just one portfolio weighting between a and b that
offers more return with less risk. if you think it is on the efficient frontier, why do you
think this? no points for guessing.
31) using your results to the last question, use multilateral netting to simplify.
