1) in contrast to many domestic bonds, which make _________ coupon payments,
coupon interest on eurobonds is typically paid _________.
a.semiannual; annually
b.annual; semiannually
c.quarterly; semiannually
d.quarterly; annually
2) the current exchange rate is £1.00 = $2.00. compute the correct balances in bank a’s
correspondent account(s) with bank b if a currency trader employed at bank a buys
£45,000 from a currency trader at bank b for $90,000 using its correspondent
relationship with bank b.
a.bank a’s dollar-denominated account at b will fall by $90,000
b.bank b’s dollar-denominated account at a will rise by $90,000
c.bank a’s pound-denominated account at b will rise by £45,000
d.bank b’s pound-denominated account at a will fall by £45,000
e.all of the above are correct
3) in the united states and the united kingdom, hostile takeovers
a.are illegal
b.can serve as a drastic corporate governance mechanism of the last resort
c.reinforce the notion that managers can take their control of the company for granted
d.require management approval
4) you are a u.s.-based treasurer with $1,000,000 to invest. the dollar-euro exchange
rate is quoted as $1.60 = 1.00 and the dollar-pound exchange rate is quoted at $2.00 =
£1.00. if a bank quotes you a cross rate of £1.00 = 1.20 how much money can an astute
trader make?
a.no arbitrage is possible
b.$1,160,000
c.$41,667
d.$40,000
5) company x wants to borrow $10,000,000 floating for 5 years; company y wants to
borrow $10,000,000 fixed for 5 years. their external borrowing opportunities are shown
below:
a swap bank is involved and quotes the following rates five-year dollar interest rate
swaps at 10.05%-10.45% against libor flat.
assume company y has agreed, but company x will only agree to the swap if the bank
offers better terms.
what are the absolute best terms the bank can offer x, given that it already booked y?
a.10.45%-10.45% against libor flat
b.10.45%-10.05% against libor flat
c.10.50%-10.50% against libor flat
d.none of the above
6) which of the following are correct?
a.
b.
c.
d.all of the above are correct
7) abc international can borrow $4,000,000 at libor plus a lending margin of .65 percent
per annum on a three-month rollover basis from barclays in london. three month libor is
currently 5.5 percent. suppose that over the second three-month interval libor falls to
5.0 percent. how much will abc pay in interest to barclays over the six-month period for
the eurodollar loan?
a.$50,000
b.$100,000
c.$118,000
d.$120,000
8) whether or not cross-border acquisitions produce synergistic gains and how such
gains are divided between acquiring and target firms
a.are important issues from the perspective of shareholder welfare
b.are important issues from the perspective of public policy
c.are important issues from the perspective of stakeholders in the target firms
d.all of the above
9) under the gold standard, international imbalances of payment will be corrected
automatically under the
a.gresham exchange rate regime
b.european monetary system
c.price-specie-flow mechanism
d.bretton woods accord
10) perhaps the most important decisions that confront the financial manager are
a.which capital projects to select
b.the correct capital structure for the firm
c.the correct capital structure for projects
d.none of the above
11) a closed end mutual fund
a.invests in bonds of a particular maturity, when they mature, the fund closes
b.trades on a stock exchange just like a publicly traded corporation
c.always trades at net asset value
d.all of the above
12) a firm may cross-list its share to
a.establish a broader investor base for its stock
b.establish name recognition in foreign capital markets, thus paving the way for the
firm to source new equity and debt capital from investors in different markets
c.expose the firm’s name to a broader investor and consumer groups
d.all of the above
13) find the value of a one-year put option on $15,000 with a strike price of 10,000. in
one year the exchange rate (currently s0($/) = $1.50/) can increase by 60% or decrease
by 37.5% (i.e. u = 1.6 and d = 0.625). the current one-year interest rate in the u.s. is i$ =
4% and the current one-year interest rate in the euro zone is i = 4%.
a.1,525.52
b.$3,328.40
c.$4,992.60
d.2,218.94
e.none of the above
14) assume that xyz corporation is a leveraged company with the following
information:
kl = cost of equity capital for xyz = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
if xyz’s debt-to-total-market-value ratio is 40%, then its weighted average cost of
capital, k, is:
a.8%
b.9%
c.10%
d.12%
15) a u.s. firm holds an asset in great britain and faces the following scenario:
where,
p* = pound sterling price of the asset held by the u.s. firm
p = dollar price of the same asset
which of the following would be an effective hedge?
a.sell £7,500 forward at the 1-year forward rate, f1($/£), that prevails at time zero
b.buy £2,500 forward at the 1-year forward rate, f1($/£), that prevails at time zero
c.sell £25,000 forward at the 1-year forward rate, f1($/£), that prevails at time zero
d.none of the above
16) in general if an investment
a.has poor liquidity it should offer investors a liquidity premium
b.can be sold fairly quickly at a fair price, it has good liquidity
c.both a and b
d.none of the above
17) a convertible bond pays interest annually at a coupon rate of 5% on a par value of
$1,000. the bond has 10 years maturity remaining and the discount rate on other-wise
identical non-convertible debt is 5%. the bond is convertible into shares of common
stock at a conversion price of $25 per share (i.e. the bond is exchangeable for 40
shares). today’s closing stock price was $31.25. what is the floor value of this bond?
a.$800.00
b.$1,000
c.$1,250
d.none of the above
18) to maximize the benefits of partial integration of capital markets
a.a country should choose to internationally cross-list those assets that are least
correlated with the domestic market portfolio
b.a country should choose to internationally cross-list those assets that are most highly
correlated with the domestic market portfolio
c.a country should choose to internationally cross-list those assets that are uncorrelated
with the domestic market portfolio
d.none of the above
19) your firm is a u.k.-based importer of bicycles. you have placed an order with an
italian firm for 1,000,000 worth of bicycles. payment (in euro) is due in 12 months. use
a money market hedge to redenominate this one-year receivable into a
pound-denominated receivable with a one-year maturity.
the following were computed without rounding. select the answer closest to yours.
a.£803,721.49
b.800,000
c.£780,312.13
d.£72,352.94
20) simplify the following set of intra company cash flows for this swiss firm
consider the following exchange rates.
21) 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 cf0 in dollars?
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 firm a could use the forward exchange markets to redenominate a 2-year
$60m 6% usd loan into a 2-year pound denominated loan.
23) the time from acceptance to maturity on a $1,000,000 banker’s acceptance is 60
days.
the importing bank’s acceptance commission is 1.00 percent and that the market rate for
60-day b/as is 5 percent.
if the exporter’s opportunity cost of capital is 11 percent, should he discount the b/a or
hold it to maturity?
24)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward exchange rate
in $ per that satisfies irp from the perspective of a customer that borrowed $1m traded
for at the spot and invested at i = 3%.
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) 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 npv in euro for the french firm if they wait one year to undertake the project
after the exchange rate rises to s1(|£) = 2.20 per £.
27) 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 hedge ratio.
28) a stock market investor would pay attention to
a. anticipated changes in exchange rates that have been already discounted and reflected
in the firm’s value
b. unanticipated changes in exchange rates that have not been discounted and reflected
in the firm’s value
29) 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:
your banker quotes the euro-zone risk-free rate at i = 6% and the british risk free rate at
i£ = 6%. find the value of the option and thereby the project.