1) studies examining the influence of industrial structure on foreign equity returns
a.conclusively show a connection
b.have been inconclusive
c.show that industrialized economies outperform lesser developed economies
d.none of the above
2) in which type of policy actions by the fed can liquidity “dry up”?
a.easy money
b.tight money
c.decrease in the reserve requirement
d.decrease in the discount rate
3) in the notation of the book, k = (1 – )kl + (1 – )i
which of the following are correct?
a.the debt-to-total market value ratio is
b.the tax rate is i
c.the after-tax cost of debt capital is i
d.all of the above
4) if the annual inflation rate is 2.5 percent in the united states and 4 percent in the u.k.,
and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate,
assuming that ppp initially held, is _____.
a.parity
b.0.9710
c.-0.0198
d.4.5
5) euro-medium term notes
a.are typically fixed-rate corporate notes issued with maturities ranging from less than a
year to about ten years
b.are typically fixed-rate corporate notes issued with maturities ranging from three
years to about ten years
c.are sold just like bonds in the primary market
d.none of the above
6) compute the debt-to-total-value ratio for a firm that has a debt-to-equity ratio of 2.
a.1/3
b.2/5
c.3/2
d.2/3
e.none of the above
7) what is the expected return on equity for a tax-free firm with a 15% expected return
on assets that pays 12% on its debt, which totals 25% of assets?
a.24%
b.15.60%
c.16%
d.20%
e.15.75%
8) several international banks offer multilateral netting software packages. these
packages
a.calculate the net currency positions of each affiliate
b.can integrate the netting function with foreign exchange exposure management
c.only work on the mac platform
d.both a and b
9) suppose the u.s. dollar substantially depreciates against the japanese yen. the change
in exchange rate
a.can have significant economic consequences for u.s. firms
b.can have significant economic consequences for japanese firms
c.can have significant economic consequences for both u.s. and japanese firms
d.none of the above
10) given the following information for a levered and unlevered firm, calculate the
difference in the cash flow available to investors. assume the corporate tax rate is 40%.
(hint:calculatethetaxsavingsarisingformthetaxdeductibilityofinterestpayments).
a.$8
b.$18
c.$78
d.$90
11) assume that the dollar-euro spot rate is $1.28 and the six-month forward rate is
the six-month u.s. dollar rate is 5% and the
eurodollar rate is 4%. the minimum price that a six-month american call option with a
striking price of $1.25 should sell for in a rational market is
a.0 cents
b.3.47 cents
c.3.55 cents
d.3 cents
12) a flexible sourcing policy
a.is primarily concerned with low-cost (and often low-quality) vendors
b.need not be confined just to materials and parts
c.only works for manufacturing firms, not service firms
d.puts the focus on the exchange rate at the expense of shipping rates
13) there is an intimate relationship between a country’s bca and how the country
finances its domestic investment and pays for government expenditures. this
relationship is given by bca x – m (s – i) + (t – g). given this, which of the following is a
true statement?
a.if (s – i) < 0, it implies that a country’s domestic savings is insufficient to finance
domestic investment
b.if (t – g) < 0, it implies that a country’s tax revenue is insufficient to finance
government spending
c.when bca is negative, it implies that government budget deficits an/or part of domestic
investment are being finance with foreign-controlled capital
d.all of the above are true
14) a u.s. firm holds an asset in great britain and faces the following scenario:
where,
p* = pound sterling price of the asset held by the u.s. firm
p = dollar price of the same asset
which of the following would be an effective hedge?
a.sell £2,278.13 forward at the 1-year forward rate, f1($/£), 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
15) when the choice of financing a foreign subsidiary is between external debt and
equity financing
a.many host governments tolerate the repatriation of funds in the form of interest much
better than dividends
b.debt financing is generally secured from the world bank, but only in developed
countries
c.many host governments tolerate the repatriation of funds in the form of dividends
much better than interest
d.none of the above
16) if for a particular county an increase in the interest rate is more or less matched by
an expected depreciation in the local currency,
a.traders will probably be tempted to find another country to invest in
b.the interest rate increase per se will not be enough to spark capital flow into the
country
c.both a and b are true
d.capital will glow out of the country as the disgruntled citizens riot and go to war with
the neighbors
17) some of the risks that a u.s. based mnc can encounter in its foreign investments are:
(i) – an increase in the cost of borrowing due to a rise in interest rates
(ii) – increase in inflation rates
(iii) – dumping
(iv) – unfair competition by local companies
(v) – inconvertibility of foreign currencies
(vi) – expropriation
(vii) – destruction of properties due to war, revolution, and other violent political events
in foreign countries
(viii) – loss of business income due to political violence
in the u.s., the overseas private investment corporation (opic) offers insurance against
which of the above:
a.(i), (ii), (iii), and (iv)
b.(v), (vi), (vii), and (viii)
c.a and b
d.none of the above
18) under the investment dollar premium system,
a.u.k. residents received a premium over the prevailing commercial exchange rate when
they sold foreign securities and repatriated the funds to the u.k
b.u.k. residents had to pay a premium over the prevailing commercial exchange rate
when they bought foreign currencies to invest in foreign securities
c.none of the above
19) 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 this opportunity affects which swap firm b will be willing to participate in.
20) for your swap (the one you have shown above) how would the swap bank quote the
swap against prime? (hint: they are quoting a bid-ask spread against “flat” prime.)
21) 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 discounts the b/a with the
importer’s bank.
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.
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.
23) in the eu, there is a
a. low degree of fiscal integration among eu countries
b. high degree of fiscal integration among eu countries