1) your firm has a british customer that is willing to place a $1 million order (with
payment due in 6 months), but insists upon paying in pounds instead of dollars.
a.the customer essentially wants you to discount your price by the value of a put option
on pounds
b.the customer essentially wants you to discount your price by the value of a call option
on pounds
c.none of the above
2) under the pure flexible exchange rate regime
a.the combined balance on the current and capital accounts will be equal in size, but
opposite in sign, to the change in the official reserves
b.the balance on the current and capital accounts will be equal in size, but opposite in
sign
c.a current account surplus or deficit must be matched by an official reserves deficit or
surplus
d.a capital account surplus or deficit must be matched by an official reserves deficit or
surplus
3) in the united kingdom, the majority of public companies
a.voluntarily abide by the code of best practice on corporate governance
b.are compelled by law to abide by the code of best practice on corporate governance
c.do not abide by the code of best practice on corporate governance
4) the sale of new common stock by corporations to initial investors occurs in
a.the primary market
b.the secondary market
c.the otc market
d.the dealer market
5) since the end of world war i, the dominant global currency has been the
a.british pound
b.japanese yen
c.euro
d.u.s. dollar
6) 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)
7) the key requirements of the cadbury code of best practice state that
a.boards of directors should include at least three outside directors
b.the positions of ceo and chairman of the board should not reside in the same
individual
c.compliance is mandatory for public corporations, optional for listed non-public
corporations
d.both a and b
8) the black-scholes option pricing formulae
a.are used widely in practice, especially by international banks in trading otc options
b.are not widely used outside of the academic world
c.work well enough, but are not used in the real world because no one has the time to
flog their calculator for five minutes on the trading floor
d.none of the above
9) 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 reduction in the number of foreign exchange transactions and the associated cost
of making fewer but larger transactions
c.the reduction in intra-company float, which is frequently as high as five days even for
wire transfers
d.the benefits that accrue from the establishment of a formal information system, which
serves as the foundation for centrally managing transaction exposure and the investment
of excess funds
e.all of the above
10) exposure to currency risk can be measured by the sensitivities of
a.the future home currency values of the firm’s assets and liabilities
b.the firm’s operating cash flows to random changes in exchange rates
c.both a and b
d.none of the above
11) suppose you observe the following exchange rates: 1 = $1.45; £1 = $1.90. calculate
the euro-pound exchange rate.
a.1.3103 = £1.00
b.£1.3333 = 1.00
c.2.00 = £1
d.3 = £1
12) one benefit of a centralized cash depository is
a.the mnc’s investment in precautionary cash balances can be substantially reduced
without a reduction in its ability to cover unforeseen expenses
b.each affiliate will have greater autonomy in managing its own cash balances
c.exchange rate restrictions can be easily circumvented
d.none of the above
13) the united states adopted the gold standard in
a.1776
b.1879
c.1864
d.1973
14) your firm has just issued five-year floating-rate notes indexed to six-month u.s.
dollar libor plus 1/4 percent. what is the amount of the first coupon payment your firm
will pay per u.s. $1,000 of face value, if six-month libor is currently 7.2 percent?
a.$36.00
b.$37.25
c.$74.50
d.none of the above
15) one unintended consequence of sarbanes-oxley
a.is that international companies are starting to prefer issuing eurobonds bonds in the
private placement market in the u.s. to avoid costly information disclosure required of
registered bonds
b.is that international companies are starting to prefer to issue yankee bonds in the
private placement market in the u.s
c.is that international companies are starting to prefer issuing yankee bonds in the
bearer bond market in the u.s. to avoid costly information disclosure required of
registered bonds
d.is that international companies have left the bond market in the u.s. to avoid costly
information disclosure required of registered bonds
16) the current spot exchange rate is $1.45/ and the three-month forward rate is $1.55/.
based upon your economic forecast, you are pretty confident that the spot exchange rate
will be $1.50/ in three months. assume that you would like to buy or sell 100,000. what
actions would you take to speculate in the forward market? how much will you make if
your prediction is correct?
a.take a short position in a forward. if you’re right you will make $15,000
b.take a long position in a forward contract on euro. if you’re right you will make
$5,000
c.take a short position in a forward contract on euro. if you’re right you will make
$5,000
d.take a long position in a forward contract on euro. if you’re right you will make
$15,000
17) at the optimal capital structure,
a.k = (1 – )kl + (1 – )i will be minimized
b.the debt-equity ratio will be equal to the debt-to-value ratio
c.k = (1 – )kl + (1 – )i will be maximized
d.none of the above
18) many countries have tax treaties with one another. these generally specify
a.the withholding tax rate applied to various types of passive income
b.that withholding tax rates imposed through tax treaties are bilateral
c.the two countries agree to impose the same tax rate on the same category of income
d.all of the above
19) hedge fund advisors typically receive a “2-plus-twenty” management fee
a.meaning 2 percent per year of the assets under management, plus performance fee 20
percent of any capital appreciation
b.meaning 2 percent per year of the assets under management, plus performance fee 20
basis points
c.meaning 2 percent per year of the assets under management, plus performance fee of
20 percent of the excess return
d.meaning 2 percent per year of the assets under management, plus performance fee 20
percent of gross return net of the risk-free rate
20) suppose you observe a spot exchange rate of $2.00/£. if interest rates are 5% apr in
the u.s. and 2% apr in the u.k., what is the no-arbitrage 1-year forward rate?
a.£2.0588/$
b.$2.0588/£
c.£1.9429/$
d.$1.9429/£
21)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you borrowed $1,000,000 for one year, how much money would you owe at
maturity?
22)
using the table what is the 6-month forward pound-yen cross-exchange rate?
23) consider an option to buy 12,500 for £10,000. in the next period, the euro can
strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or
weaken by 20%.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
use your results from the last three questions to verify your earlier result for the value of
the call.
24) consider an option to buy £10,000 for 12,500. in the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the
dollar by ten percent. on the other hand, the euro could depreciate against the pound by
20 percent.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
using risk neutral valuation (i.e. the binomial option pricing model) find the value of the
call (in euro).
25) consider an option to buy £10,000 for 12,500. in the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the
dollar by ten percent. on the other hand, the euro could depreciate against the pound by
20 percent.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
find the risk neutral probability of an “up” move.
26) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward bid exchange
rate in $ per that that satisfies irp from the perspective of a customer.
27)
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 = 4%.
28) suppose that you hold a piece of land in the city of london that you may want to sell
in one year. as a u.s. resident, you are concerned with the dollar value of the land.
assume that if the british economy booms in the future, the land will be worth £2,000,
and one british pound will be worth $1.80. if the british economy slows down, on the
other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say,
$2.20/£. you feel that the british economy will experience a boom with a 60 percent
probability and a slowdown with a 40 percent probability.
compute the variance of the dollar value of your property that is attributable to
exchange rate uncertainty.
29) indirect exchange rate quotations from the u.s. perspective are
a. the price of one unit of the foreign currency in terms of the u.s. dollar
b. the price of one u.s. dollar in the foreign currency
30)
consider the following international investment opportunity. it involves a gold mine that
can be opened at a cost, then produces a positive cash flow, but then requires
environmental clean-up:
what is the euro-denominated irr of this project?