1) act as a swap bank and quote bid and ask prices to a and b that are attractive to a and
b and promise to make at least 20bp for your firm.
2) the economic theory of mercantilism holds that
a.a continuing trade surplus should be a government’s major policy goal
b.the main source of wealth of a country is its productive capacity
c.free trade is the result of countries exploiting their comparative advantage
d.none of the above
3) one implication of the random walk hypothesis is
a.given the efficiency of foreign exchange markets, it is difficult to outperform the
market-based forecasts unless the forecaster has access to private information that is not
yet reflected in the current exchange rate
b.given the efficiency of foreign exchange markets, it is difficult to outperform the
market-based forecasts unless the forecaster has access to private information that is
already reflected in the current exchange rate
c.given the relative inefficiency of foreign exchange markets, it is difficult to
outperform the technical forecasts unless the forecaster has access to private
information that is not yet reflected in the current futures exchange rate
d.none of the above
4) concentrated ownership of a public company
a.can be an effective way to alleviate the agency problem between shareholders and
managers
b.is the norm in great britain
c.tends to be an ineffective way to alleviate conflicts of interest between groups of
shareholders
d.none of the above
5) the ascendance of the dollar the dominant global currency reflects several key factors
such as
a.the size of the u.s. population
b.the mature and open capital markets of the u.s. economy
c.exchange rate stability
d.all of the above
6) honda’s decision to build a plant in ohio
a.was welcomed by the united auto workers
b.was encouraged by assistance from the state of ohio, including improved
infrastructure around the plant and abatement of property taxes
c.involved setting up a special foreign trade zone that allowed honda to import auto
parts from japan at a reduced tariff rate
d.all of the above
7) prior to the peso crisis, mexico depended on foreign portfolio capital to finance its
economic development. this foreign capital influx
a.caused higher domestic inflation
b.led to an overvalued peso
c.helped mexico’s trade balances
d.a and b are correct
8) the current marginal u.s. income tax rate is positioned
a.pretty well in the middle of the rates assessed by the majority of other countries
b.towards the upper end of the rates assessed by the majority of other countries
c.towards the lower end of the rates assessed by the majority of other countries
9) a reduced cost of equity capital increases the firm’s value
a.through revaluation of the firm’s existing cash flows from existing projects
b.through increased investment as more projects become positive npvs
c.both a and b
d.none of the above
10) assume that a product has the following three stages of production:
if the value-added tax (vat) rate is 15%, what would be the vat over all stages of
production?
a.90
b.120
c.465
d.255
11) your firm is a swiss exporter of bicycles. you have sold an order to a french firm for
1,000,000 worth of bicycles. payment from the french firm (in euro) is due in 12
months. use a money market hedge to redenominate this one-year receivable into a
swiss franc-denominated receivable with a one-year maturity.
the following were computed without rounding. select the answer closest to yours.
a.sfr. 1,728,900.26
b.sfr. 1,600,000
c.sfr. 1,544,705.88
d.sfr. 800,000
12) capital export neutrality
a.is the criterion that an ideal tax should be effective in raising revenue of the
government and not have any negative effects on the economic decision-making
process of the taxpayer
b.requires that taxable income is taxed in the same manner by the taxpayer’s national
tax authority regardless of where in the world it is earned
c.implies that the tax burden a host country imposes on the foreign subsidiary of the
mnc should be the same regardless of which country the mnc is incorporated and the
same as that placed on domestic firms
d.none of the above
13) stock in daimler ag, the famous german automobile manufacturer trades on both the
frankfurt stock exchange in germany and on the new york stock exchange. on the
frankfurt bourse, daimler closed at a price of 54.34 on wednesday, march 5, 2008. on
the same day, daimler closed in new york at $83.55 per share. to prevent arbitrage
trading between the two exchanges, the shares should trade at the same price when
adjusted for the exchange rate. the $/ exchange rate on march 5 was $1.5203/1.00. thus,
54.34 $1.5203/ = $82.61, while the closing price in new york was $83.55. the difference
is easily explainable by the fact that
a.transactions costs exceeded the price difference, so no arbitrage was possible even for
market makers
b.no one noticed the arbitrage that day, but in a day or so the opening price will adjust
c.the new york market closes several hours after the frankfurt exchange, and thus
market prices or exchange rates had changed slightly
d.none of the above
14) the extent to which the value of the firm would be affected by expected changes in
the exchange rate is
a.transaction exposure
b.translation exposure
c.economic exposure
d.none of the above
15) 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 proposes the following interest only swap: y will pay the swap bank annual
payments on $10,000,000 with a fixed rate of rate of 9.90%.in exchange the swap bank
will pay to company y interest payments on $10,000,000 at libor – 0.15%;
what is the value of this swap to company y?
a.company y will save 15 basis points per year on $10,000,000 = $15,000 per year
b.company y will save 45 basis points per year on $10,000,000 = $45,000 per year
c.company y will save 5 basis points per year on $10,000,000 = $5,000 per year
d.company y will only break even on the deal
16) 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 = $1.50. u.s. dollar-denominated government
bonds currently have a yield to maturity of 4%. suppose that the european central bank
is considering either tightening or loosening its monetary policy. it is widely believed
that in one year there are only two possibilities:
following revaluation, the exchange rate is expected to remain steady for at least
another year
find the expost irr in euro for the american firm if they buy the bond today and then the
exchange rate rises to s1($|) = $1.80 per .
17) international trade is more difficult and risky from the exporter’s perspective than is
domestic trade because
a.the exporter may not be familiar with the buyer, and thus not know if the importer is a
good credit risk
b.if the merchandise is exported abroad and the buyer does not pay, it may prove
difficult, if not impossible, for the exporter to have any legal recourse
c.political instability makes it risky to ship merchandise abroad certain to parts of the
world
d.all of the above
18) consider a u.s. mnc with three subsidiaries and the following foreign exchange
transactions shown at left. use multilateral netting to reduce the number of foreign
exchange transactions.
a.
b.
c.
d.none of the above