1) in evaluating political risk, experts focus their attention on a set of key factors such
as
a.the host country’s political/government system
b.historical records of political parties and their relative strengths
c.integration of the host country into the world political/economic system
d.all of the above
2) in a given year, the u.s. irs places an overall limitation applied to foreign tax credits.
a.the maximum tax credit is figured on world-wide foreign-source income; losses in one
country can offset profits in another
b.value-added taxes paid cannot be included in determining the amount of the foreign
tax credit
c.the overall limitation is limited to the amount of tax that would be due on the
foreign-source income if it had been earned in the united states
d.all of the above
3) price discovery in the secondary stock markets
a.occurs due to the competitive trading between buyers and sellers, just like on ebay
b.is set once a day at the close
c.is set by the investment bankers at the ipo
d.all of the above
4) a u.s. parent firm, as result of its business activities in germany, has a net exposure of
1,000,000. the consolidated reports were prepared at the year-end for the last two
successive years. if the exchange rates on these reporting dates changed from $1.00 =
1.10 to $1.00 = 1.00, then the translation exposure report will indicate a “reporting
currency imbalance” of
a.$90,910
b.$0
c.-$90,910
d.none of the above
5) the major legislation controlling the operation of foreign banks in the u.s.
a.specifies that foreign branch banks operating in the u.s. must comply with u.s.
banking regulations just like u.s. banks
b.specifies that foreign branch banks operating in the u.s. must comply with their
country-of-origin banking regulations just like u.s. banks operating abroad
c.specifies that the ‘shell” branches are illegal for u.s. and foreign banks
d.both a and c
6) your firm is a swiss importer of bicycles. you have placed an order with a british firm
for £1,000,000 worth of bicycles. payment (in pounds sterling) is due in 12 months. use
a money market hedge to redenominate this one-year pound denominated payable into a
swiss franc-denominated payable with a one-year maturity.
the following were computed without rounding. select the answer closest to yours.
a.sfr. 2,000,000
b.sfr. 2,151,118.62
c.sfr. 2,068,383.28
d.sfr. 1,921,941.75
7) what is the expected return on equity for firm in the 40% tax bracket 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) statistical discrepancy, which by definition represents errors and omissions
a.cannot be calculated directly
b.is calculated by taking into account the balance-of-payments identity
c.probably has some elements that are honest mistakes, it can’t all be money laundering
and drugs
d.all of the above
9) under fasb 52, when a net translation exposure exists,
a.a derivatives hedge is necessary to bring balance to the consolidated balance sheet
after an exchange rate change
b.a money market hedge is necessary to bring balance to the consolidated balance sheet
after an exchange rate change
c.a cumulative translation adjustment account is necessary to bring balance to the
consolidated balance sheet after an exchange rate change
d.none of the above
10) using the temporal method, monetary accounts such as cash
a.are not translated
b.are translated at the average exchange rate prevailing over the reporting period
c.are translated at the current forward exchange rate
d.are translated at the current spot exchange rate
11) the current spot exchange rate is $1.55 = 1.00 and the three-month forward rate is
$1.60 = 1.00. consider a three-month american call option on 62,500 with a strike price
of $1.50 = 1.00. if you pay an option premium of $5,000 to buy this call, at what
exchange rate will you break-even?
a.$1.58 = 1.00
b.$1.62 = 1.00
c.$1.50 = 1.00
d.$1.68 = 1.00
12) according to the monetary approach, the exchange rate can be expressed as
a.
b.
c.
d.none of the above
13) accounting transparency
a.can only be achieved when managers commit to serving on their own audit committee
b.occurs when the accounting department has translucent cubicles for their workers
c.promises to reduce the information asymmetry between corporate insiders and the
public
d.none of the above
14) with regard to a swap bank acting as a dealer in swap transactions, interest rate risk
refers to
a.the risk that arises from the situation in which the floating-rates of the two
counterparties are not pegged to the same index
b.the risk that interest rates changing unfavorably before the swap bank can lay off to an
opposing counterparty on the other side of an interest rate swap entered into with the
first counterparty
c.the risk the swap bank faces from fluctuating exchange rates during the time it takes
for the bank to lay off a swap it undertakes with one counterparty with an opposing
transaction
d.the risk that a counterparty will default
15) in mutual funds, investment in emerging foreign equity markets
a.represents less than one percent of investments in u.s.-based mutual funds
b.represents about five percent of investments in u.s.-based mutual funds
c.represents more than twenty percent of investments in u.s.-based mutual funds
d.declined during the 1990s
16) managing operating exposure
a.is a short-term tactical issue
b.is a long-term issue, like selecting a site for a factory
c.is relatively unimportant, since most mncs have a built-in hedge
d.none of the above
17) when the domestic currency is strong or expected to become strong,
a.this could erode the competitive position of the firm’s exports
b.this could erode the competitive position of the firm’s import competition
c.the firm should consider locating production facilities in a foreign country where costs
are low
d.both a and c
18) the cadbury code has not been legislated into law, and compliance with the code is
voluntary.
a.however, the london stock exchange (lse) currently requires that each listed company
show whether the company is in compliance with the code and explain why if it is not
b.this “comply or explain” approach has apparently persuaded many companies to
comply rather than explain
c.currently, 90 percent of all lse-listed companies have adopted the cadbury code
d.all of the above
19) it is common practice among currency traders worldwide to both price and trade
currencies against the u.s. dollar. consider a currency dealer who makes a market in 5
currencies against the dollar. if he were to supply quotes for each currency in terms of
all of the others, how many quotes would he have to provide?
a.36
b.30
c.60
d.120
e.none of the above
20) 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.
determine the amount the exporter will receive if he discounts the b/a with the
importer’s bank.
21) 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.
what would be the interest rate?
22)
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:
find the euro-zone cost of capital to compute is the dollar-denominated npv of this
project.
23) 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).
24) the stock market of country a has an expected return of 5%, and a standard
deviation of expected return of 8%. the stock market of country b has an expected
return of 15% and a standard deviation of expected return of 10%.
assume that the correlation of expected return between security a and b is 0.2. calculate
the standard deviation of expected return of a portfolio that has half of its money
invested in a and half in b.
25) the time from acceptance to maturity on a $6,000,000 banker’s acceptance is 360
days.
the importing bank’s acceptance commission is 2 percent and that the market rate for
360-day b/as is 3 percent.
if the exporter’s opportunity cost of capital is 11 percent, should he discount the b/a or
hold it to maturity?
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 irr in euro for the french firm if they wait one year to undertake the project after
the exchange rate falls to s1(|£) = 1.80 per £.
27) the stock market of country a has an expected return of 5%, and a standard
deviation of expected return of 8%. the stock market of country b has an expected
return of 15% and a standard deviation of expected return of 10%.
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? either way, your answer should include verification.