1) libor
a.is the london interbank offered rate
b.is the reference rate in london for eurodollar deposits
c.one of several reference rates in london: there is a libor for eurodollars, euroyen,
eurocanadian dollars, and even euro
d.all of the above
2) 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
the variance of the exchange rate is:
a.0.0200
b.0.10
c.0.002
d.none of the above
3) restrictions or impediments to free trade include such things as
a.import quotas
b.import tariffs
c.costly transportation
d.all of the above
4) an overseas affiliate of a u.s. mnc can be organized
a.as a branch
b.as a subsidiary
c.both a and b
d.none of the above
5) 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
the hedge fund manager notices the optionality in starting this project today. he asks
you to comment and outline your valuation strategy.
6) the turnover ratio percentages for 36 equity markets of emerging markets for the five
years beginning with 2002 were measured. many of the small equity markets in each
region (e.g., peru, venezuela, sri lanka, slovak republic, croatia, and zimbabwe) have
relatively low turnover ratios,
a.indicating poor liquidity at present
b.indicating good liquidity at present
c.indicating strong investment performance over the period
d.none of the above
7) the lower the transfer price
a.the higher the net profit reported by the mnc
b.the lower the gross profit of the transferring division relative to the receiving division
c.the higher the gross profit of the receiving division relative to the transferring division
d.none of the above
8) the source of translation exposure
a.is a mismatch of net assets and net liabilities denominated in the same currency
b.is a mismatch of net assets and net liabilities denominated in the different currencies
c.is a mismatch of current assets and current liabilities denominated in different
currencies
d.none of the above
9) a country’s international transactions can be grouped into the following three main
types:
a.current account, medium term account, and long term capital account
b.current account, long term capital account, and official reserve account
c.current account, capital account, and official reserve account
d.capital account, official reserve account, trade account
10) tax neutrality
a.has its foundations in the principles of economic efficiency and equity
b.can be a difficult principle to apply in practice
c.is determined by three criteria: capital export neutrality, capital import neutrality and
national neutrality
d.all of the above
11) the firm’s tax rate is 34%. the firm’s pre-tax cost of debt is 8%; the firm’s
debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm’s common stock is
1.5; the market risk premium is 9%. what is the required return on assets?
a.33.33%
b.10.85%
c.13.12%
d.16.5%
e.none of the above
12) currently, the biggest bank in the world is
a.citigroup
b.bank of america
c.ubs
d.the world bank
13) financial accounting standards board (fasb) statements 8 and 52 relate to the
translation methods. the following outlines the objectives and descriptions of the two
statements.
(i) – measure in dollars an enterprise’s assets, liabilities, revenues, or expenses that are
denominated in a foreign currency according to generally accepted accounting
principles
(ii) – is essentially the temporal method of translation (with some subtle differences)
(iii) – provide information that is generally compatible with the expected economic
effects of a rate change on an enterprise’s cash flows and equity
(iv) – reflect in consolidated statements the financial results and relationships of the
individual consolidated entities as measured in their functional currencies in conformity
with u.s. generally accepted accounting principles
the “functional currency” is defined in fasb 52 as
a.the currency of the primary economic environment in which the entity operates
b.the currency in which the mnc prepares its consolidated financial statements
c.a currency that is not the parent firm’s home country currency
d.both b and c
14) during the period of the classical gold standard (1875-1914) there were
a.highly volatile exchange rates
b.volatile exchange rates
c.moderately volatile exchange rates
d.stable exchange rates
e.no exchange rates
15) the hedge ratio
a.is the size of the long (short) position the investor must have in the underlying asset
per option the investor must write (buy) to have a risk-free offsetting investment that
will result in the investor perfectly hedging the option
b.
c.is related to the number of options that an investor can write without unlimited loss
while holding a certain amount of the underlying asset
d.all of the above
16) consider a u.s.-based mnc with a wholly-owned italian subsidiary. following a
depreciation of the dollar against the euro, which of the following conclusions are
correct?
a.the cash flow in euro could be altered due an alteration in the firm’s competitive
position in the marketplace
b.a given operating cash flow in euro will be converted to a higher u.s. dollar cash flow
c.both a and b
d.none of the above
17) the public corporation has a key weakness:
a.the conflicts of interest between bondholders and shareholders
b.the conflicts of interest between managers and bondholders
c.the conflicts of interest between stakeholders and shareholders
d.the conflicts of interest between managers and shareholders
18) suppose that britain pegs the pound to gold at six pounds per ounce, whereas the
exchange rate between pounds and u.s. dollars is $5 = £1. what should an ounce of gold
be worth in u.s. dollars?
a.$29.40
b.$30.00
c.$0.83
d.$1.20
19) in 2012 the united states had a current account deficit. the current account deficit
implies that the united states
a.had a surplus on legal consulting and engineering services
b.produced more output than it consumed
c.consumed more output than it produced
d.none of the above
20)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
there is (at least) one profitable arbitrage at these prices. what is it?
21) the stock market of country a has an expected return of 8%, and standard deviation
of expected return of 5%. the stock market of country b has an expected return of 16%
and standard deviation of expected return of 10%.
find the expected return of a portfolio with half invested in a and half invested in b.
22) 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.
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.
find the cost today of your hedge portfolio in pounds.
24) 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:
the cfo who has a cfa notices the optionality in starting this project today. he asks you to
comment and outline your valuation strategy.
25) calculate the euro-based return an italian investor would have realized by investing
10,000 into a $50 american stock. one year after investment, the stock has no value
since the firm is bankrupt. meanwhile the exchange rate has changed from .625 per
dollar to .6875 per dollar, and he sold $16,000 forward at the forward rate of .65 per
dollar.
26) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward ask 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 that satisfies irp from the perspective of a customer who borrowed 1m,
traded for dollars at the spot rate and invested at i$ = 2%.
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.