1) a five-year, 4 percent euro denominated bond sells at par. a comparable risk
five-year, 5.5 percent euro/dollar dual-currency bond pays $1,500 at maturity per 1,000
of face value. it sells for 1,250. what is the implied $/ exchange rate at maturity?
a.$1.2266/1.00
b.0.8153/$1.00
c.$1.25/1.00
d.$1.50/1.00
2) the theory of comparative advantage
a.claims that economic well-being is enhanced if each country’s citizens produce only a
single product
b.claims that economic well-being is enhanced when all countries compare commodity
prices after adjusting for exchange rate differences in order to standardize the prices
charged all countries
c.claims that economic well-being is enhanced if each country’s citizens produce that
which they have a comparative advantage in producing relative to the citizens of other
countries, and then trade production
d.claims that no country has an absolute advantage over another country in the
production of any good or service
3) the current exchange rate is £1.00 = $2.00. compute the correct balances in bank a’s
correspondent account(s) with bank b if a currency trader employed at bank a buys
£45,000 from a currency trader at bank b for $90,000 using its correspondent
relationship with bank b.
a.bank a’s dollar-denominated account at b will rise by $90,000
b.bank b’s dollar-denominated account at a will fall by $90,000
c.bank a’s pound-denominated account at b will rise by £45,000
d.bank b’s pound-denominated account at a will rise by £45,000
4) concentrated corporate ownership is most prevalent in
a.italy
b.the u.k
c.the u.s
d.australia
5) during the 1990s there
a.were three major currency crises
b.were two major currency crises
c.was only one currency crisis
d.were no major currency crises
6) solve for the weighted average cost of capital:
a.7.00%
b.6.89%
c.6.73%
d.6.67%
e.6.57%
7) most governments at least try to make it difficult for people to cross their borders
illegally. this barrier to the free movement of labor is an example of
a.information asymmetry
b.excessive transactions costs
c.racial discrimination
d.a market imperfection
8) labor services in a country can be severely underpriced relative to its productivity
a.because workers are not allowed to freely move across national boundaries to seek
higher wages
b.because among all factor markets, the labor market is the most imperfect
c.because workers may choose to not move across national boundaries to seek higher
wages due to the cultural differences
d.all of the above
9) what is the objective of managing operating exposure?
a.stabilize cash flows in the face of fluctuating exchange rates
b.selecting low cost production sites
c.increase the variability of cash flows in the face of fluctuating exchange rates
d.both a and c
10) find the present value of a 3-year bond that pays an annual coupon, has a coupon
rate of 6%, a yield to maturity of 5%, a par value of 1,000 when the yield to maturity is
5%.
a.1,018.81
b.1,027.23
c.1,099.96
d.none of the above
11) recent studies show that when investors control exchange risk by using currency
forward contracts to hedge
a.international bond portfolios outperform domestic bond portfolios
b.international bond portfolios dominate domestic stock portfolios in terms of
risk-return efficiency
c.both a and b
d.none of the above
12) under which accounting method are most income statement accounts are translated
at the average exchange rate for the period?
a.current/noncurrent method
b.monetary/nonmonetary method
c.temporal method
d.current rate method
13) the standard size foreign exchange transactions are for
a.$10 million u.s
b.$1 million u.s
c.1 million
14) the spot market
a.involves the almost-immediate purchase or sale of foreign exchange
b.involves the sale of futures, forwards, and options on foreign exchange
c.takes place only on the floor of a physical exchange
d.all of the above
15) according to the internalization theory of fdi
a.firms that have intangible assets with a public good property tend to invest directly in
foreign countries
b.property rights in intangible assets are difficult to establish and protect, especially in
foreign countries where legal recourse may not be readily available
c.both b and a
d.none of the above
16) zero-coupon bonds issued in 2006 are due in 2016. if they were originally sold at 55
percent of face value, the implied yield to maturity at issuance is
a.1.062%
b.6.16%
c.8.31%
d.cannot be determined, need more information
17) you have written a call option on £10,000 with a strike price of $20,000. the current
exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to
$4.00/£1.00 or decrease to $1.00/1.00 (i.e. u = 2 and d = 1/u = 0. 5). the current interest
rates are i$ = 3% and are i£ = 2%. find the hedge ratio and use it to create a position in
the underlying asset that will hedge your option position.
a.buy £10,000 today at $2.00/£1.00
b.enter into a short position in a futures contract on £6,666.67
c.lend the present value of £6,666.67 today at i£ = 2%
d.enter into a long position in a futures contract on £6,666.67
e.both c and d would work
f.none of the above
18) a five-year, 4 percent euroyen bond sells at par. a comparable risk five-year, 5.5
percent yen/dollar dual-currency bond pays $833.33 at maturity per ¥100,000 of face
value. it sells for ¥110,000. what is the implied ¥/$ exchange rate at maturity?
a.¥131/$1.00
b.¥120/$1.00
c.¥110/$1.00
d.¥103/$1.00
19) xyz corporation, located in the united states, has an accounts payable obligation of
¥750 million payable in one year to a bank in tokyo. the current spot rate is ¥116/$1.00
and the one year forward rate is ¥109/$1.00. the annual interest rate is 3 percent in
japan and 6 percent in the united states. xyz can also buy a one-year call option on yen
at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. assume that
the forward rate is the best predictor of the future spot rate. the future dollar cost of
meeting this obligation using the option hedge is
a.$6,450,000
b.$6,545,400
c.$6,653,833
d.$6,880,734
20) an italian currency dealer has good credit and can borrow 800,000 for one year. the
one-year interest rate in the u.s. is i$ = 2% and in the euro zone the one-year interest
rate is i = 6%. the spot exchange rate is $1.25 = 1.00 and the one-year forward
exchange rate is $1.20 = 1.00. show how to realize a certain euro-denominated profit
via covered interest arbitrage.
a.borrow $1,000,000 at 2%. trade $1,000,000 for 800,000; invest at i = 6%; translate
proceeds back at forward rate of $1.20 = 1.00, gross proceeds = $1,017,600
b.borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the u.s. at i$ = 2%
for one year; translate 848,000 back into euro at the forward rate of $1.20 = 1.00. net
profit $2,400
c.borrow 800,000 at i = 6%; translate to dollars at the spot, invest in the u.s. at i$ = 2%
for one year; translate 850,000 back into euro at the forward rate of $1.20 = 1.00. net
profit 2,000
d.both c and b