1) if a foreign entity is only a shell company for carrying accounts that could be carried
on the parent’s books,
a.the functional currency would generally be the parent’s currency
b.the functional currency would generally be the local currency
c.there is no reason to hedge transaction exposure
d.none of the above
2) a european option is different from an american option in that
a.one is traded in europe and one in traded in the united states
b.european options can only be exercised at maturity; american options can be
exercised prior to maturity
c.european options tend to be worth more than american options, ceteris paribus
d.american options have a fixed exercise price; european options’ exercise price is set at
the average price of the underlying asset during the life of the option
3) another name for the incompatible trinity is the
a.tobin tax
b.triffin paradox
c.trilemma
d.none of the above
4) your firm is a u.k.-based importer of bicycles. you have placed an order with a swiss
firm for sfr. 1,000,000 worth of bicycles. payment (in swiss francs) is due in 12 months.
use a money market hedge to redenominate this one-year receivable into a
euro-denominated receivable with a one-year maturity.
the following were computed without rounding. select the answer closest to yours.
a.£500,000
b.£464,874.41
c.£446,730.77
d.£509,900.99
5) assume that the risk-free rate of return is 4%, and the expected return on the market
portfolio is 10%. if the systematic risk inherent in the stock of abc corporation is 1.80,
using the capital asset pricing model (capm) calculate the expected return of abc.
a.14.0%
b.14.8%
c.16.0%
d.16.8%
6) investors will generally accept a lower yield on ________ than on __________ of
comparable terms, making them a less costly source of funds for the issuer to service.
a.bearer bonds; registered bonds
b.registered bonds; bearer bonds
c.eurobonds; domestic bonds
d.domestic bonds; eurobonds
7) several studies document the empirical link between
a.weak investor protection and gdp growth
b.financial development and economic growth
c.growth in gdp and concentrated ownership
d.none of the above
8) the required return on equity for an all-equity firm is 10.0%. they currently have a
beta of one and the risk-free rate is 5% and the market risk premium is 5%. they are
considering a change in capital structure to a debt-to-equity ratio of the tax rate is 40%,
the pre-tax cost of debt is 8%. find the beta if this firm changes capital structure.
a.1.12
b.1
c.7.4%
d.none of the above
9) according to the technical approach, what matters in exchange rate determination
a.the past behavior of exchange rates
b.the velocity of money
c.the future behavior of exchange rates
d.the beta
10) draw the tree for a call option on $20,000 with a strike price of £10,000. the current
exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will
either double or be cut in half. the current interest rates are i$ = 3% and are i£ = 2%.
a.
b.
c.none of the above
11) a measure of liquidity for a stock market is the turnover ratio; defined as
a.the ratio of stock market transactions over a period of time divided by the size, or
market capitalization, of the stock market
b.the ratio the size, or market capitalization, of the stock market divided by the value of
the stock market transactions over a period of time
c.the ratio of aggregate company sales over a period of time divided by the size, or
market capitalization, of the stock market
d.none of the above
12) the smaller the concentration percentage,
a.the more concentrated a market is in a few stock issues
b.the less concentrated a market is
c.the more liquid the secondary stock market is
d.none of the above
13) a swap bank has identified two companies with mirror-image financing needs (they
both want to borrow equivalent amounts for the same amount of time. company x has
agreed to one leg of the swap but company y is “playing hard to get”.
a.if the swap bank has already contracted one leg of the swap, they should be anxious to
offer better terms to company y to just get the deal done
b.the swap bank could just sell the company x side of the swap
c.company x should lobby y to “get on board”
d.both a and b
14) two major clearing systems for international bond transactions are
a.euroclear and clearstream international
b.euroclear and clearasil
c.deutsche brse clearing and cedel international
d.none of the above
15) a 2-year, 4 percent euro denominated bond sells at par. a comparable risk 2-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.0.8265/$1.00
b.$1.2099/1.00
c.$1.25/1.00
d.$1.50/1.00
16) since sr < ar, then
a.abc bank will pay xyz bank a cash settlement at the beginning of the 91-day fra period
b.xyz bank will pay abc bank a cash settlement at the beginning of the 91-day fra period
c.abc bank will pay xyz bank a cash settlement at the end of the 91-day fra period
d.xyz bank will pay abc bank a cash settlement at the end of the 91-day fra period
17) shelf registration
a.allows the shelves in a set of bookshelves to remain level
b.allows an issuer to preregister a securities issue, and then ‘shelve” the securities for
later sale
c.allows an investment bank to increase the fees they charge by charging for storage of
the ‘shelved” securities
d.eliminates the information disclosure that many foreign firms found objectionable in
the foreign bond market
18) which of the following issues are difficulties for the fundamental approach to
exchange rate forecasting?
a.one has to forecast a set of independent variables to forecast the exchange rates.
forecasting the former will certainly be subject to errors and may not be necessarily
easier than forecasting the latter
b.the parameter values, that is the ‘s and ‘s, that are estimated using historical data may
change over time because of changes in government policies and/or the underlying
structure of the economy. either difficulty can diminish the accuracy of forecasts even if
the model is correct
c.the model itself can be wrong
d.all of the above
19)
find the no-arbitrage cross exchange rate. the dollar-euro exchange rate is quoted as
$1.60 = 1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.
a.¥192/1.00
b.1.92/¥100
c.1.25/¥1.00
d.1.00/¥1.92
20) 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