1) during the period between world war i and world war ii, many central banks
followed a policy of sterilization of gold
a.by restricting the rate of growth in the supply of gold
b.by matching inflows and outflows of gold respectively with reductions and increases
in domestic money and credit
c.by matching inflows and outflows of gold respectively with increases and reductions
in domestic money and credit
d.none of the above
2) nominal differences in currency swaps
a.can be explained by the set of international parity relationships
b.can be explained by the credit risk differentials
c.can be explained by the quality spread differential
d.disappear when controlling for volatility
3) suppose that you have written a call option on 10,000 with a strike price in dollars.
suppose further that the hedge ratio is . which of the following would be an appropriate
hedge for a short position in this call option?
a.buy 10,000 today at today’s spot exchange rate
b.buy 5,000 today at today’s spot exchange rate
c.agree to buy 5,000 at the maturity of the option at the forward exchange rate for the
maturity of the option that prevails today (i.e., go long in a forward contract on 5,000)
d.buy the present value of 5,000 discounted at i for the maturity of the option
e.both c and d would work
f.none of the above
4) today is january 1, 2009. the state of iowa has offered your firm a subsidized loan. it
will be in the amount of $10,000,000 at an interest rate of 5% and have annual
(amortizing) payments over 3 years. the first payment is due december 31, 2009 and
your taxes are due january 1 of each year on the previous year’s income. the yield to
maturity on your firm’s existing debt is 8%. what is the apv of this subsidized loan?
note that i did not round my intermediate steps. if you did, your answer may be off by a
bit. select the answer closest to yours.
a.-$3,497,224.43
b.$417,201.05
c.$840,797
d.none of the above
5) consider the borrowing rates for parties a and b. a wants to finance a $100,000,000
project at a fixed rate. b wants to finance a $100,000,000 project at a floating rate. both
firms want the same maturity, 5 years.
construct a mutually beneficial interest only swap that makes money for a, b, and the
swap bank in equal measure.
6) the international monetary system went through several distinct stages of evolution.
these stages are summarized, in alphabetic order, as follows:
(i) – bimetallism
(ii) – bretton woods system
(iii) – classical gold standard
(iv) – flexible exchange rate regime
(v) – interwar period
the chronological order that they actually occurred is:
a.(iii), (i), (iv), (ii), and (v)
b.(i), (iii), (v), (ii), and (iv)
c.(vi), (i), (iii), (ii), and (v)
d.(v), (ii), (i), (iii), and (iv)
7) a zero-coupon french bond promises to pay 100,000 in five years. the current
exchange rate is $1.50 = 1.00 and inflation is forecast at 3% in the u.s. and 2% in the
euro zone per year for the next five years. the appropriate discount rate for a bond of
this risk would be 10% if it paid in dollars. what is the appropriate price of the bond?
a.£65,196.13 = $97,794.20
b.£62,092.13 = $93,138.20
c.none of the above
8) suppose that boeing corporation exported a boeing 747 to lufthansa and billed 10
million payable in one year. the money market interest rates and foreign exchange rates
are given as follows:
assume that boeing sells a currency forward contract of 10 million for delivery in one
year, in exchange for a predetermined amount of u.s. dollars. suppose that on the
maturity date of the forward contract, the spot rate turns out to be $1.40/ (i.e. less than
the forward rate of $1.46/). which of the following is true?
a.boeing would have received only $14.0 million, rather than 14.6 million, had it not
entered into the forward contract
b.boeing gained $0.6 million from forward hedging
c.a and b
d.none of the above
9) suppose that the exchange rate is 1.25 = £1.00.
options (calls and puts) are available on the london exchange in units of 10,000 with
strike prices of £0.80 = 1.00. options (calls and puts) are available on the frankfurt
exchange in units of £10,000 with strike prices of 1.25 = £1.00. for a u.k. firm to hedge
a 100,000 receivable,
a.buy 10 call options on the euro with a strike in pounds sterling
b.buy 8 put options on the pound with a strike in euro
c.buy 10 put options on the euro with a strike in pounds sterling
d.buy 8 call options on the pound with a strike in euro
e.both a and b
f.both c and d
10) the u.s. irs allows transfer prices to be set using comparable uncontrolled price
method. this method requires
a.finding the price that an unrelated willing seller would accept from an unrelated
willing buyer
b.the price at which the good is resold by the distribution affiliate is reduced by an
amount sufficient to cover overhead costs and a reasonable profit
c.an appropriate profit is added to the cost of the manufacturing affiliate
d.financial models and econometric techniques
11) why do managers tend to retain free cash flow?
a.managers are in the best position to decide the best use of those funds
b.these funds are needed for undertaking profitable projects and the issue costs are less
than new issues of stocks or bonds
c.managers may not be acting in the shareholders best interest, and for a variety of
reasons, want to use the free cash flow
d.none of the above
12) following the demise of the bretton woods system, the imf
a.created a new role for itself, providing loans to countries facing balance-of-payments
and exchange rate difficulties
b.ceased to exists, since the era of fixed exchange rates had ended
c.became the sole agent responsible for maintaining fixed exchange rates
d.became the central bank of the united nations
13) when designing an incentive contract,
a.it is important for the board of directors to set up an independent compensation
committee that can carefully design the contract and diligently monitor manager’s
actions
b.senior executives can be trusted to not abuse incentive contracts by artificially
manipulating accounting numbers since the auditors should look in to that
c.the presence of any incentive is enough, whether it is accounting based or stock-price
based
d.the board of directors should always give the managers a “heads i win, tails you lose”
type of option
14) countries a and b currently consume 400 units of food and 400 units of textiles each
and currently do not trade with one another. the citizens of country a have to give up
one unit of food to gain two units of textiles, while the citizens of country b have to
give up one unit of textiles to gain two units of food. their production possibilities
curves are shown.
under the theory of comparative advantage
a.the citizens of country a should make food and trade with the citizens of country b for
textiles
b.the citizens of country a should make textiles and trade with the citizens of country b
for food
c.there are no gains from trade in this example
d.a is twice as good as b at making food and b is twice as good as a at making textiles