1) if the exchange rate follows a random walk
a.the future exchange rate is unpredictable
b.the future exchange rate is expected to be the same as the current exchange rate, st =
e(st+ 1)
c.the best predictor of future exchange rates is the forward rate ft = e(st+ 1|it)
d.both b and c
2) 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. the future
dollar cost of meeting this obligation using the money market hedge is
a.$6,450,000
b.$6,545,400
c.$6,653,833
d.$6,880,734
3) use the binomial option pricing model to find the value of a call option on £10,000
with a strike price of 12,500.
the current exchange rate is 1.50/£1.00 and in the next period the exchange rate can
increase to 2.40/£ or decrease to 0.9375/1.00 (i.e. u = 1.6 and d = 1/u = 0.625).
the current interest rates are i = 3% and are i£ = 4%.
choose the answer closest to yours.
a.3,275
b.2,500
c.3,373
d.3,243
4) in an agency market, the broker takes the client’s order through the agent, who
matches it with another public order. the agent can be viewed as
a.a dealer
b.a specialist
c.a broker’s broker
d.none of the above
5) the advantages of a market order include the fact that
a.you are pretty much guaranteed that your order will be executed
b.a market order typically has lower commissions than a limit order
c.market orders increase your liquidity
d.both a and b
6)
using the table shown, what is the spot cross-exchange rate between pounds and euro?
a.1.00 = £0.75
b.£1.33 = 1.00
c.£1.00 = 0.75
d.none of the above
7) the communist victory in china in 1949 is an example of
a.micro risk
b.macro risk
c.both a and b
d.none of the above
8) the role of an underwriter is to
a.help negotiate terms with the borrower
b.ascertain market conditions
c.manage the issuance
d.all of the above
9) the size of the swap market is
a.measured by notational principal
b.over 7 trillion dollars
c.both a and b
d.none of the above
10) 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 = $1.50. u.s. dollar-denominated government
bonds currently have a yield to maturity of 4%. suppose that the european central bank
is considering either tightening or loosening its monetary policy. it is widely believed
that in one year there are only two possibilities:
following revaluation, the exchange rate is expected to remain steady for at least
another year
your banker quotes the euro-zone risk-free rate at i = 5% and the u.s. risk free rate at i$
= 4%. find the value of the option and thereby the correct value of the bond to a u.s.
investor.
11) in comparison to the current/noncurrent method, the monetary/nonmonetary method
a.differs substantially with regard to the treatment of inventory
b.classifies accounts on the basis of similarity of attributes rather than the similarity of
maturities
c.both a and b
d.none of the above
12) the three basic types of taxation are
a.income tax, withholding tax, and value-added tax
b.income tax, withholding tax, and business tax
c.withholding tax, value-added tax, and corporate tax
d.personal tax, corporate tax, and operating tax
13) abc international can borrow $4,000,000 at libor plus a lending margin of .65
percent per annum on a three-month rollover basis from barclays in london. three
month libor is currently 5.5 percent. suppose that over the second three-month interval
libor falls to 5.0 percent. how much will abc pay in interest to barclays over the
six-month period for the eurodollar loan?
a.$50,000
b.$100,000
c.$118,000
d.$120,000
14) generally speaking, a firm with recurrent exposure can best hedge using which
product?
a.options
b.swaps
c.futures
d.all of the above
15) suppose you observe a spot exchange rate of $2.00/£. if interest rates are 5% apr in
the u.s. and 2% apr in the u.k., what is the no-arbitrage 1-year forward rate?
a.£2.0588/$
b.$2.0588/£
c.£1.9429/$
d.$1.9429/£
16) 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
which of the above statements pertain to fasb 52?
a.(i)
b.(i) and (ii)
c.(iii) and (iv)
d.(i), (ii), and (iii)
17) 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 4; 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 firm’s cost of equity capital?
a.33.33%
b.10.85%
c.13.12%
d.16.50%
e.none of the above