1) as a rule, when the interest rate of the foreign currency is greater than the interest rate
of the quoting currency,
a.the outright forward rate is less than the spot exchange rate
b.the outright forward rate is more than the spot exchange rate
c.the currency will trade at a premium in the forward contract
d.none of the above
2) with regard to a swap bank acting as a dealer in swap transactions, mismatch risk
refers to
a.the risk that arises from the situation in which the floating-rates of the two
counterparties are not pegged to the same index
b.the risk that interest rates changing unfavorably before the sap bank can lay off to an
opposing counterparty on the other side of an interest rate swap entered into with the
first counterparty
c.the risk the swap bank faces from fluctuating exchange rates during the time it takes
for the bank to lay off a swap it undertakes with one counterparty with an opposing
transaction
d.the risk that it may be difficult or impossible to find an exact opposite match for a
swap the bank has agreed take
3) which of the following is most indicative of the pressure that a country’s currency
faces for depreciation or appreciation?
a.the current account
b.the capital account
c.the statistical discrepancies
d.the official settlement balance
4) in david ricardo’s theory of comparative advantage,
a.international trade is a zero-sum game in which one trading partner’s gain comes at
the expense of another’s loss
b.liberalization of international trade will enhance the welfare of the world’s citizens
c.is a short-run argument, not a long-run argument
d.has been superseded by the now-orthodox view of mercantilism
5) the floor value of a convertible bond
a.is the ‘straight bond” value
b.is the conversion value
c.is the minimum of a and b
d.is the maximum of a and b
6) 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
which of the following conclusions are correct?
a.most of the volatility of the dollar value of the british asset can be removed by
hedging exchange risk because b2[var(s)] and var(e) are 1,125,000 ($)2 and 2,500 ($)2
respectively
b.most of the volatility of the dollar value of the british asset cannot be removed by
hedging exchange risk because b2[var(s)] and var(e) are 236,717 ($)2 and 493,751 ($)2
respectively
c.most of the volatility of the dollar value of the british asset cannot be removed by
hedging exchange risk because b2[var(s)] and var(e) are 125,000 ($)2 and -127,500
($)2 respectively
d.most of the volatility of the dollar value of the british asset can be removed by
hedging exchange risk because b2[var(s)] and var(e) are 125,000 ($)2 and -127,500
($)2 respectively
7) assume that a product has the following three stages of production:
if the value-added tax (vat) rate is 15%, what would be the vat over all stages of
production?
a.90
b.120
c.465
d.255
8) 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
9) 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
using your results to the last question, make a recommendation vis–vis when to buy the
bond.
10) if french-based affiliate a owes u.s.-based affiliate b $1,000 and affiliate b owes
affiliate a 2,000 when the exchange rate is $1.10 = 1.00. the net payment between a and
b should be
a.1,091 from b to a
b.1,091 from a to b
c.$1,200 from b to a
d.none of the above
11) ishares
a.exchange traded funds that are subject to u.s. sec and irs diversification requirements
b.open-end mutual funds sold otc
c.exchange traded funds that are not subject to u.s. sec and irs diversification
requirements
d.none of the above
12) benefits from adopting a common european currency include
a.reduced transaction costs
b.elimination of exchange rate risk
c.increased price transparency will promote europe-wide competition
d.all of the above
13) an exporter faced with exposure to a depreciating currency can reduce transaction
exposure with a strategy of
a.paying or collecting early
b.paying or collecting late
c.paying late, collecting early
d.paying early, collecting late
14) once a mnc decides to undertake a foreign project, it can take various measures to
minimize its exposure to political risk. these include
a.the mnc can form a joint venture with a local company
b.the mnc may also consider forming a consortium of international companies to
undertake the foreign project
c.the mnc can use local debt to finance the foreign project
d.the mnc may purchase insurance against the hazard of political risk
e.all of the above
15) compute the domestic country beta of stansfield bicycles as well as its world beta.
a.1.00 and 0.80 respectively
b.0.80 and 0.00 respectively
c.4.50 and 4.00 respectively
d.none of the above
16) macroeconomic factors affecting international equity returns include
a.exchange rate changes
b.interest rate differentials
c.changes in inflationary expectations
d.all of the above
17) which of the following are reasons why a bank may establish a multinational
operation?
a.low marginal and transaction costs
b.home nation information services, and prestige
c.growth and risk reduction
d.all of the above
18) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
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.
19) 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.
if the call finishes in-the-money what is your portfolio cash flow?
20) 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 value today of your replicating today portfolio in euro.
21) the time from acceptance to maturity on a $30,000,000 banker’s acceptance is 45
days.
the importing bank’s acceptance commission is 1.5 percent and that the market rate for
45-day b/as is 4 percent.
calculate the amount the banker will receive if the exporter discounts the b/a with the
importer’s bank.
22)
consider the following international investment opportunity. it involves a gold mine that
can be opened at a cost, then produces a positive cash flow, but then requires
environmental clean-up:
what is the dollar-denominated irr of this project?
23)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
using your previous answers and a bit more work, find the 1-year forward exchange rate
in $ per that satisfies irp from the perspective of a customer that borrowed $1m traded
for at the spot and invested at i = 3%.
24) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you borrowed 1,000,000 for one year, how much money would you owe at maturity?
25) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had 1,000,000 and traded it for usd at the spot rate, how many usd will you get?