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1) find the hedge ratio for a put option on $15,000 with a strike price of 10,000. in one
period the exchange rate (currently s($/) = $1.50/) can increase by 60% or decrease by
37.5% (i.e. u = 1.6 and d = 0.625).
a.-15/49
b.5/13
c.3/2
d.15/49
2) assuming that the interaffiliate cash flows are uncorrelated with one another,
calculate the standard deviation of the portfolio of cash held by the centralized
depository for the following affiliate members:
a.$34,960.33
b.$139,841.33
c.$104,880.88
d.none of the above
3) a bank may establish a multinational operation for the reason of transaction costs. the
underlying rationale being that
a.banks follow their multinational customers abroad to prevent the erosion of their
clientele to foreign banks seeking to service the multinational's foreign subsidiaries
b.multinational banking operations help a bank prevent the erosion of its traveler's
check, tourist, and foreign business markets from foreign bank competition
c.by maintaining foreign branches and foreign currency balances, banks may reduce
transaction costs and foreign exchange risk on currency conversion if government
controls can be circumvented
d.multinational banks are often not subject to the same regulations as domestic banks.
there may be reduced need to publish adequate financial information, lack of required
deposit insurance and reserve requirements on foreign currency deposits, and the
absence of territorial restrictions
4) correspondent bank relationships can be beneficial
a.because a bank can service its mnc clients at a very low cost
b.because a bank can service its mnc clients without the need to have personnel in many
different countries
c.because a bank can service its mnc clients without developing its own foreign
facilities to service its clients
d.all of the above
5) a u.s.-based currency dealer has good credit and can borrow $1,000,000 for one year.
the one-year interest rate in the u.s. is i$ = 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 dollar 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
6) the required return on equity for a levered firm is 10.60%. the debt to equity ratio is
the tax rate is 40%, the pre-tax cost of debt is 8%. find the cost of capital if this firm
were financed entirely with equity.
a.10%
b.12%
c.8.67%
d.none of the above
7) consider a 1-year call option written on £10,000 with an exercise price of $2.00 =
£1.00. the current exchange rate is $2.00 = £1.00; the u.s. risk-free rate is 5% over the
period and the u.k. risk-free rate is also 5%. in the next year, the pound will either
double in dollar terms or fall by half (i.e. u = 2 and d = ). if you write 1 call option,
what is the value today (in dollars) of the hedge portfolio?
a.£6,666.67
b.£6,349.21
c.$12,698.41
d.$20,000
e.none of the above
8) concentrated ownership of a public company
a.is normal in the united states, following the well-publicized scandals of recent years
b.is relatively rare in the united states and common in many other parts of the world
c.leads to a free-rider problem with the minority shareholders relying on the majority
shareholders to assume an undue burden in monitoring the management
d.is the norm in great britain
9) when an interest-only swap is established on an amortizing basis
a.the debt service exchanges decrease periodically through time as the hypothetical
notational principal is amortized
b.the debt service exchanges are the same each year, but the level of interest and
principal changes as the loans amortize
c.there is no such thing as an amortizing interest-only swap
d.none of the above
10) generally speaking, a firm is subject to high degrees of operating exposure
a.when its costs are sensitive to exchange rate changes
b.when its prices are sensitive to exchange rate changes
c.when either its cost or its price is sensitive to exchange rate changes
d.none of the above
11) will an arbitrageur facing the following prices be able to make money?
a.yes, borrow 1,000,000 at 3.65%; trade for $ at the bid spot rate $1.40 = 1.00; invest at
4.1%; hedge this with a long position in a forward contract
b.yes, borrow $1,000,000 at 4.2%; trade for at the spot ask exchange rate $1.43 = 1.00;
invest 699,300.70 at 3.5%; hedge this by going short in forward (agree to sell @ bid
price of $1.44/ in one year). cash flow in 1 year $237.76
c.no; the transactions costs are too high
d.none of the above
