1) suppose you observe the following exchange rates: 1 = $1.50; £1 = $2.00. calculate
the euro-pound exchange rate.
a.1.3333 = £1.00
b.£1.3333 = 1.00
c.3.00 = £1
d.1.25 = £1.00
2) suppose that the one-year interest rate is 4.0 percent in the italy, the spot exchange
rate is $1.60/, and the one-year forward exchange rate is $1.58/. what must one-year
interest rate be in the united states?
a.2%
b.2.7%
c.5.32%
d.none of the above
3) as of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected
to prevail for the next year in the u.s. is 2% and 3% in the euro zone. what is the
one-year forward rate that should prevail?
a.1.00 = $1.2379
b.1.00 = $1.2139
c.1.00 = $0.9903
d.$1.00 = 1.2623
4) pricing a currency swap after inception involves
a.finding the difference between the present values of the payments streams the party
will receive in one currency and pay in the other currency, converted to a common
currency
b.sending a market order to a swap dealer
c.finding the sum of the present values of the payments streams that each party will
receive in one currency and pay in the other currency, converted to a common currency
d.none of the above
5) a counterpurchase
a.involves a technology transfer via the sale of a manufacturing plant: as part of the
terms, the seller of the plant agrees to purchase a certain portion of the plant output
b.is similar to a buy-back transaction but the seller of the plant agrees to buy unrelated
goods
c.is a form of barter
d.involves two parties agreeing to buy a specified amount of goods or services from one
another
6) given the following information for a levered and unlevered firm, calculate the
difference in the cash flow available to investors. assume the corporate tax rate is 40%.
(hint:calculatethetaxsavingsarisingformthetaxdeductibilityofinterestpayments).
a.$8
b.$18
c.$78
d.$90
7) which of the following are true?
a.unless you give your broker specific instructions to the contrary, orders to buy or sell
a stock are day orders
b.orders that have been placed but not executed during regular trading hours will
automatically carry over into after-hours trading but not the next regular trading day
c.similarly, day orders placed during after-hours trading will automatically carry over
into the next regular trading day
d.if your order is not executed during a trading session, you are not allowed to place a
new order in the next trading session
e.all of the above are true
8) a flexible sourcing policy
a.is primarily concerned with low-cost (and often low-quality) vendors
b.need not be confined just to materials and parts
c.only works for manufacturing firms, not service firms
d.puts the focus on the exchange rate at the expense of shipping rates
9) assume that a product has the following three stages of production:
if the value-added tax (vat) rate is 10%, what would be the vat over all stages of
production?
a.64
b.36
c.465
d.225
10) find the value today of a 2-year dual currency bond with annual coupons (paid in
u.s. dollars at a 5 percent coupon rate) that pays £500 per $1,000 par value at maturity.
the cash flows of the bond are:
the dollar-based yield to maturity is i$ = 3%; the spot exchange rate is $1.80 = £1.00;
expected inflation over the next three years is $ = 2% in the u.s. and £ = 3% in the u.k.
a.$927.62
b.$941.30
c.$965.06
d.$599.00
11) how high does the lending rate in the euro zone have to be before an arbitrageur
would not consider borrowing dollars, trading for euro at the spot, investing in the euro
zone and hedging with a short position in the forward contract?
a.the bid-ask spreads are too wide for any profitable arbitrage when i> 0
b.3.48%
c.-2.09%
d.none of the above
12) foreign equities as a proportion of u.s. investors’ portfolio wealth rose from about 1
percent in the early 1980s to about ___ by 201
a.10%
b.23%
c.33%
d.67%
13) in the notation of the book, k = (1 – )kl + (1 – )i
which of these are correct?
a.the debt-to-equity ratio is
b.the tax rate is
c.the after-tax cost of debt capital is i
d.all of the above
14) suppose in order to defraud the shareholders, a manager sets up an independent
company that he owns sells the main company’s output to this company. he would be
tempted to set the transfer price
a.below market prices
b.above market prices
c.at the market price
d.in accordance with gaap
15) suppose that the exchange rate is 1.25 = £1.00.
options (calls and puts) are available on the philadelphia exchange in units of 10,000
with strike prices of $1.60/1.00.
options (calls and puts) are available on the philadelphia exchange in units of £10,000
with strike prices of $2.00/£1.00.
for a u.s. firm to hedge a 100,000 payable,
a.buy 10 call options on the euro with a strike in dollars
b.buy 8 put options on the pound with a strike in dollars
c.sell 10 call options on the euro with a strike in dollars
d.sell 8 put options on the pound with a strike in dollars
e.both a and b
f.both c and d
16) the fisher effect can be written for the united states as:
a.option a
b.option b
c.option c
d.option d
17) the current exchange rate is 1.00 = $1.50. compute the correct balances in bank a’s
correspondent account(s) with bank b if a currency trader employed at bank a buys
100,000 from a currency trader at bank b for $150,000 using its correspondent
relationship with bank b.
a.bank a’s dollar-denominated account at b will fall by $150,000
b.bank b’s dollar-denominated account at a will fall by $150,000
c.bank a’s pound-denominated account at b will fall by 100,000
d.bank b’s pound-denominated account at a will rise by 100,000