1) a foreign country could provide low cost production sites
a.because the factors of production are underpriced
b.because the currency is undervalued
c.because the locals like to give away their land labor and capital to foreigners
d.both a and b
2) consider the no-trade input/output situation presented in the following table and
graph for south and north carolina. assume that free trade is legal.
which state is better at making guns?
a.south carolina
b.north carolina
c.neither
3) what is the correct label for the vertical axis in the j-curve?
a.time
b.change in the trade balance
c.size of trade balance
d.size of merchandise trade balance
4) with regard to the oip,
a.the composition of the optimal international portfolio is identical for all investors,
regardless of home country
b.the oip has more return and less risk for all investors, regardless of home country
c.the composition of the optimal international portfolio is identical for all investors of a
particular country, whether or not they hedge their risk with currency futures contracts
d.none of the above
5) the sf/$ spot exchange rate is sf1.25/$ and the 180 day forward exchange rate is
sf1.30/$. the forward premium (discount) is
a.the dollar is trading at an 8% premium to the swiss franc for delivery in 180 days
b.the dollar is trading at a 4% premium to the swiss franc for delivery in 180 days
c.the dollar is trading at an 8% discount to the swiss franc for delivery in 180 days
d.the dollar is trading at a 4% discount to the swiss franc for delivery in 180 days
6) company x wants to borrow $10,000,000 floating for 5 years; company y wants to
borrow 5,000,000 fixed for 5 years. the exchange rate is $2 = 1 and is not expected to
change over the next 5 years. their external borrowing opportunities are:
a swap bank proposes the following interest-only swap: company x will pay the swap
bank annual payments on $10,000,000 at an interest rate of $9.80%; in exchange the
swap bank will pay to company x interest payments on 5,000,000 at a fixed rate of
10.5%. y will pay the swap bank interest payments on 5,000,000 at a fixed rate of
12.80% and the swap bank will pay y annual payments on $10,000,000 with the coupon
rate of 12%.
if company x takes on the swap, what external actions should they engage in?
a.they should borrow $10,000,000 at $10%
b.they should borrow 5,000,000 at 10.50% interest-only for five years; translate pounds
to dollars at the spot rate
c.they should borrow 5,000,000 at 10.50% interest-only for five years; translate pounds
to dollars at the spot rate; enter long position in a forward contract to buy 5,000,000 in
five years
d.none of the above
7) in 1992, the enron development corporation, a subsidiary of the houston-based
energy company, signed a contract to build the largest-ever power plant in india,
requiring a total investment of $2.8 billion. after enron had spent nearly $300 million,
the project was canceled by hindu nationalist politicians in the maharashtra state where
the plant was to be built. which of the following are true?
a.subsequently, maharashtra invited enron to renegotiate its contract
b.the lack of an effective means of enforcing contracts in a foreign country is clearly a
major source of political risk associated with fdi
c.in an effort to pressure maharashtra to reverse its decision, enron “pushed like hell”
the u.s. energy department to make a statement in june 1995 to the effect that canceling
the enron deal could adversely affect other power projects. the statement only
compounded the situation. the bjp politicians immediately criticized the statement as an
attempt by washington to bully india
d.all of the above
8) find the present value of a 2-year treasury bond that pays a semi-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.$1,231.15
c.$699.07
d.none of the above
9) forfaiting, in which a bank purchases at a discount from an importer a series of
promissory notes in favor of an exporter,
a.is a short-term form of trade financing
b.is a medium-term form of trade financing
c.is a long-term form of trade financing
d.none of the above
10) the exposure coefficient in the regression is:
a.a measure of how a change in the exchange rate affects the dollar value of a firm’s
assets
b.has a value of zero if the value of the firm’s assets is perfectly correlated with changes
in the exchange rate
c.both a and b
d.none of the above
11) advantages of investing in mutual funds known as country funds include:
a.speculation in a single foreign market at minimum cost
b.using them as building blocks of a personal international portfolio
c.diversification into emerging markets that are otherwise practically inaccessible
d.all of the above
12) the ‘sharpe performance measure” (shp) is
a.
b.
c.
d.none of the above
13) a direct foreign tax credit is
a.computed for direct taxes paid on active foreign-source income of a foreign branch of
a u.s. mnc
b.computed on the indirect withholding taxes withheld form passive income distributed
by the foreign subsidiary to the u.s. parent
c.computed for income taxes deemed paid by the subsidiary
d.both a and b
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.
suppose that trade is allowed and that the international exchange rate between food and
textiles is one-for-one. the increased consumption following trade will be
a.an increase of 400 units of food and 400 units of textiles
b.an increase of 1,200 units of food and 1,200 units of textiles
c.an increase of 800 units of food and 800 units of textiles
d.there are no gains from trade in this example
15) restate the following one-, three-, and six-month outright forward american term
bid-ask quotes in forward points:
a.
b.
c.
d.none of the above
16) the link between the home currency value of a firm’s assets and liabilities and
exchange rate fluctuations is
a.asset exposure
b.operating exposure
c.both a and b
d.none of the above
17) 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
the hedge fund manager notices the optionality in starting this project today. he asks
you to comment and outline your valuation strategy.
18) following monetary union and the advent of the euro:
a.the countries of the european union have enacted common securities regulation
b.a pan-european stock exchange has developed in london, similar to the nyse in scope
and trading practices
c.development of a common securities regulations, even among the countries of the
european union, has not as yet occurred
d.none of the above
19) a stop order is an order to buy or sell a stock once the price of the stock reaches a
specified price, known as
a.the stop price
b.the limit price
c.the last price
d.the sell price