1) the sarbanes-oxley act of 2002
a.has had the consequence that many foreign firms have de-listed in the u.s. exchanges
and listed their shares on the london stock exchange and other european exchanges
b.has increased the pace of foreign firms listing their shares in the u.s
c.a and b are both true
d.all of the above
2) before you can use the hedging strategies such as a forward market hedge, options
market hedge, and so on, you should consider running a regression of the form
. when reviewing the output, you should initially focus on
a.the intercept a
b.the slope coefficient b
c.mean square error, mse
d.r2
3) a market-value index
a.is calculated such that the proportion of the index a stock represents is determined by
its proportion of the total market capitalization of all stocks in the index
b.is calculated as the average price of all the stocks in the index that trade that day, one
example is the nasdaq
c.is calculated like the djia
d.none of the above
4) capital import neutrality
a.is the criterion that an ideal tax should be effective in raising revenue of the
government and not have any negative effects on the economic decision-making
process of the taxpayer
b.requires that taxable income is taxed in the same manner by the taxpayer’s national
tax authority regardless of where in the world it is earned
c.implies that the tax burden a host country imposes on the foreign subsidiary of the
mnc should be the same regardless of which country the mnc is incorporated and the
same as that placed on domestic firms
d.none of the above
5) suppose a bank customer with 1,000,000 wishes to trade out of euro and into
japanese yen. the dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-yen
exchange rate is quoted at $1.00 = ¥120. how many yen will the customer get?
a.¥192,000,000
b.¥5,208,333
c.¥75,000,000
d.¥5,208.33
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) 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d.has been superseded by the now-orthodox view of mercantilism
8) a swap bank
a.can act as a broker, bringing together counterparties to a swap
b.can act as a dealer, standing ready to buy and sell swaps
c.both a and b
d.only sometimes a but never ever b
9) your firm’s interaffiliate cash receipts and disbursements matrix is shown below
($000):
find the net cash flow for the entire firm
a.$0 in or out
b.$5,000 out
c.$30,000 in
d.$30,000 out
e.none of the above
10) since the passage of the sarbanes-oxley act,
a.some foreign firms choose to list their shares on the london stock exchange and other
european exchanges, instead of u.s. exchanges, to avoid the costly compliance
b.the pace of foreign firms listing their shares in the u.s. has increased
c.the firms have passed this increased cost on to their customers
11) the cost of compliance with the sarbanes-oxley act
a.is a small amount, since most firms were playing by rules to begin with
b.disproportionately affects small firms
c.is paid for with tax credits for firms found to be in compliance
d.both a and c
12) a 1-year, 4 percent pound denominated bond sells at par. a comparable risk 1-year,
5.5 percent pound/dollar dual-currency bond pays $2,000 at maturity per £1,000 of face
value. it sells for £900. what is the implied direct $/£ exchange rate at maturity?
a.£0.4405/$1.00
b.$1.2048/£1.00
c.$2.2701/£1.00
d.$2.0000/£1.00
13) forward parity states that
a.any forward premium or discount is equal to the expected change in the exchange rate
b.any forward premium or discount is equal to the actual change in the exchange rate
c.the nominal interest rate differential reflects the expected change in the exchange rate
d.an increase (decrease) in the expected inflation rate in a country will cause a
proportionate increase (decrease) in the interest rate in the country
14) calculate the dollar-based percentage return an american would have if he bought a
british stock at 50 per share and sold it one year later at 60. the spot exchange rate one
year ago was $1.50 = 1 and the spot rate prevailing at the end of the year was $1.20 = 1.
a.36% gain
b.20% gain
c.4% loss
d.9.6% gain
e.none of the above
15) the extent to which the value of the firm would be affected by unexpected changes
in the exchange rate is
a.transaction exposure
b.translation exposure
c.economic exposure
d.none of the above
16) if japan exports more than it imports, then
a.the supply of dollars is likely to exceed the demand in the foreign exchange market,
ceteris paribus
b.one can infer that the yen would be likely to appreciate against other currencies
c.a and b
d.none of the above
17) proportionately more domestic bonds than international bonds are denominated in
the ______ and the ______ while more international bonds than domestic bonds are
denominated in the _________ and the ________.
a.euro; yen; dollar; pound sterling
b.dollar; pound sterling; euro; yen
c.euro; pound sterling; dollar; yen
d.dollar; yen; euro; pound sterling
18) in the united states, managers are legally bound by the “duty of loyalty” to
a.the board of directors
b.the shareholders
c.the bondholders
d.the government
19) your firm is an italian importer of bicycles. you have placed an order with a swiss
firm for sfr. 2,000,000 worth of bicycles. payment (in francs) is due in 12 months. detail
a strategy using futures contracts that will hedge your exchange rate risk. have an
estimate of how many contracts of what type and maturity.
a.go long 200 12-month swiss franc futures contracts; and long 125 12-month euro
futures contracts
b.go short 200 12-month swiss franc futures contracts; and short 125 12-month euro
futures contracts
c.go long 200 12-month swiss franc futures contracts; and short 125 12-month euro
futures contracts
d.go short 200 12-month swiss franc futures contracts; and long 125 12-month euro
futures contracts
e.none of the above
20)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had borrowed $1,000,000 and traded for euro at the spot rate, how many do you
receive?
21) the strik-it-rich gold mining company is contemplating expanding its operations. to
do so it will need to purchase land that its geologists believe is rich in gold.
strik-it-rich’s management believes that the expansion will allow it to mine and sell an
additional 2,000 troy ounces of gold per year. the expansion, including the cost of the
land, will cost $500,000. the current price of gold bullion is $425 per ounce and
one-year gold futures are trading at $450.50 = $425 (1.06). extraction costs are $375 per
ounce. the firm’s cost of capital is 10 percent.
strik-it-rich’s management is, however, concerned with the possibility that large sales of
gold reserves by russia and the united kingdom will drive the price of gold down to
$390 for the foreseeable future. on the other hand, management believes there is some
possibility that the world will soon return to a gold reserve international monetary
system. in the latter event, the price of gold would increase to at least $460 per ounce.
the course of the future price of gold bullion should become clear within a year.
strik-it-rich can postpone the expansion for a year by buying a purchase option on the
land for $25,000.
estimate the value of the option on the land to the management of the mine.
22) a french firm is considering a one-year investment in the united kingdom with a
pound-denominated rate of return of i£ = 15%. the firm’s local cost of capital is i = 10%
the project costs £1,000 and will return £1,150 at the end of one year.
the current exchange rate is 2.00 = £1.00
suppose that the bank of england is considering either tightening or loosening its
monetary policy. it is widely believed that in one year there are only two possibilities:
find the irr in euro for the french firm if they wait one year to undertake the project after
the exchange rate falls to s1(|£) = 1.80 per £.
23) your firm’s interaffiliate cash receipts and disbursements matrix is shown below
($000):
using your results to the last question, use bilateral netting to simplify.
24)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you borrowed 1,000,000 for one year, how much money would you owe at maturity?
25) find the dollar value today of a 1-period at-the-money call option on ¥300,000. the
spot exchange rate is ¥100 = $1.00. in the next period, the yen can increase in dollar
value by 15 percent or decrease by 15 percent. the risk free rate in dollars is i$ = 5%;
the risk free rate in yen is i¥ = 1%.
26) assume that you are a retail customer.
please note that your answers are worth zero points if they do not include currency
symbols ($, )
there is (at least) one profitable arbitrage at these prices. what is it?
27) calculate the euro-based return an italian investor would have realized by investing
10,000 into a £50 british stock. one year after investment, the stock pays a £1 dividend,
and sells for £54 the exchange rate has changed from 1.25 per pound to 1.30 per pound.