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1) exposure to currency risk can be measured by the sensitivities of
a.the future home currency values of the firm's assets and liabilities
b.the firm's operating cash flows to random changes in exchange rates
c.both a and b
d.none of the above
2) your firm is in the 34% tax bracket. the yield to maturity on your existing bonds is
8%. the state of georgia offers to loan your firm $1,000,000 with a two year amortizing
loan at a 5% rate of interest and annual payments due at the end of the year.
the interest will be deductible at the time that you pay. what is the apv of this
below-market loan to your firm? i did not round any of my intermediate steps. you
might be a little bit off. pick the answer closest to yours.
a.$64,157.38
b.$417,201.05
c.$840,797
d.none of the above
3) consider a u.s. mnc who owns a foreign asset. if the foreign currency value of the
asset is inversely related to changes in the dollar-foreign currency exchange rate,
a.the company has a built-in hedge
b.the dollar value variability that is independent of exchange rate movements
c.both a and b
d.none of the above
4) who benefits from debt-for-equity swaps?
a.the creditor bank
b.the ldc
c.the market maker
d.all of the above
5) how many methods of foreign currency translation have been used in recent years?
(u.s. gaap.)
a.one
b.two
c.three
d.four
6) the fisher effect can be written for the united states as:
a.option a
b.option b
c.option c
d.option d
7) your firm is an italian exporter of bicycles. you have sold an order to a british firm
for £1,000,000 worth of bicycles. payment from the customer (in pounds sterling) 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 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts
b.go short 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts
c.go long 100 12-month pound futures contracts; and short 125 12-month euro futures
contracts
d.go short 100 12-month pound futures contracts; and long 125 12-month euro futures
contracts
e.none of the above
8) an example of a political risk is
a.expropriation of assets
b.adverse change in tax rules
c.the opposition party being elected
d.both answers a and b are correct
9) the key to extracting private benefits of control that are not shared by other
shareholders on a pro rata basis is to
a.become a large shareholder and acquire control rights exceeding cash flow rights
b.buy a large block of nonvoting shares
c.sell your shares in a tender offer
d.force the firm into bankruptcy
10) the first two columns give the maximum daily amounts of beer and whiskey that
southern ireland and northern ireland can produce when they completely specialize in
one or other product. the last two columns give each country's consumption without
trade.
suppose that northern ireland and southern ireland each have 1,000 hours of labor per
day. southern workers are paid 1 per day and northern workers are paid £1 per day. what
is the exchange rate associated with an international price of one keg of beer = 1 bottle
of whiskey?
a.1.25 = £1
b.0.80 = £1
c.1 = £1
d.none of the above
11) the record of investing in u.s.-based stock mutual funds
a.shows that the movements of the u.s. stock market account for about 20 percent of the
fluctuations of the value of u.s.-based stock mutual funds
b.shows that the talent of individual portfolio managers accounts for about 90 percent
of the fluctuations of the value of u.s.-based stock mutual fundsluck the other ten
percent
c.shows that the movements of the u.s. stock market account for about 90 percent of the
fluctuations of the value of u.s.-based stock mutual funds
d.none of the above
12) if the interest rate in the u.s. is i$ = 5 percent for the next year and interest rate in
the u.k. is i£ = 8 percent for the next year, uncovered irp suggests that
a.the pound is expected to depreciate against the dollar by about 3 percent
b.the pound is expected to appreciate against the dollar by about 3 percent
c.the dollar is expected to appreciate against the pound by about 3 percent
d.both a and c
13) reasons for a country to impose exchange restrictions on its own currency, limiting
conversion to other currencies include
a.enticing more foreign investment from mncs
b.for a variety of reasons, the country may find itself short of foreign currency reserves
c.creating a home-grown business climate
d.all of the above
14) your firm is a u.k.-based exporter of bicycles. you have sold an order to a french
firm for 1,000,000 worth of bicycles. payment from the french firm (in euro) 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 short 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts
b.go long 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts
c.go long 100 12-month euro futures contracts; and short 80 12-month pound futures
contracts
d.go short 100 12-month euro futures contracts; and long 80 12-month pound futures
contracts
e.none of the above
15) under the bretton woods system,
a.the u.s. dollar was the only currency that was fully convertible to gold; other
currencies were not directly convertible to gold
b.all currencies of member states were fully convertible to gold
c.all currencies of member states were fully convertible to gold or silver
d.none of the above
16) calculate the euro-based return an italian investor would have realized by investing
10,000 into a £50 british stock using 50% margin. one year after investment, the stock
pays a £1 dividend, and sells for £54. the interest on the margin loan is 1% per year. the
margin loan was denominated in pounds.
spot exchange rates at the start and end of the year are shown in the table.
17) 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.
determine the bond equivalent yield the importer's bank will earn from discounting the
b/a with the exporter.
18) 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:
using the notion of a hedge ratio, make a recommendation vis--vis how to undertake the
project today without "buying" the option.
19) your firm's interaffiliate cash receipts and disbursements matrix is shown below
($000):
using your results to the last question, use bilateral netting to simplify.
20) the first two columns give the maximum daily
amounts of beer and whiskey that southern ireland and northern ireland can produce
when they completely specialize in one or other product. the last two columns give each
country's consumption without trade.
is northern ireland better off when it trades with southern ireland?
21)
please note that your answers are worth zero points if they do not include currency
symbols ($, )
if you had 1,000,000 and traded it for usd at the spot rate, how many usd will you get?
22)
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?
