1) with any hedge
a.your losses on one side should about equal your gains on the other side
b.you should try to make money on both sides of the transaction: that way you make
money coming and going
c.you should spend at least as much time working the hedge as working the underlying
deal itself
d.you should agree to anything your banker puts in front of your face
2) financial accounting standards board (fasb) statements 8 and 52 relate to the
translation methods. the following outlines the objectives and descriptions of the two
statements.
(i) – measure in dollars an enterprise’s assets, liabilities, revenues, or expenses that are
denominated in a foreign currency according to generally accepted accounting
principles
(ii) – is essentially the temporal method of translation (with some subtle differences)
(iii) – provide information that is generally compatible with the expected economic
effects of a rate change on an enterprise’s cash flows and equity
(iv) – reflect in consolidated statements the financial results and relationships of the
individual consolidated entities as measured in their functional currencies in conformity
with u.s. generally accepted accounting principles
the actual translation process prescribed by fasb 52 is
a.a two-stage process
b.a twelve step program
c.a five-step process
d.none of the above
3) it can be argued that, while financial hedging can be used to stabilize a firm’s cash
flows,
a.it is not a substitute for long-term operational hedging
b.it is therefore a substitute for long-term operational hedging
c.it is inferior to money market hedging
d.none of the above
4) find the dollar value today of a 1-period at-the-money call option on 10,000. the spot
exchange rate is 1.00 = $1.25. in the next period, the euro can increase in dollar value to
$2.00 or fall to $1.00. the interest rate in dollars is i$ = 27.50%; the interest rate in euro
is i = 2%.
a.$3,308.82
b.$0
c.$3,294.12
d.$4,218.75
5) a typical foreign trade transaction requires three basic documents
a.letter of credit, bill of lading, and shipping documents
b.time draft, banker’s acceptance, and bill of lading
c.letter of credit, time draft, and bill of lading
d.letter of credit, banker’s acceptance, and bill of lading
6) adrs
a.are american depository receipts
b.denominated in u.s. dollars that trade on a u.s. stock exchange
c.are depository receipts for foreign stocks held by the u.s. depository’s custodian
d.all of the above
7) u.s. car makers were forced to build their own network of dealerships to enter the
japanese market.
a.this is an example of backward vertical integration
b.this is an example of forward vertical integration
c.this is an example of sideways vertical integration
d.none of the above
8) abc international has borrowed $4,000,000 at libor plus a lending margin of .65
percent per annum on a three-month rollover basis from barclays in london. three
month libor is currently 5.5 percent, but abc is worried about an increase in three-month
libor 3 months from now. what could they do to hedge?
a.buy a 3 6 fra in the amount of $4 million
b.sell a 3 6 fra in the amount of $4 million
c.buy a 3 3 fra in the amount of $4 million
d.buy a 3 9 fra in the amount of $4 million
9) the gains from trade
a.are likely realized in the long run when workers and firms have had the time to adjust
to the new competitive environment
b.are immediately realized in the short run, when governments drop protectionist
policies
c.are smaller than the costs of adjustment
d.none of the above
10) also, mncs often find it profitable to locate manufacturing/processing facilities near
a.the home office to exploit their assets in place
b.the natural resources in order to save transportation costs
c.their competitor’s manufacturing plant to even out the playing field with regard to
shipping costs
d.none of the above
11) in view of the fact that ppp is the manifestation of the law of one price applied to a
standard commodity basket,
a.it will hold only if the prices of the constituent commodities are equalized across
countries in a given currency
b.it will hold only if the composition of the consumption basket is the same across
countries
c.both a and b
d.none of the above
12) the organizational form of a mnc can affect the timing of a tax liability. this means
a.the principle of tax equity might be violated
b.as long as regardless of the country in which an affiliate of a mnc earns taxable
income, the same tax rates apply, then the tax due date doesn’t matter
c.tax timing will even out over a reporting cycle, so there is no big deal here
d.none of the above
13) mncs have invested in china
a.by lower material costs
b.by lower labor costs
c.by a desire to preempt the entry of rivals into china’s potentially huge market
d.all of the above
14) u.s. citizens must pay tax on the imputed interest represented by the fact that zero
coupon bonds price gets a bit closer to par value as each year goes by. if you have a
25-year zero coupon bond with $1,000 par value, how much imputed interest will you
record in the coming year if interest rates stay the same at ten percent?
a.$92.30
b.$9.23
c.$0
d.none of the above
15) a “call market”
a.is otc and over-the-phone
b.features an agent of the exchange that accumulates a batch of orders that are
periodically executed by written or verbal auction throughout the day
c.provides traders with execution at certain prices
d.both b and c
16) which of the following are identified by your text as a strategy for managing
operating exposure:
1) selecting low-cost production sites
2) flexible sourcing policy
3) diversification of the market
4) product differentiation and r&d efforts
5) financial hedging
a.1), 3), and 5) only
b.2) and 4) only
c.1), 4), and 5) only
d.1), 2), 3), 4), and 5)
17) in the event of a default
a.the forfait does not have recourse against the exporter in the event of a default by the
importer
b.the forfait does have recourse against the exporter in the event of a default by the
importer
c.the exporter will have to return the goods to the importer
d.none of the above
18) financial accounting standards board (fasb) statements 8 and 52 relate to the
translation methods. the following outlines the objectives and descriptions of the two
statements.
(i) – measure in dollars an enterprise’s assets, liabilities, revenues, or expenses that are
denominated in a foreign currency according to generally accepted accounting
principles
(ii) – is essentially the temporal method of translation (with some subtle differences)
(iii) – provide information that is generally compatible with the expected economic
effects of a rate change on an enterprise’s cash flows and equity
(iv) – reflect in consolidated statements the financial results and relationships of the
individual consolidated entities as measured in their functional currencies in conformity
with u.s. generally accepted accounting principles
in implementing fasb 52,
a.the functional currency of the foreign entity must be translated into the reporting
currency in which the consolidated statements are reported.
b.the local currency of a foreign entity may not always be its functional currency. if it is
not, the temporal method of translation is used to remeasure the foreign entity’s books
into the functional currency.
c.the current rate method is used to translate from the functional currency to the
reporting currency.
d.in some cases, a foreign entity’s functional currency may be the same as the reporting
currency, in which case translation is not necessary.
e.all of the above are true
19) when nestl, a swiss firm, bought the american firm carnation, it was engaged in
foreign direct investment. if nestl had only bought a non-controlling number of shares
of the firm,
a.nestl would have been engaged in portfolio investment
b.nestl would have been engaged in a cross-border acquisition
c.it would depend if they bought the shares from an american or a canadian
d.none of the above
20)
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?
21) the stock market of country a has an expected return of 5%, and standard deviation
of expected return of 8%. the stock market of country b has an expected return of 15%
and standard deviation of expected return of 10%.
is it reasonable to conclude that your portfolio is on the efficient frontier? if not, then
prove your point by finding just one portfolio weighting between a and b that offers
more return with less risk. if you think it is on the efficient frontier, why do you think
this? no points for guessing.
22)
consider the following international investment opportunity. it involves a gold mine that
can be opened at a cost, then produces a positive cash flow, but then requires
environmental clean-up:
what is the dollar-denominated irr of this project?
23) 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.
what should strik-it-rich’s management do?
24) the criteria of tax neutrality: capital export neutrality, capital import neutrality and
national neutrality
25) in countries with concentrated ownership
a. hostile takeovers are quite rare
b. hostile takeovers are quite common
26) consider an option to buy 12,500 for £10,000. in the next period, the euro can
strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or
weaken by 20%.
big hint: don’t round, keep exchange rates out to at least 4 decimal places.
draw the tree.
27) the time from acceptance to maturity on a $1,000,000 banker’s acceptance is 60
days.
the importing bank’s acceptance commission is 1.00 percent and that the market rate for
60-day b/as is 5 percent.
calculate the amount the banker will receive if the exporter discounts the b/a with the
importer’s bank.