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________ states that nominal interest rates in each country are equal to the required real
rate of return plus compensation for expected inflation.
A) Absolute PPP
B) Relative PPP
C) The Law of One Price
D) The Fisher Effect
Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign
currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$
and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to
¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot
price her potential gain is ________ and her potential loss is ________.
A) $100,000; unlimited
B) unlimited; unlimited
C) $100,000; $100,000
D) unlimited; $100,000
An MNE has a contract for a relatively predictable long-term inflow of Japanese yen
that the firm chooses to hedge by paying for imports from Canada in Japanese yen. This
hedging strategy is known as:
A) a natural hedge.
B) currency-switching.
C) matching.
D) diversification.
________, traditionally referred to as chartists, focus on price and volume data to
determine past trends that are expected to continue into the future.
A) Mappists
B) Trappist monks
C) Filibusters
D) Technical analysts
The sensitivity of the option premium to a small change in the spot exchange rate is
called the gamma.
A/An ________ is an agreement between a buyer and seller that a fixed amount of one
currency will be delivered at a specified rate for some other currency.
A) Eurodollar transaction
B) import/export exchange
C) foreign exchange transaction
D) interbank market transaction
Of the following, which would NOT be considered an issue for an investment
agreement prior to investing in a foreign country?
A) the basis for setting transfer prices
B) the right to export to third-country markets
C) provision for arbitration of disputes
D) All of the above could be negotiated prior to investing.
Based on observations of firms that have successfully invested abroad, we can conclude
companies are more competitive when:
A) facing sophisticated and demanding customers in the home market.
B) surrounded by a critical mass of related industries and suppliers.
C) located in countries that are naturally endowed with the appropriate factors of
production.
D) all of the above are true
Which of the following is an unlikely reason for firms to participate in the swap
market?
A) To replace cash flows scheduled in an undesired currency with cash flows in a
desired currency.
B) Firms may raise capital in one currency but desire to repay it in another currency.
C) Firms desire to swap fixed and variable payment or receipt of funds.
D) All of the above are likely reasons for a firm to enter the swap market.
In addition to gaining liquidity, which of the following could also be considered a
legitimate reason for cross-listing equity?
A) enhance a firm's local image
B) become more familiar with the local financial community
C) get better local press coverage
D) all of the above
A common type of swap transaction in the foreign exchange market is the ________
where the dealer buys the currency in the spot market and sells the same amount back
to the same bank in the forward market.
A) "forward against spot"
B) "forspot"
C) "repurchase agreement"
D) "spot against forward"
A ________ transaction in the foreign exchange market requires an almost immediate
delivery (typically within two days) of foreign exchange.
A) spot
B) forward
C) futures
D) none of the above
Of the following, which is NOT a part of J-Curve adjustment path?
A) the currency contract period
B) the exchange rate pass-through period
C) the quantity adjustment period
D) Each of the above is part of the J-Curve adjustment path.
Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a
corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year
period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to
be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit
annually. The current one-year rate is 5%.
Refer to Instruction 8.1. Choosing strategy #1 will:
A) guarantee the lowest average annual rate over the next three years.
B) eliminate credit risk but retain repricing risk.
C) maintain the possibility of lower interest costs, but maximizes the combined credit
and repricing risks.
D) preclude the possibility of sharing in lower interest rates over the three-year period.
NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from the
Allofit Territories Company (ATC) located in Canada. With the steady decline of the
U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC
to be an increasingly difficult proposition. In response to NRI's request, ATC has
proposed the following risk-sharing arrangement. First, set the current spot rate as the
base rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base
rate. Any rate outside of the 5% range, ATC will share equally with NRI the difference
between the spot rate and the base rate. If the current spot rate is C$1.20/$, what are the
upper and lower limits for trading to take place at C$1.20?
A) C$1.205/$ - C$1.195/$
B) C$1.15/$ - C$1.25/$
C) C$1.14/$ - C$1.26/$
D) none of the above
Which of the following statements is NOT true regarding MNEs when compared to
purely domestic firms?
A) MNEs tend to rely more on short and intermediate term debt.
B) MNEs have greater foreign exchange risk.
C) MNEs have greater costs of asymmetric information.
D) MNEs have higher agency costs.
For the three years from early 2002 to early 2005, the euro maintained a strong and
steady rise in value against the U.S. dollar (USD). After a brief respite in 2005, the euro
continued its climb against the USD into 2008. Which of the following were NOT a
contributing factor in the assent of the euro and the decline in the dollar?
A) severe U.S. balance of payments deficits
B) a general weakening of the dollar after the attacks of September 11, 2001
C) large U.S. balance of payment surpluses
D) All of the above were contributing factors.
Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a
corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year
period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to
be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit
annually. The current one-year rate is 5%.
Refer to Instruction 8.1. If your firm felt very confident that interest rates would fall or,
at worst, remain at current levels, and were very confident about the firm's credit rating
for the next 10 years, which strategy would you likely choose? (Assume your firm is
borrowing money.)
A) Strategy #3
B) Strategy #2
C) Strategy #1
D) Strategy #1, #2, or #3; you are indifferent among the choices.
Level ________ is the easiest standard to satisfy for issuing ADRs.
A) 144a
B) III
C) II
D) I
According to the international Fisher Effect, if an investor purchases a five-year U.S.
bond that has an annual interest rate of 5% rather than a comparable British bond that
has an annual interest rate of 6%, then the investor must be expecting the ________ to
________ at a rate of at least 1% per year over the next 5 years.
A) British pound; appreciate
B) British pound; revalue
C) U.S. dollar; appreciate
D) U.S. dollar; depreciate
The Economist publishes annually the "Big Mac Index" by which they compare the
prices of the McDonald's Corporation's Big Mac hamburger around the world. The
index estimates the exchange rates for currencies based on the assumption that the
burgers in question are the same across the world and therefore, the price should be the
same. If a Big Mac costs $2.54 in the United States and 294 yen in Japan, what is the
estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?
A) $0.0086/¥
B) ¥124/$
C) $0.0081/¥
D) ¥115.75/$
Central Valley Transit Inc. (CVT) has just signed a contract to purchase light rail cars
from a manufacturer in Germany for euro 3,000,000. The purchase was made in June
with payment due six months later in December. Because this is a sizable contract for
the firm and because the contract is in euros rather than dollars, CVT is considering
several hedging alternatives to reduce the exchange rate risk arising from the sale. To
help the firm make a hedging decision you have gathered the following information.
∙ The spot exchange rate is $1.250/euro
∙ The six month forward rate is $1.22/euro
∙ CVT's cost of capital is 11%
∙ The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
∙ The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
∙ The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
∙ The U.S. 6-month lending rate is 6% (or 3% for 6 months)
∙ December call options for euro 750,000; strike price $1.28, premium price is 1.5%
∙ CVT's forecast for 6-month spot rates is $1.27/euro
∙ The budget rate, or the highest acceptable purchase price for this project, is $3,900,000
or $1.30/euro
Refer to Instruction 10.1. If CVT chooses NOT to hedge their euro payable, the amount
they pay in six months will be:
A) $3,500,000.
B) $3,900,000.
C) €3,000,000.
D) unknown today
Level II ADRs must meet:
A) U.S. GAAP standards.
B) home country accounting standards.
C) both U.S. GAAP and home country standards.
D) none of the above
Under an international regime of fixed exchange rates, countries with a BOP ________
should consider ________ their currency while countries with a BOP ________ should
consider ________ their currency.
A) deficit, revaluing; surplus, revaluing
B) deficit, devaluing; surplus, devaluing
C) surplus, devaluing; deficit, revaluing
D) surplus, revaluing; deficit, devaluing
The principle focus of the IMF bailout efforts during the Asian financial crisis was:
A) banking liquidity.
B) shareholder's wealth.
C) reestablishing fixed currency exchange rates in Asia.
D) dollarization of Asian currencies.
Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a
corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year
period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to
be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit
annually. The current one-year rate is 5%.
Refer to Instruction 8.1. Choosing strategy #2 will:
A) guarantee the lowest average annual rate over the next three years.
B) eliminate credit risk but retain repricing risk.
C) maintain the possibility of lower interest costs, but maximizes the combined credit
and repricing risks.
D) preclude the possibility of sharing in lower interest rates over the three-year period.
Which of the following is NOT an example of an operating cash flow?
A) management fees and distributed overhead
B) royalties and license fees
C) rent and lease payments
D) dividend paid to parent company
The authors discuss the concept of the "Impossible Trinity" or the inability to achieve
simultaneously the goals of exchange rate stability, full financial integration, and
monetary independence. If a country chooses to have a pure float exchange rate regime,
which two of the three goals is a country most able to achieve?
A) monetary independence and exchange rate stability
B) exchange rate stability and full financial integration
C) full financial integration and monetary independence
D) A country cannot attain any of the exchange rate goals with a pure float exchange
rate regime.
If a firm undertakes a project with ordinary cash flows and estimates that the firm has a
positive NPV, then the IRR will be:
A) less than the cost of capital.
B) greater than the cost of capital.
C) greater than the cost of the project.
D) cannot be determined from this information
________ exposure is the potential for accounting-derived changes in owner's equity to
occur because of the need to translate foreign currency financial statements into a single
reporting currency.
A) Transaction
B) Operating
C) Economic
D) Accounting (aka translation)
In the United States, the Foreign Credit Insurance Corporation:
A) is a subsidiary of the Export-Import Bank.
B) provides letters of credit for U.S. importers.
C) provides letters of credit for U.S. exporters.
D) provides policies that protect U.S. exporters against default by foreign importers.
Futures contracts require that the purchaser deposit an initial sum as collateral. This
deposit is called a:
A) collateralized deposit.
B) marked market sum.
C) margin.
D) settlement.
By cross listing and selling its shares on a foreign stock exchange, a firm typically tries
to accomplish which of the following?
A) improve the liquidity of its existing shares
B) increase its share price
C) increase the firm's visibility
D) all of the above
