FINC495 Week-2 Quiz 1 Correct 59 out of 60

Question 1 (1 point)

 MNCs can use their global presence to

a) 

take advantage of underpriced labor services available in certain developing countries.

b) 

gain access to special R&D capabilities residing in advanced foreign counties.

c) 

boost profit margins and create shareholder value.

d) 

all of the above

Question 2 (1 point)

The massive privatization that is currently taking place in formerly socialist countries, will likely

a) 

eventually enhance the standard of living to these countries' citizens.

b) 

depend on private investment.

c) 

increase the opportunity set facing these countries' citizens.

d) 

all of the above

Question 3 (1 point)

In countries like France and Germany,

a) 

managers have often made business decisions with regard to maximizing market share to the exclusion of other goals.

b) 

managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.

c) 

managers have often regarded the prosperity and growth of their combines, or families of related firms, as their critical goal.

d) 

managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal.

Question 4 (1 point)

Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to the free movement of labor is an example of

a) 

information asymmetry.

b) 

excessive transactions costs.

c) 

racial discrimination.

d) 

a market imperfection.

Question 5 (1 point)

 

The Nestlé Corporation, a well-known Swiss MNC, used to issue two different classes of common stock, bearer shares and registered shares, and foreigners were allowed to hold only

a) 

registered shares.

b) 

bearer shares.

c) 

voting shares.

d) 

convertible shares.

Question 6 (1 point)

What major dimension sets apart international finance from domestic finance?

a) 

Foreign exchange and political risks

b) 

Market imperfections

c) 

Expanded opportunity set

d) 

All of the above

Question 7 (1 point)

 Question 7 Unsaved

Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Compute the opportunity cost of producing one additional unit of food instead of textiles.

Question 7 options:

a) 

1 yard of textiles per 1.67 pounds of food

b) 

1 pound of food per 1.67 yards of textiles

c) 

1 yard of textiles per .6 pounds of food

d) 

1 pound of food per .6 yards of textiles

Question 8 (1 point)

 Question 8 Unsaved

Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of

Question 8 options:

a) 

exchange rate risk.

b) 

political risk.

c) 

market imperfections.

d) 

weakness in the dollar.

Question 9 (1 point)

 Question 9 Unsaved

The goal of shareholder wealth maximization

Question 9 options:

a) 

is not appropriate for non-U.S. business firms.

b) 

means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially.

c) 

is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met.

d) 

is in conflict with the privatization process taking place in third-world countries.

Question 10 (1 point)

 Question 10 Unsaved

Since the end of World War I, the dominant global currency has been the

Question 10 options:

a) 

British pound.

b) 

Japanese yen.

c) 

Euro.

d) 

U.S. dollar.

Question 11 (1 point)

 Question 11 Unsaved

Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment.

Question 11 options:

a) 

Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.

b) 

Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.

c) 

a) and b) both work

d) 

None of the above

Question 12 (1 point)

 Question 12 Unsaved

With regard to the current exchange rate arrangement between Italy and Germany, it is best characterized as

Question 12 options:

a) 

independent floating (market determined).

b) 

managed float.

c) 

an exchange arrangement with no separate legal tender.

d) 

pegged exchange rate within a horizontal band.

Question 13 (1 point)

 Question 13 Unsaved

A central bank can fix an exchange rate

Question 13 options:

a) 

in perpetuity.

b) 

only for as long as the market believes that it has the political will to do so.

c) 

only for as long as it has reserves of gold.

d) 

only for as long as it has independence of monetary policy.

Question 14 (1 point)

 Question 14 Unsaved

Under the Bretton Woods system

Question 14 options:

a) 

each country established a par value for its currency in relation to the dollar.

b) 

the U.S. dollar was pegged to gold at $35 per ounce.

c) 

each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary.

d) 

all of the above

Question 15 (1 point)

 Question 15 Unsaved

The Asian Currency Crisis

Question 15 options:

a) 

happened just prior to the Mexican peso crisis.

b) 

turned out to be far more serious than the Mexican peso crisis in terms of the extent of contagion.

c) 

was limited to Asian currencies.

d) 

was almost over before anyone outside the pacific rim noticed.

Question 16 (1 point)

 Question 16 Unsaved

Assume that a country is on the gold standard. In order to support unrestricted convertibility into gold, banknotes need to be backed by a gold reserve of some minimum stated ratio. In addition,

Question 16 options:

a) 

the domestic money stock should rise and fall as gold flows in and out of the country.

b) 

the central bank can control the money supply by buying or selling the foreign currencies.

c) 

Both a) and b)

Question 17 (1 point)

 Question 17 Unsaved

The growth of the Eurodollar market, which is a transnational, unregulated fund market

Question 17 options:

a) 

was encouraged by U.S. legislation designed to stem the outflow of dollars from the U.S.

b) 

was discouraged by U.S. legislation designed to stem the outflow of dollars from the U.S.

Question 18 (1 point)

 Question 18 Unsaved

During the period between World War I and World War II,

Question 18 options:

a) 

the major European powers and the U.S. returned to the gold standard and fixed exchange rates.

b) 

while most countries abandoned the gold standard during World War I, international trade and investment flourished during the interwar period under a coherent international monetary system.

c) 

the U.S. dollar emerged as the dominant world currency, gradually replacing the British pound for the role.

d) 

None of the above.

Question 19 (1 point)

 Question 19 Unsaved

The Mexican Peso Crisis was touched off by

Question 19 options:

a) 

an unsurprising announcement by the Mexican government to devalue to peso against the dollar by 14 percent.

b) 

an unexpected announcement by the Mexican government to devalue to peso against the dollar by 14 percent.

c) 

an announcement by the Mexican government to enact a currency board arrangement with the U.S. dollar.

d) 

contagion from other Latin American and Asian financial markets.

Question 20 (1 point)

 Question 20 Unsaved

The main cost of European monetary union is

Question 20 options:

a) 

the loss of national monetary and exchange rate policy independence.

b) 

increased exchange rate uncertainty.

c) 

lessened political integration.

d) 

none of the above

Question 21 (1 point)

 Question 21 Unsaved

With regard to the capital account

Question 21 options:

a) 

the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

b) 

U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow.

c) 

U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.

d) 

all of the above

Question 22 (1 point)

 Question 22 Unsaved

In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves. Under this regime

Question 22 options:

a) 

-BCA = BKA.

b) 

BCA = - BRA = 0.

c) 

BKA = -BRA.

d) 

BSA = BCA.

Question 23 (1 point)

 Question 23 Unsaved

Continued U.S. trade deficits coupled with foreigners' desire to diversify their currency holdings away from U.S. dollars

Question 23 options:

a) 

could further diminish the position of the dollar as the dominant reserve currency.

b) 

could affect the value of U.S. dollar (e.g. through the currency diversification decisions of Asian central banks).

c) 

could lend steam to the emergence of the euro as a credible reserve currency.

d) 

all of the above

Question 24 (1 point)

 Question 24 Unsaved

Currently, international reserve assets are comprised of

Question 24 options:

a) 

gold, platinum, foreign exchanges, and special drawing rights (SDRs).

b) 

gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).

c) 

gold, diamonds, foreign exchanges, and special drawing rights (SDRs).

d) 

reserve positions in the International Monetary Fund (IMF), only.

Question 25 (1 point)

 Question 25 Unsaved

The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity to solve for the statistical discrepancy.

Question 25 options:

a) 

The statistical discrepancy = (BCA + BKA) - BRA

b) 

The statistical discrepancy = BCA - BKA + BRA  (This is incorrect)

c) 

The statistical discrepancy = BCA - BKA - BRA

d) 

The statistical discrepancy = BCA + BKA + BRA

Question 26 (1 point)

 Question 26 Unsaved

As of 2007 gold accounting for

Question 26 options:

a) 

90 percent of the total reserve assets held by IMF member countries.

b) 

70 percent of the total reserve assets held by IMF member countries.

c) 

approximately 50 percent of the total reserve assets held by IMF member countries.

d) 

less than 2 percent of the total reserve assets held by IMF member countries.

Question 27 (1 point)

 Question 27 Unsaved

More important than the absolute size of a country's balance-of-payments disequilibrium

Question 27 options:

a) 

is the nature and cause of the disequilibrium.

b) 

is whether it is a trade surplus or deficit.

c) 

is whether the local government is mercantilist or not.

d) 

Nothing is more important than the absolute size of a country's balance-of-payments disequilibrium.

Question 28 (1 point)

 Question 28 Unsaved

If the interest rate rises in the U.S. while other variables remain constant

Question 28 options:

a) 

capital inflows into the U.S. will increase.

b) 

capital inflows into the U.S. may not materialize.

c) 

capital will flow out of the U.S.

d) 

none of the above

Question 29 (1 point)

 Question 29 Unsaved

When a country's currency depreciates against the currencies of major trading partners,

Question 29 options:

a) 

the country's exports tend to rise and imports fall.

b) 

the country's exports tend to fall and imports rise.

c) 

the country's exports tend to rise and imports rise.

d) 

the country's exports tend to fall and imports fall.

Question 30 (1 point)

 Question 30 Unsaved

If the United States imports more than it exports, then this means that

Question 30 options:

a) 

the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.

b) 

the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus.

c) 

the U.S. dollar would be under pressure to appreciate against other currencies.

d) 

both b) and c) are correct

Question 31 (1 point)

 Question 31 Unsaved

The public corporation

Question 31 options:

a) 

is jointly owned by a (potentially) large number of shareholders.

b) 

offers shareholders limited liability.

c) 

separates the ownership and control of a firm's assets.

d) 

all of the above

Question 32 (1 point)

 Question 32 Unsaved

The central issue of corporate governance is

Question 32 options:

a) 

how to protect creditors from managers and controlling shareholders.

b) 

how to protect outside investors from the controlling insiders.

c) 

how to alleviate the conflicts of interest between managers and shareholders.

d) 

how to alleviate the conflicts of interest between shareholders and bondholders.

Question 33 (1 point)

 Question 33 Unsaved

After a hostile takeover

Question 33 options:

a) 

the existing management team is usually fired.

b) 

the existing management team is usually retained at a higher wage.

c) 

the target company usually mounts a takeover defense.

Question 34 (1 point)

 Question 34 Unsaved

In high-growth industries where companies' internally generated funds fall short of profitable investment opportunities,

Question 34 options:

a) 

managers are less likely to waste funds in unprofitable projects.

b) 

managers are more likely to waste funds in unprofitable projects.

Question 35 (1 point)

 Question 35 Unsaved

Concentrated corporate ownership is most prevalent in

Question 35 options:

a) 

Italy.

b) 

The U.K.

c) 

The U.S.

d) 

Australia.

Question 36 (1 point)

 Question 36 Unsaved

Private benefits of corporate control will tend to be higher in

Question 36 options:

a) 

French civil law countries than in English common law countries.

b) 

English common law countries than in French civil law countries.

c) 

French civil law countries than in Scandinavian civil law countries.

d) 

English common law countries than in German civil law countries.

Question 37 (1 point)

 Question 37 Unsaved

The objective of corporate governance reform should be what?

Question 37 options:

a) 

Strengthen the protection of outside investors from expropriation by managers

b) 

Strengthen the protection of outside investors from expropriation by controlling insiders

c) 

Both a) and b)

d) 

None of the above

Question 38 (1 point)

 Question 38 Unsaved

The key to extracting private benefits of control that are not shared by other shareholders on a pro rata basis is to

Question 38 options:

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.

Question 39 (1 point)

 Question 39 Unsaved

In many countries with concentrated ownership

Question 39 options:

a) 

the conflicts of interest between shareholders and managers are worse than in countries with diffuse ownership of firms.

b) 

the conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders.

c) 

the conflicts of interest are greater between managers and shareholders than between large controlling shareholders and small outside shareholders.

d) 

corporate forms of business organization with concentrated ownership are rare.

Question 40 (1 point)

 Question 40 Unsaved

In what country do the three largest shareholders control, on average, about 60 percent of the shares of a public company?

Question 40 options:

a) 

United States

b) 

Canada

c) 

Great Britain

d) 

Italy

Question 41 (1 point)

 Question 41 Unsaved

Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €1.0242/$1.00. The importer accepts this price, so his bank will ____________the importer's account in the amount of ____________.

Question 41 options:

a) 

debit, $500,000

b) 

credit, €512,100

c) 

credit, $500,000

d) 

debit, €512,100

Question 42 (1 point)

 Question 42 Unsaved

The €/$ spot exchange rate is $1.50/€ and the 90-day forward premium is 10 percent. Find the 90-day forward price.

Question 42 options:

a) 

$1.65/€

b) 

$1.5375/€

c) 

$1.9125/€

d) 

None of the above

Question 43 (1 point)

 Question 43 Unsaved

The difference between a broker and a dealer is

Question 43 options:

a) 

dealers sell drugs; brokers sell houses.

b) 

brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to buy and sell from their inventory.

c) 

brokers transact in stocks and bonds; currency is bought and sold through dealers.

d) 

none of the above

Question 44 (1 point)

 Question 44 Unsaved

Indirect exchange rate quotations from the U.S. perspective are

Question 44 options:

a) 

the price of one unit of the foreign currency in terms of the U.S. dollar.

b) 

the price of one U.S. dollar in the foreign currency.

Question 45 (1 point)

 Question 45 Unsaved

Market microstructure refers to

Question 45 options:

a) 

the basic mechanics of how a marketplace operates.

b) 

the basics of how to make small (micro-sized) currency trades.

c) 

how macroeconomic variables such as GDP and inflation are determined.

d) 

none of the above

Question 46 (1 point)

 Question 46 Unsaved

If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and ask prices are

Question 46 options:

a) 

€0.6667 and €0.6623.

b) 

$1.51 and $1.50.

c) 

€0.6623 and €0.6667.

d) 

cannot be determined with the information given.

Question 47 (1 point)

 Question 47 Unsaved

Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 = €1.00.

Question 47 options:

a) 

The trader has lost $625.

b) 

The trader has lost $6,250.

c) 

The trader has made $6,250.

d) 

The trader has lost $66,287.88

Question 48 (1 point)

 Question 48 Unsaved

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money?

Question 48 options:

a) 

No arbitrage is possible.

b) 

Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£.

c) 

Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€.

Question 49 (1 point)

 Question 49 Unsaved

Swap transactions

Question 49 options:

a) 

involve the simultaneous sale (or purchase) of spot foreign exchange against a forward purchase (or sale) of approximately an equal amount of the foreign currency.

b) 

account for over half of Interbank FX trading.

c) 

involve trades of one foreign currency for another without going through the U.S. dollar.

d) 

all of the above

Question 50 (1 point)

 Question 50 Unsaved

Spot Rate Quotations

 Picture 

 

Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is

Question 50 options:

a) 

€1.00 = $1.25.

b) 

€0.80 = $1.00.

c) 

£1.00 = $1.80.

d) 

None of the above

Question 51 (1 point)

 Question 51 Unsaved

Although IRP tends to hold, it may not hold precisely all the time

Question 51 options:

a) 

due to transactions costs, like the bid ask spread.

b) 

due to asymmetric information.

c) 

due to capital controls imposed by governments.

d) 

both a) and c)

Question 52 (1 point)

 Question 52 Unsaved

The price of a McDonald's Big Mac sandwich

Question 52 options:

a) 

is about the same in the 120 countries that McDonalds does business in.

b) 

varies considerably across the world in dollar terms.

c) 

supports PPP.

d) 

none of the above.

Question 53 (1 point)

 Question 53 Unsaved

The International Fisher Effect suggests that

Question 53 options:

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.

Question 54 (1 point)

 Question 54 Unsaved

When Interest Rate Parity (IRP) does not hold

Question 54 options:

a) 

there is usually a high degree of inflation in at least one country.

b) 

the financial markets are in equilibrium.

c) 

there are opportunities for covered interest arbitrage.

d) 

both b) and c)

Question 55 (1 point)

 Question 55 Unsaved

If a foreign county experiences a hyperinflation,

Question 55 options:

a) 

its currency will depreciate against stable currencies.

b) 

its currency may appreciate against stable currencies.

c) 

its currency may be unaffected—it's difficult to say.

d) 

none of the above

Question 56 (1 point)

 Question 56 Unsaved

The moving average crossover rule

Question 56 options:

a) 

is a fundamental approach to forecasting exchange rates.

b) 

states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is appreciating.

c) 

states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is depreciating.

d) 

none of the above

Question 57 (1 point)

 Question 57 Unsaved

Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5% APR in the U.S. and 2% APR in the U.K., what is the no-arbitrage 1-year forward rate?

Question 57 options:

a) 

£2.0588/$

b) 

$2.0588/£

c) 

£1.9429/$

d) 

$1.9429/£

Question 58 (1 point)

 Question 58 Unsaved

Some commodities never enter into international trade. Examples include

Question 58 options:

a) 

nontradables.

b) 

haircuts.

c) 

housing.

d) 

all of the above

Question 59 (1 point)

 Question 59 Unsaved

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

Question 59 options:

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)

Question 60 (1 point)

 Question 60 Unsaved

Studies of the accuracy of paid exchange rate forecasters

Question 60 options:

a) 

tend to support the view that "you get what you pay for".

b) 

tend to support the view that forecasting is easy, at least with regard to major currencies like the euro and Japanese yen.

c) 

tend to support the view that banks do their best forecasting with the yen.

d) 

none of the above