FINC495 Week-4 Mid Term Exam SCORE 94 PERCENT

 

Question 1 options:

a)            is the common currency of Europe.

b)            is divisible into 100 cents, just like the U.S. dollar.

c)            may eventually have a transaction domain larger than the U.S. dollar.

d)            all of the above.

 

Question 2 (2 points)

 Question 2 Saved

If one country is twice the size of another country and is better at making almost everything than the benighted citizens of the smaller county,

Question 2 options:

               

 

a)

                the bigger country enjoys an absolute advantage.

               

 

b)

                the bigger country enjoys a relative advantage.

               

 

c)

                the bigger country enjoys a comparative advantage.

               

 

d)

                there is not enough information to make a determination.

Question 3 (2 points)

 Question 3 Saved

Japan has experienced large trade surpluses. Japanese investors have responded to this by

Question 3 options:

               

 

a)

                liquidating their positions in stocks to buy dollar denominated bonds.

               

 

b)

                investing heavily in U.S. and other foreign financial markets.

               

 

c)

                lobbying the U.S. government to depreciate its currency.

               

 

d)

                lobbying the Japanese government to allow the yen to appreciate.

Question 4 (2 points)

 Question 4 Saved

Since the end of World War I, the U.S. dollar has played the role of the dominant global currency, displacing the

Question 4 options:

               

 

a)

                German mark.

               

 

b)

                French Franc.

               

 

c)

                Japanese Yen.

               

 

d)

                British pound.

Question 5 (2 points)

 Question 5 Saved

Production of goods and services has become globalized to a large extent as a result of

Question 5 options:

               

 

a)

                natural resources being depleted in one country after another.

               

 

b)

                skilled labor being highly mobile.

               

 

c)

                multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher.

               

 

d)

                common tastes worldwide for the same goods and services.

Question 6 (2 points)

 Question 6 Saved

The ascendance of the dollar the dominant global currency reflects several key factors such as

Question 6 options:

               

 

a)

                the size of the U.S. population.

               

 

b)

                the mature and open capital markets of the U.S. economy.

               

 

c)

                exchange rate stability.

               

 

d)

                all of the above.

Question 7 (2 points)

 Question 7 Saved

The World Trade Organization, WTO,

Question 7 options:

               

 

a)

                has the power to enforce the rules of international trade.

               

 

b)

                covers agriculture and physical goods, but not services or intellectual property rights.

               

 

c)

                recently expelled China for human rights violations.

               

 

d)

                ruled that NAFTA is to be the model for world trade integration.

Question 8 (2 points)

 Question 8 Saved

Undoubtedly, we are now living in a world where all the major economic functions—consumption, production, and investment

Question 8 options:

               

 

a)

                are still inherently local.

               

 

b)

                are still regional in nature.

               

 

c)

                are slowly becoming globalized.

               

 

d)

                are highly globalized.

Question 9 (2 points)

 Question 9 Saved

Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of

Question 9 options:

               

 

a)

                exchange rate risk.

               

 

b)

                political risk.

               

 

c)

                market imperfections.

               

 

d)

                none of the above, since $100,000 = €80,000 × $1.25/€1.00

Question 10 (2 points)

 Question 10 Saved

Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat

Question 10 options:

               

 

a)

                show that managers might be tempted to pursue their own private interests at the expense of shareholders.

               

 

b)

                show that Italian shareholders are better at monitoring managerial behavior than U.S. shareholders.

               

 

c)

                show that white-collar criminals hardly ever get punished.

               

 

d)

                show that socialism is a better way to go than capitalism.

Question 11 (2 points)

 Question 11 Unsaved

Advantages of a fixed exchange rate include

Question 11 options:

               

 

a)

                reduction in exchange rate risk for businesses.

               

 

b)

                reduction in transactions costs.

               

 

c)

                reduction in trading frictions.

               

 

d)

                all of the above

Question 12 (2 points)

 Question 12 Unsaved

Generally speaking, a country would be more prone to asymmetric shocks

Question 12 options:

               

 

a)

                the more diversified and less trade-dependent its economy is.

               

 

b)

                the less diversified and more trade-dependent its economy is.

               

 

c)

                the less diversified and less trade-dependent its economy is.

               

 

d)

                the more diversified and more trade-dependent its economy is.

Question 13 (2 points)

 Question 13 Unsaved

Put the following in correct date order:

Question 13 options:

               

 

a)

                Jamaica Agreement, Plaza Agreement, Louvre Accord.

               

 

b)

                Plaza Agreement, Jamaica Agreement, Louvre Accord.

               

 

c)

                Louvre Accord, Jamaica Agreement, Plaza Agreement.

               

 

d)

                Jamaica Agreement, Louvre Accord, Plaza Agreement.

Question 14 (2 points)

 Question 14 Unsaved

Under the gold standard, international imbalances of payment will be corrected automatically under the

Question 14 options:

               

 

a)

                Gresham Exchange Rate regime.

               

 

b)

                European Monetary System.

               

 

c)

                Price-specie-flow mechanism.

               

 

d)

                Bretton Woods Accord.

Question 15 (2 points)

 Question 15 Unsaved

Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system?

Question 15 options:

               

 

a)

                1 German mark = $2

               

 

b)

                1 German mark = $0.50

               

 

c)

                1 German mark = $3

               

 

d)

                1 German mark = $1

Question 16 (2 points)

 Question 16 Unsaved

The G-7 is composed of

Question 16 options:

               

 

a)

                Canada, France, Japan, Germany, Italy, the U.K., and the United States.

               

 

b)

                Switzerland, France, Japan, Germany, Italy, the U.K., and the United States.

               

 

c)

                Switzerland, France, North Korea, Germany, Italy, the U.K., and the United States.

               

 

d)

                Switzerland, France, Japan, Germany, Canada, the U.K., and the United States.

Question 17 (2 points)

 Question 17 Unsaved

Suppose that your country officially defines gold as ten times more valuable than silver (i.e. the central bank stands ready to redeem the currency in gold and silver and the official price of gold is ten times the official price of silver). If the market price of gold is only eight times as much as silver.

Question 17 options:

               

 

a)

                The central bank could go broke if enough arbitrageurs attempt to take advantage of the pricing disparity.

               

 

b)

                The central bank will make money since they are overpricing gold.

Question 18 (2 points)

 Question 18 Unsaved

Ecuador does not have its own national currency, circulating the U.S. dollar instead. About how many countries do not have their own national currency?

Question 18 options:

               

 

a)

                10

               

 

b)

                20

               

 

c)

                30

               

 

d)

                40

Question 19 (2 points)

 Question 19 Unsaved

To pave the way for the European Monetary Union, the member countries of the European Monetary System agreed to achieve a convergence of their economies. Which of the following is NOT a condition of convergence:

Question 19 options:

               

 

a)

                keep the ratio of government budget deficits to GDP below 3 percent.

               

 

b)

                keep gross public debts below 60 percent of GDP.

               

 

c)

                achieve a high degree of price stability.

               

 

d)

                maintain its currency at a fixed exchange rate to the ERM.

Question 20 (2 points)

 Question 20 Unsaved

Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to

Question 20 options:

               

 

a)

                carefully manage their exchange risk exposure.

               

 

b)

                carefully measure their exchange risk exposure.

               

 

c)

                both a) and b)

Question 21 (2 points)

 Question 21 Unsaved

Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation?

Question 21 options:

               

 

a)

                The current account

               

 

b)

                The capital account

               

 

c)

                The statistical discrepancies

               

 

d)

                The official settlement balance

Question 22 (2 points)

 Question 22 Unsaved

Factor income

Question 22 options:

               

 

a)

                consists largely of interest, dividends, and other income on foreign investments.

               

 

b)

                is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability.

               

 

c)

                is generally a very minor part of national income accounting, smaller than the statistical discrepancy.

               

 

d)

                none of the above

Question 23 (2 points)

 Question 23 Unsaved

The vast majority of the foreign-exchange reserves held by central banks are denominated in

Question 23 options:

               

 

a)

                local currencies.

               

 

b)

                U.S. dollars.

               

 

c)

                Yen.

               

 

d)

                Euro.

Question 24 (2 points)

 Question 24 Unsaved

In 2007 the United States had a current account deficit. The current account deficit implies that the United States

Question 24 options:

               

 

a)

                had a surplus on legal consulting and engineering services.

               

 

b)

                produced more output than it consumed.

               

 

c)

                consumed more output than it produced.

               

 

d)

                none of the above

Question 25 (2 points)

 Question 25 Unsaved

Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash.

Question 25 options:

               

 

a)

                Payment by InBev will be recorded as a debit.

               

 

b)

                The deposit of the funds by the sellers will be recorded as a debit.

               

 

c)

                Payment by InBev will be recorded as a credit.

               

 

d)

                The deposit of the funds by the buyer will be credit.

Question 26 (2 points)

 Question 26 Unsaved

For questions in this section, the notation is

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

 

There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X - M ≡ (S - I) + (T - G). Given this, which of the following is a true statement?

Question 26 options:

               

 

a)

                If (S - I) < 0, it implies that a country's domestic savings is insufficient to finance domestic investment.

               

 

b)

                If (T - G) < 0, it implies that a country's tax revenue is insufficient to finance government spending.

               

 

c)

                When BCA is negative, it implies that government budget deficits and/or part of domestic investment are being finance with foreign-controlled capital.

               

 

d)

                All of the above are true

Question 27 (2 points)

 Question 27 Unsaved

The most important international reserve asset, comprising 94 percent of the total reserve assets held by IMF member countries is

Question 27 options:

               

 

a)

                gold.

               

 

b)

                foreign exchanges.

               

 

c)

                special Drawing Rights (SDRs).

               

 

d)

                reserve positions in the International Monetary Fund (IMF).

Question 28 (2 points)

 Question 28 Unsaved

For questions in this section, the notation is

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

 

The difference between a country's savings and investment is given by

Question 28 options:

               

 

a)

                S - I

               

 

b)

                I × S

               

 

c)

                X - M

               

 

d)

                GNP - Y

Question 29 (2 points)

 Question 29 Unsaved

The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include

Question 29 options:

               

 

a)

                consumption and investment and government expenditure.

               

 

b)

                consumption and government expenditure and net exports.

               

 

c)

                consumption and net exports and government expenditure.

               

 

d)

                consumption less imports.

Question 30 (2 points)

 Question 30 Unsaved

The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves.

Question 30 options:

               

 

a)

                acquisitions of controlling interests in foreign businesses.

               

 

b)

                investments in foreign stocks and bonds that do not involve acquisitions of control.

               

 

c)

                bank deposits, currency investment, trade credit, and the like.

               

 

d)

                all of the above

Question 31 (2 points)

 Question 31 Unsaved

If an incentive contract specifies certain accounting performance

Question 31 options:

               

 

a)

                that accounting number will likely be the focus of managers.

               

 

b)

                managers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder wealth.

               

 

c)

                managers will be unable to manipulate the GAAP, so shareholders can be confident of having their wealth maximized.

Question 32 (2 points)

 Question 32 Unsaved

Free cash flow refers to

Question 32 options:

               

 

a)

                a firm's cash reserve in excess of tax obligation.

               

 

b)

                a firm's funds in excess of what's needed for undertaking all profitable projects.

               

 

c)

                a firm's cash reserve in excess of interest and tax payments.

               

 

d)

                a firm's income tax refund that is due to interest payments on borrowing.

Question 33 (2 points)

 Question 33 Unsaved

When managerial self-dealings are excessive and left unchecked,

Question 33 options:

               

 

a)

                they can have serious negative effects on share values.

               

 

b)

                they can impede the proper functions of capital markets.

               

 

c)

                they can impede such measures as GDP growth.

               

 

d)

                all of the above

Question 34 (2 points)

 Question 34 Unsaved

In a hostile takeover attempt, the bidder typically

Question 34 options:

               

 

a)

                makes a tender offer to the target shareholders at a price substantially less than the prevailing share price.

               

 

b)

                makes a tender offer to the target shareholders at the prevailing share price.

               

 

c)

                makes a tender offer to the target shareholders at a price substantially exceeding the prevailing share price.

               

 

d)

                seeks to merge with the target company with an exchange of shares.

Question 35 (2 points)

 Question 35 Unsaved

Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns sells the main company's output to this company. He would be tempted to set the transfer price

Question 35 options:

               

 

a)

                below market prices.

               

 

b)

                above market prices.

               

 

c)

                at the market price.

               

 

d)

                in accordance with GAAP.

Question 36 (2 points)

 Question 36 Unsaved

The key requirements of the Cadbury Code of Best Practice state that

Question 36 options:

               

 

a)

                the compensation, nominating, and audit committees to be entirely composed of independent directors.

               

 

b)

                the positions of CEO and chairman of the board should not reside in the same individual.

               

 

c)

                listed companies to have boards of directors with a majority of independents.

               

 

d)

                none of the above

Question 37 (2 points)

 Question 37 Unsaved

For firms with free cash flows,

Question 37 options:

               

 

a)

                debt can be a stronger mechanism than stocks for credibly bonding managers to release cash flows to investors.

               

 

b)

                equity dividends can be a stronger mechanism than bonds for credibly bonding managers to release cash flows to investors.

               

 

c)

                preferred stock dividends can be a stronger mechanism than bonds for credibly bonding managers to release cash flows to investors.

               

 

d)

                none of the above

Question 38 (2 points)

 Question 38 Unsaved

The board of directors may grant stock options to managers in order to

Question 38 options:

               

 

a)

                save executive compensation costs.

               

 

b)

                use as a substitute for bonus.

               

 

c)

                align the interest of managers with that of shareholders.

               

 

d)

                none of the above

Question 39 (2 points)

 Question 39 Unsaved

Why do managers tend to retain free cash flow?

Question 39 options:

               

 

a)

                Managers are in the best position to decide the best use of those funds.

               

 

b)

                These funds are needed for undertaking profitable projects and the issue costs are less than new issues of stocks or bonds.

               

 

c)

                Managers may not be acting in the shareholders best interest, and for a variety of reasons, want to use the free cash flow.

               

 

d)

                None of the above

Question 40 (2 points)

 Question 40 Unsaved

Following the adoption of the Cadbury Code of Best practice joint CEO/COB positions declined

Question 40 options:

               

 

a)

                from 27 percent of the companies before the adoption to 15 percent afterwards.

               

 

b)

                from 37 percent of the companies before the adoption to 15 percent afterwards.

               

 

c)

                from 47 percent of the companies before the adoption to 15 percent afterwards.

               

 

d)

                from 57 percent of the companies before the adoption to 15 percent afterwards.

Question 41 (2 points)

 Question 41 Unsaved

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

Question 41 options:

               

 

a)

                $1.65/€

               

 

b)

                $1.5375/€

               

 

c)

                $1.9125/€

               

 

d)

                None of the above

Question 42 (2 points)

 Question 42 Unsaved

Most interbank trades are

Question 42 options:

               

 

a)

                speculative or arbitrage transactions.

               

 

b)

                simple order processing for the retail client.

               

 

c)

                overnight loans from one bank to another.

               

 

d)

                brokered by dealers.

Question 43 (2 points)

 Question 43 Unsaved

In conversation, interbank foreign exchange traders use a shorthand abbreviation in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.9072-$1.9077. The currency dealer would likely quote that as _____.

Question 43 options:

               

 

a)

                72-77

               

 

b)

                77-72

               

 

c)

                5 points

               

 

d)

                None of the above

Question 44 (2 points)

 Question 44 Unsaved

The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the Canadian dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15. Determine the triangular arbitrage profit that is possible if you have $1,000,000.

Question 44 options:

               

 

a)

                $44,063 profit    (Incorrect)

               

 

b)

                $46,093 loss

               

 

c)

                No profit is possible

               

 

d)

                $46,093 profit

Question 45 (2 points)

 Question 45 Unsaved

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation?

Question 45 options:

               

 

a)

                Sell €1,000,000 forward for $1.50/€.

               

 

b)

                Buy €1,000,000 forward for $1.50/€.

               

 

c)

                Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€.

               

 

d)

                Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€.

Question 46 (2 points)

 Question 46 Unsaved

At the wholesale level

Question 46 options:

               

 

a)

                most trading takes place OTC between individuals on the floor of the exchange.

               

 

b)

                most trading takes place over the phone.

               

 

c)

                most trading flows over Reuters and EBS platforms.

               

 

d)

                most trading flows through specialized "broking" firms.

Question 47 (2 points)

 Question 47 Unsaved

In the Interbank market, the standard size of a trade among large banks in the major currencies is

Question 47 options:

               

 

a)

                for the U.S.-dollar equivalent of $10,000,000,000.

               

 

b)

                for the U.S.-dollar equivalent of $10,000,000.

               

 

c)

                for the U.S.-dollar equivalent of $100,000.

               

 

d)

                for the U.S.-dollar equivalent of $1,000.

Question 48 (2 points)

 Question 48 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 48 options:

               

 

a)

                debit, $500,000

               

 

b)

                credit, €512,100

               

 

c)

                credit, $500,000

               

 

d)

                debit, €512,100

Question 49 (2 points)

 Question 49 Unsaved

Intervention in the foreign exchange market is the process of

Question 49 options:

               

 

a)

                a central bank requiring the commercial banks of that country to trade at a set price level.

               

 

b)

                commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.

               

 

c)

                a central bank buying or selling its currency in order to influence its value.

               

 

d)

                the government of a country prohibiting transactions in one or more currencies.

Question 50 (2 points)

 Question 50 Unsaved

Relative to the spot price the forward price will be

Question 50 options:

               

 

a)

                usually less than the spot price.

               

 

b)

                usually more than the spot price.

               

 

c)

                usually equal to the spot price.

               

 

d)

                usually less than or more than the spot price more often than it is equal to the spot price.

Question 51 (2 points)

 Question 51 Unsaved

Some commodities never enter into international trade. Examples include

Question 51 options:

               

 

a)

                nontradables.

               

 

b)

                haircuts.

               

 

c)

                housing.

               

 

d)

                all of the above

Question 52 (2 points)

 Question 52 Unsaved

Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy?

Question 52 options:

               

 

a)

                Take $1m, invest in U.S. T-bills.

               

 

b)

                Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.

               

 

c)

                Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.

               

 

d)

                Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.

Question 53 (2 points)

 Question 53 Unsaved

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

Question 53 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 54 (2 points)

 Question 54 Unsaved

Interest Rate Parity (IRP) is best defined as

Question 54 options:

               

 

a)

                When a government brings its domestic interest rate in line with other major financial markets.

               

 

b)

                When the central bank of a country brings its domestic interest rate in line with its major trading partners.

               

 

c)

                An arbitrage condition that must hold when international financial markets are in equilibrium.

               

 

d)

                None of the above

Question 55 (2 points)

 Question 55 Unsaved

Covered Interest Arbitrage (CIA) activities will result in

Question 55 options:

               

 

a)

                an unstable international financial markets.

               

 

b)

                restoring equilibrium quite quickly.

               

 

c)

                a disintermediation.

               

 

d)

                no effect on the market.

Question 56 (2 points)

 Question 56 Unsaved

The random walk hypothesis suggests that

Question 56 options:

               

 

a)

                the best predictor of the future exchange rate is the current exchange rate.

               

 

b)

                the best predictor of the future exchange rate is the current forward rate.

               

 

c)

                both a) and b) are consistent with the efficient market hypothesis.

               

 

d)

                None of the above

Question 57 (2 points)

 Question 57 Unsaved

According to the research in the accuracy of paid exchange rate forecasters,

Question 57 options:

               

 

a)

                as a group, they do not do a better job of forecasting the exchange rate than the forward rate does.

               

 

b)

                the average forecaster is better than average at forecasting.

               

 

c)

                the forecasters do a better job of predicting the future exchange rate than the market does.

               

 

d)

                none of the above

Question 58 (2 points)

 Question 58 Unsaved

Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.18/€. What must one-year interest rate be in the United States?

Question 58 options:

               

 

a)

                1.2833%

               

 

b)

                1.0128%

               

 

c)

                4.75%

               

 

d)

                None of the above

Question 59 (2 points)

 Question 59 Unsaved

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward rate?

Question 59 options:

               

 

a)

                €1.5291/$

               

 

b)

                $1.5291/€

               

 

c)

                €1.4714/$

               

 

d)

                $1.4714/€

Question 60 (2 points)

 Question 60 Unsaved

Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 5% APR in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?

Question 60 options:

               

 

a)

                €1.5291/$

               

 

b)

                $1.5291/€

               

 

c)

                €1.4714/$

               

 

d)

                $1.4714/€

Question 61 (2 points)

 Question 61 Unsaved

Yesterday, you entered into a futures contract to sell €62,500 at $1.50 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted?

Question 61 options:

               

 

a)

                $1.5160 per €.

               

 

b)

                $1.208 per €.

               

 

c)

                $1.1920 per €.

               

 

d)

                $1.1840 per €.

Question 62 (2 points)

 Question 62 Unsaved

Suppose the futures price is below the price predicted by IRP. What steps would assure an arbitrage profit?

Question 62 options:

               

 

a)

                Go short in the spot market, go long in the futures contract.

               

 

b)

                Go long in the spot market, go short in the futures contract.

               

 

c)

                Go short in the spot market, go short in the futures contract.

               

 

d)

                Go long in the spot market, go long in the futures contract.

Question 63 (2 points)

 Question 63 Unsaved

A European option is different from an American option in that

Question 63 options:

               

 

a)

                one is traded in Europe and one in traded in the United States.

               

 

b)

                European options can only be exercised at maturity; American options can be exercised prior to maturity.

               

 

c)

                European options tend to be worth more than American options, ceteris paribus.

               

 

d)

                American options have a fixed exercise price; European options' exercise price is set at the average price of the underlying asset during the life of the option.

Question 64 (2 points)

 Question 64 Unsaved

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. If you pay an option premium of $5,000 to buy this call, at what exchange rate will you break-even?

Question 64 options:

               

 

a)

                $1.58 = €1.00

               

 

b)

                $1.62 = €1.00

               

 

c)

                $1.50 = €1.00

               

 

d)

                $1.68 = €1.00

Question 65 (2 points)

 Question 65 Unsaved

If you think that the dollar is going to appreciate against the euro, you should

Question 65 options:

               

 

a)

                buy put options on the euro.

               

 

b)

                sell call options on the euro.

               

 

c)

                buy call options on the euro.

               

 

d)

                none of the above

Question 66 (2 points)

 Question 66 Unsaved

Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars). Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call?

Question 66 options:

               

 

a)

                $1.4720/€

               

 

b)

                $1.5280/€

               

 

c)

                $1.500/€

               

 

d)

                None of the above

Question 67 (2 points)

 Question 67 Unsaved

In the event of a default on one side of a futures trade,

Question 67 options:

               

 

a)

                the clearing member stands in for the defaulting party.

               

 

b)

                the clearing member will seek restitution for the defaulting party.

               

 

c)

                if the default is on the short side, a randomly selected long contract will not get paid. That party will then have standing to initiate a civil suit against the defaulting short.

               

 

d)

                both a) and b)

Question 68 (2 points)

 Question 68 Unsaved

For European currency options written on euro with a strike price in dollars, what of the effect of an increase in the exchange rate S(€/$)?

Question 68 options:

               

 

a)

                Decrease the value of calls and puts ceteris paribus

               

 

b)

                Increase the value of calls and puts ceteris paribus

               

 

c)

                Decrease the value of calls, increase the value of puts ceteris paribus

               

 

d)

                Increase the value of calls, decrease the value of puts ceteris paribus (Incorrect)

Question 69 (2 points)

 Question 69 Unsaved

Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost?

Question 69 options:

               

 

a)

                Lost $0.04 per € or $2,500

               

 

b)

                Made $0.04 per € or $2,500

               

 

c)

                Lost $0.06 per € or $3,750

               

 

d)

                None of the above

Question 70 (2 points)

 Question 70 Unsaved

The "open interest" shown in currency futures quotations is

Question 70 options:

               

 

a)

                the total number of people indicating interest in buying the contracts in the near future.

               

 

b)

                the total number of people indicating interest in selling the contracts in the near future.

               

 

c)

                the total number of people indicating interest in buying or selling the contracts in the near future.

               

 

d)

                the total number of long or short contracts outstanding for the particular delivery month.

Question 71 (2 points)

 Question 71 Unsaved

Your firm is bidding on a large construction contract in a foreign country. This contingent exposure could best be hedged

Question 71 options:

               

 

a)

                with put options on the foreign currency.

               

 

b)

                with call options on the foreign currency.

               

 

c)

                both a) and b), depending upon the specifics ("the rest of the story").

               

 

d)

                with futures contracts.

Question 72 (2 points)

 Question 72 Unsaved

To find the swap rate for a 3-year swap, you would

Question 72 options:

               

 

a)

                take the arithmetic average of the 1-, 2-, and 3-year forward rates.

               

 

b)

                take the geometric average of the 1-, 2-, and 3-year forward rates.

               

 

c)

                bootstrap the LIBOR yield curve.

               

 

d)

                none of the above

Question 73 (2 points)

 Question 73 Unsaved

An exporter faced with exposure to an appreciating currency can reduce transaction exposure with a strategy of

Question 73 options:

               

 

a)

                paying or collecting early.

               

 

b)

                paying or collecting late.

               

 

c)

                paying late, collecting early. (Incorrect)

               

 

d)

                paying early, collecting late.

Question 74 (2 points)

 Question 74 Unsaved

Your U.S. firm has a £100,000 payable with a 3-month maturity. Which of the following will hedge your liability?

Question 74 options:

               

 

a)

                Buy the present value of £100,000 today at the spot exchange rate, invest in the U.K. at i£.

               

 

b)

                Buy a call option on £100,000 with a strike price in dollars. (Incorrect)

               

 

c)

                Take a long position in a forward contract on £100,000 with a 3-month maturity.

               

 

d)

                All of the above

Question 75 (2 points)

 Question 75 Unsaved

Which of the following options strategies are internally consistent?

Question 75 options:

               

 

a)

                Sell puts and buy calls

               

 

b)

                Buy puts and sell calls

               

 

c)

                Buy puts and buy calls

               

 

d)

                Both a) and b)

Question 76 (2 points)

 Question 76 Unsaved

In evaluating the pros and cons of corporate risk management, "market imperfections" refer to

Question 76 options:

               

 

a)

                information asymmetry, differential transaction costs, default costs, and progressive corporate taxes.

               

 

b)

                leading and lagging, receivables and payables, and diversification costs.

               

 

c)

                economic costs, noneconomic costs, arbitrage costs, and hedging costs.

               

 

d)

                management costs, corporate costs, liquidity costs, and trading costs.

Question 77 (2 points)

 Question 77 Unsaved

The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is

Question 77 options:

               

 

a)

                transaction exposure.

               

 

b)

                translation exposure.

               

 

c)

                economic exposure.

               

 

d)

                none of the above

Question 78 (2 points)

 Question 78 Unsaved

A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets paid. To hedge, the U.S. firm bought put options on the euro with a strike price of $1.65. They paid an option premium $0.01 per euro. If at maturity, the exchange rate is $1.60,

Question 78 options:

               

 

a)

                the firm will realize $1,145,000 on the sale net of the cost of hedging.

               

 

b)

                the firm will realize $1,150,000 on the sale net of the cost of hedging.

               

 

c)

                the firm will realize $1,140,000 on the sale net of the cost of hedging.

               

 

d)

                none of the above

Question 79 (2 points)

 Question 79 Unsaved

A put option to sell $18,000 at a strike price of $1.80 = £1.00 is equivalent to

Question 79 options:

               

 

a)

                a call option to buy £10,000 at a strike price of $1.80 = £1.00.

               

 

b)

                a call option on $18,000 at a strike price of $1.80 = £1.00.

               

 

c)

                a put option on £10,000 at a strike price of $1.80 = £1.00.

               

 

d)

                none of the above

Question 80 (2 points)

 Question 80 Unsaved

XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using the forward hedge is

Question 80 options:

               

 

a)

                $6,450,000.

               

 

b)

                $6,545,400. (Incorrect)

               

 

c)

                $6,653,833.

               

 

d)

                $6,880,734.

Question 81 (2 points)

 Question 81 Unsaved

If the domestic currency is strong or expected to become strong,

Question 81 options:

               

 

a)

                a firm can choose to locate production facilities in a foreign country where costs are low due to either the undervalued currency or underpriced factors of production.

               

 

b)

                a firm should curtail R&D efforts until the exchange rate situation improves.

               

 

c)

                a firm should abandon international sales and focus on domestic market share.

               

 

d)

                the firm should focus on profiting in the currency futures market based on its forecasts.

Question 82 (2 points)

 Question 82 Unsaved

Consider a U.S. MNC with operations in Great Britain. Which of the following are potential risks following a strengthening of the dollar?

Question 82 options:

               

 

a)

                A pound sterling depreciation may affect operating cash flow in pounds by altering the firm's competitive position in the marketplace.

               

 

b)

                A given operating cash flow in pounds will be converted into a lower dollar amount after the pound depreciation.

               

 

c)

                Both a) and b)

               

 

d)

                None of the above

Question 83 (2 points)

 Question 83 Unsaved

Consider a U.S.-based MNC with a wholly-owned German subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the conversion effect of the depreciation?

Question 83 options:

               

 

a)

                The cash flow in euro could be altered due a change in the firm's competitive position in the marketplace.

               

 

b)

                A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow.

               

 

c)

                Both a) and b)

               

 

d)

                None of the above

Question 84 (2 points)

 Question 84 Unsaved

A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries) can

Question 84 options:

               

 

a)

                not mitigate the effects of exchange rate changes.

               

 

b)

                lessen the effect of exchange rate changes by sourcing from where input costs are low.

               

 

c)

                focus on selling commodity products with product differentiation.

               

 

d)

                pursue a strategy of increasing its products price elasticity of demand.

Question 85 (2 points)

 Question 85 Unsaved

A firm's operating exposure is

Question 85 options:

               

 

a)

                defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates.

               

 

b)

                determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products.

               

 

c)

                determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing.

               

 

d)

                all of the above

Question 86 (2 points)

 Question 86 Unsaved

The link between a firm's future operating cash flows and exchange rate fluctuations is

Question 86 options:

               

 

a)

                asset exposure

               

 

b)

                operating exposure

               

 

c)

                both a) and b)

               

 

d)

                none of the above

Question 87 (2 points)

 Question 87 Unsaved

The firm may not be able to pass through changes in the exchange rate

Question 87 options:

               

 

a)

                in markets with low product differentiation.

               

 

b)

                in markets with high price elasticities.

               

 

c)

                both a) and b)

               

 

d)

                none of the above

Question 88 (2 points)

 Question 88 Unsaved

Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation of the dollar against the euro, which of the following best describes the mechanism of any effect of the depreciation?

Question 88 options:

               

 

a)

                The change in the cash flow in euro due an alteration in the firm's competitive position in the marketplace is in part a function of the elasticity of demand for the firm's product.

               

 

b)

                A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow regardless of the firm's hedging program.

               

 

c)

                Both a) and b)

               

 

d)

                None of the above

Question 89 (2 points)

 Question 89 Unsaved

In recent years,

Question 89 options:

               

 

a)

                the U.S. dollar has appreciated substantially against most major currencies of the world, especially against the euro.

               

 

b)

                the U.S. dollar has depreciated substantially against most major currencies of the world, especially against the euro.

               

 

c)

                the U.S. dollar has maintained its value against most major currencies of the world, especially against the euro.

 

Question 90 (2 points)

Economic exposure refers to

Question 90 options:

a)            the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.

b)            the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.

c)            the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.

d)            ex post and ex ante currency exposures.

 

Question 91 (2 points)

Under which method does the gain or loss due to translation adjustment not affect reported cash flows, as it does with the other three translation methods?

Question 91 options:

a)            Current/noncurrent method

b)            Monetary/nonmonetary method

c)            Temporal method

d)            Current rate method

 

Question 92 (2 points)

The underlying principle of the monetary/nonmonetary method is

Question 92 options:

a)            assets and liabilities should be translated based on their maturity.

b)            monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes.

c)            monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates.

d)            all balance sheet accounts are translated at the current exchange rate, except for stockholders' equity. A "plug" equity account named cumulative translation adjustment (CTA) is used to make the balance sheet balance, since translation gains or losses do not go through the income statement according to this method.

 

Question 93 (2 points)

Which of the following is a translation method where the gain or loss due to translation adjustment does not affect reported cash flows?

Question 93 options:

a)            Current/noncurrent method

b)            Current rate method

c)            Current/future method

d)            Short/long term method

 

Question 94 (2 points)

 The actual translation process prescribed by FASB 52 is

Question 94 options:

a)            a two-stage process.

b)            a twelve step program.

c)            a five-step process.

d)            none of the above.

 

Question 95 (2 points)

The underlying principle of the temporal method is

Question 95 options:

a)            assets and liabilities should be translated based on their maturity.

b)            monetary accounts have a similarity because their value represents a sum of money whose currency equivalent after translation changes each time the exchange rate changes.

c)            monetary accounts are translated at the current exchange rate; other accounts are translated at the current exchange rate if they are carried on the books at current value; items carried at historical cost are translated at historic exchange rates.

d)            all balance sheet accounts are translated at the current exchange rate, except for stockholders' equity. A "plug" equity account named cumulative translation adjustment (CTA) is used to make the balance sheet balance, since translation gains or losses do not go through the income statement according to this method.

 

Question 96 (2 points)

Using the temporal method, monetary accounts such as cash

Question 96 options:

a)            are not translated.

b)            are translated at the average exchange rate prevailing over the reporting period.

c)            are translated at the current forward exchange rate.

d)            are translated at the current spot exchange rate.

 

Question 97 (2 points)

The management of translation exposure is best described as

Question 97 options:

a)            selecting a mechanical means for handling the consolidation process for MNCs that logically deals with exchange rate changes.

b)            selecting a mechanical means for handling the consolidation process for MNCs that makes this quarter's accounting numbers as attractive as possible.

c)            selecting a mechanical means for handling the consolidation process for MNCs that treats inventory valuation as LIFO on the income statement and FIFO on the balance sheet.

d)            selecting a mechanical means for handling the consolidation process for MNCs that treats inventory valuation as FIFO on the income statement and LIFO on the balance sheet.

 

Question 98 (2 points)

In highly inflationary economies, FASB 52 requires that the foreign entities' financial statement be remeasured from the local currency "as if the functional currency were the reporting currency". The purpose of this requirement is

Question 98 options:

a)            to prevent large important balance sheet accounts, carried at historical values, from having insignificant values once translated into the reporting currency at the current rate.

b)            to prevent games playing in the accounting books.

c)            to prevent having to restate the books at a later date.

d)            none of the above

 

Question 99 (2 points)

Under which accounting method are most income statement accounts translated at the average exchange rate for the period?

Question 99 options:

a)            Current/noncurrent method

b)            Monetary/nonmonetary method

c)            Temporal method

d)            Current rate method

 

Question 100 (2 points)

When determining the functional currency,

Question 100 options:

a)            if the sales prices for the foreign entity's products are generally not responsive on a short-term basis to exchange rate changes, but are determined more by local competition and government regulation, the local currency should be the functional currency.

b)            if there is an active local market for the foreign entity's products the local currency should be the functional currency.

c)            if factor of production costs for the foreign entity are primarily, and on a continuing basis, costs for components obtained from the parent's country the functional currency should be the home currency.

d)            all of the above