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An MNC may gain from its global presence by
A. spreading R&D expenditures and advertising costs over their global sales.
B. pooling global purchasing power over suppliers.
C. utilizing their technological and managerial know-how globally with minimum additional costs.
D. all of the options
D. all of the options
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 most critical goal.
D. managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal.
B. managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.
The World Trade Organization, WTO,
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.
A. has the power to enforce the rules of international trade.
Japan has experienced large trade surpluses. Japanese investors have responded to this by
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
B. investing heavily in U.S. and other foreign financial markets.
The common monetary policy for the euro zone is now formulated by
A. the Bundesbank in Germany.
B. the Federal Reserve Bank.
C. the World Bank.
D. the European Central Bank.
D. the European Central Bank.
The Jamaican Agreement was held to amend the Bretton Woods Agreement of the fixed exchange rate system in
A. 1973
B. 1975
C. 1976
D. 1978
E. 1979
C. 1976
The international monetary system can be defined as the institutional framework within which
A. international payments are made.
B. movement of capital is accommodated
C. exchange rates among currencies are determined
D. all of the above
D. all of the above
Monetary policy for the countries using the euro as a currency is now conducted by
A. the Federal Reserve.
B. the Bundesbank.
C. European Central Bank.
D. none of the above
C. European Central Bank.
Which of the following is not one of advantages for a flexible exchange rate system?
A. countries can maintain independent monetary policy
B. exchange rates under a flexible system are unstable
C. countries can maintain independent fiscal policy
D. flexible exchange rates permit a smooth adjustment to external shocks
E. Central banks do not need to maintain large reserves
B. exchange rates under a flexible system are unstable
Benefits from adopting a common European currency include
A. reduced transaction costs.
B. elimination of exchange rate risk.
C. increased price transparency that will promote Europe-wide competition.
D. all of the above
D. all of the above
The balance of payments records
A. only international trade, (exports and imports).
B. only cross-border investments (FDI and portfolio investment).
C. not only international trade, (exports and imports) but also cross-border investments.
D. none of the above
C. not only international trade, (exports and imports) but also cross-border investments.
Balance of payments
Presentin in tas the talis core endy backeys international transactions over a certain period of time
B. provides detailed information concerning the demand and supply of a country's currency.
C. can be used to evaluate the performance of a country in international economic competition.
D. all of the above
D. all of the above
The financial account measures
A. the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets
B. the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
C. the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products.
D. the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products.
B. the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
When Honda, a Japanese auto maker, built a factory in Ohio,
A. it was engaged in foreign direct investment.
B. it was engaged in portfolio investment.
C. it was engaged in a cross-border acquisition.
D. none of the above.
A. it was engaged in foreign direct investment.
The financial account includes
A. the export and import of goods and services...
B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
C. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
D. None of the above
B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
If the spot rate of the Israel shekel is S.32 and the six-month forward rate is $.30, what is the forward premium or discount on an annual basis?
A. discount; 11.5%
B. premium; 11.5%
C. premium; 12.5%
D. discount; 12.5%
E. premium; 22.5%
D. discount; 12.5%
If one has agreed to sell a foreign exchange forward,
A. you have a short position in the forward contract.
B. you have a long position in the forward contract
C. until the exchange rate moves, you haven't made money, so you're neither short nor long.
D. you have a short position in the spot market.
A. you have a short position in the forward contract.
Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. How many yen will the customer get?
A. ¥192,000,000
B. ¥5,208,333
C. ¥75,000,000
D. ¥5,208.33
E. None of the above
A. ¥192,000,000
Suppose you observe the following exchange rates: €1 = 5.85; £1 = $1.60; and €2.00 = £1.00.
Starting with $1,000,000, how can you make money?
A. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85
B. Start with dollars, exchange for euros at €1 = S.85; exchange for pounds at €2.00 = £1.00; exchange for dollars at 21 = $1.60.
C. Start with euros; exchange for pounds; exchange for dollars; exchange for euros.
D. No arbitrage profit is possible.
A. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85
Assume that the spot rate changed from $0.64 per Swiss franc on January 1 in one recent year to $0.68 per
Swiss franc on December 31 of that year
What is the percentage change in the franc spot rate using indirect quotes for a US company?
A. 5.55%
B. 6.25%
C. 7.77%
D. 8.85%
E. 9.45%
B. 6.25%
Interest Rate Parity (IRP) is best defined as
A. when a government brings its domestic interest rate in line with other major financial markets.
B. when the central bank of a country brings its domestic interest rate in line with its major trading partners.
C. an arbitrage condition that must hold when international financial markets are in equilibrium.
D. None of the above
C. an arbitrage condition that must hold when international financial markets are in equilibrium.
Suppose you observe a spot exchange rate of 51.50/€. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward rate?
A. €1.5291/$
B. $1.5291/€
C. €1.4714/$
D. $1.4714/€
D. $1.4714/€
A higher U.S. interest rate (i$ ^) will result in
A. (i) a stronger dollar.
B. (ii) a lower spot exchange rate (expressed as foreign currency per U.S. dollar).
C. both (i) and (ii)
D. none of the above
A. (i) a stronger dollar.
Purchasing Power Parity (PPP) theory states that
A. (i) the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels.
B. (ii) as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies.
C. (iii) the prices of standard commodity baskets in two countries are not relate
D. both (i) and (ii)
D. both (i) and (ii)
In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,
A. it will hold only if the prices of the constituent commodities are equalized across countries in a given currency.
B. it will hold only if the composition of the consumption basket is the same across countries.
C. none of the above
D. it will hold only if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries.
D. it will hold only if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries.
Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0.8011/¥100.
Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME Yen contract is ¥12,500,000). If you have a short position in one futures contract, the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be
A. $1,425.
B. $2,000.
C. $2,325.
D. $3,425.
C. $2,325.
The "open interest" shown in currency futures quotations is
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.
D. the total number of long or short contracts outstanding for the particular delivery month.
With any hedge
A. according to the rule of zero-sum game, your losses on one side should about equal your gains on the other side.
B. you should try to make money on both sides of the transaction: that way you make money coming and going
C. you should spend at least as much time working the hedge as working the underlying deal itself.
D. you should agree to anything your banker puts in front of your face.
A. according to the rule of zero-sum game, your losses on one side should about equal your gains on the other side.
If you have a long position in a foreign currency, you can hedge with:
A. A short position in an exchange-traded futures option
B. A short position in a currency forward contract
C. A short position in foreign currency warrants
D. Borrowing (not lending) in the domestic and foreign money markets
B. A short position in a currency forward contract
If you owe a foreign currency denominated debt, you can hedge with
A. (i) a long position in a currency forward contract.
B. (ii) a long position in an exchange-traded futures option.
C. (iii) buying the foreign currency today and investing it in the foreign county.
D. both (i) and (iii)
D. both (i) and (iii)
The choice between a forward market hedge and a money market hedge often comes down to
A. interest rate parity.
B. option pricing
C. flexibility and availability.
D. none of the above
A. interest rate parity.
The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is
A. transaction exposure.
B. translation exposure.
C. economic exposure.
D. none of the above
B. translation exposure.
It is conventional to classify foreign currency exposures into the following types:
A. economic exposure, transaction exposure, and translation exposure.
B. economic exposure, noneconomic exposure, and political exposure.
C. national exposure, international exposure, and trade exposure.
D. conversion exposure, and exchange exposure.
A. economic exposure, transaction exposure, and translation exposure.
Which of the following are identified by your text as a strategy for managing operating exposure:
(1) Selecting low-cost production sites
(3) iversican of me market.
(4) Product differentiation and R&D efforts
(5) Financial Hedging
A. (1), (3), and (5) only
B. (2) and (4) only
C. (1), (4), and (5) only
D. (1), (2), (3), 4), and (5)
D. (1), (2), (3), 4), and (5)
Which of the following is false?
A. The competitive effect is that a depreciation may affect operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace.
B. The conversion effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation.
C. The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation.
D. None of the above
C. The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation.
What does it mean to have redenominated an asset in terms of the dollar?
A. You have undertaken a hedging strategy that gives the asset a constant dollar value.
B. Multiply the foreign currency value of the asset by the spot exchange rate.
C. Undertaken accounting changes to eliminate translation exposure.
D. None of the above
A. You have undertaken a hedging strategy that gives the asset a constant dollar value.
Two studies found a link between exchange rates and the stock prices of U.S. firms,
A. (i) this suggests that exchange rate changes can systematically affect the value of the firm by influencing its operating cash flows.
B. (ii) this suggests that exchange rate changes can systematically affect the value of the firm by influencing the domestic currency values of its assets and liabilities
C. Both (i) and (ii)
D. none of the above
C. Both (i) and (ii)
Financial Accounting Standards Board (FASB) Statements 8 and 52 relate to the translation methods. The following outlines the objectives and descriptions of the two statements
(i) Measure in dollars an enterprise's assets, liabilities, revenues, or expenses that are denominated in a foreign currency according to generally accepted accounting principles
(iii) Is essentially the temporal method of translation (with some subtle differences)
(iii) Provide information that is generally compatible with the expected economic effects of a rate change on an enterprise's cash flows and equity (iv) Reflect in consolidated statements the financial results and relationships of the individual consolidated entities as measured in their...
Which of the above statements pertain to FASB 52?
A. (i)
B. (i) and (ii)
C. (iii) and (iv)
D. (i), (ii), and (iii)
C. (iii) and (iv)
The difference between accounting exposure and translation exposure is that
A. translation is about going from one language to another, accounting is just about the numbers.
B. accounting exposure and translation exposure are the same thing.
C. hedging one always involves increasing the other.
D. hedging one might involve increasing the other.
B. accounting exposure and translation exposure are the same thing.
The "reporting currency" is defined in FASB 52 as
A. the currency of the primary economic environment in which the entity operates.
B. the currency in which the MNC prepares its consolidated financial statements.
C. a currency that is not the parent firm's home country currency.
D. the currency in which the MNC prepares its consolidated financial statements, as well as a currency that is not the parent firm's home country currency.
B. the currency in which the MNC prepares its consolidated financial statements.
FASB 8
A. required taking foreign exchange gains or losses through the income statement.
B. caused reported earnings to fluctuate substantially from year to year.
C. ran into acceptance problems from the accounting profession and MNCs.
D. all of the options
D. all of the options
A derivatives hedge that seeks to eliminate translation exposure
A. eliminates any mismatch of the rate of change in net assets and the rate of change in net liabilities denominated in the same currency.
B. really involves speculation about foreign exchange rate changes
C. simultaneously goes long and short in currency futures contracts
D. none of the options
B. really involves speculation about foreign exchange rate changes
In situations where company ownership is widely dispersed,
A.a substantial number of shareholders guarantees effective oversight of managerial conduct as there's typically someone willing to bear the monitoring expenses.
B. there's a challenge of "free riders," discouraging shareholder involvement, as few have a significant motivation to bear the monitoring costs
C. the majority of shareholders will possess ample motivation to bear the monitoring costs.
D. the presence of a "free rider' issue promotes shareholder activism.
B. there's a challenge of "free riders," discouraging shareholder involvement, as few have a significant motivation to bear the monitoring costs
In Germany. the corporate board Is
A. legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders.
B. legally charged as a management board only.
C. legally charged as a supervisory board only.
D. legally charged with representing the interests of shareholders exclusively.
A. legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders.
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 ......
A. debit; €512,100
B. credit: $500,000
C. debit; $500,000
D. debit; $524,492
C. debit; $500,000
Which of the following best describes interest rate parity (IRP)?
A. It ensures equality of interest rates within a single country
B. It represents a relationship between inflation rates and interest rates
C. It is an arbitrage condition that maintains equilibrium in international financial markets
D. It refers to the balance between supply and demand for money market instruments
C. It is an arbitrage condition that maintains equilibrium in international financial markets
Which of the following is NOT one of the three distinct forecasting approaches commonly used?
A. Efficient market approach
B. Fundamental approach
C. Technical approach
D. Analytical approach
D. Analytical approach
Which of the following accurately describes the roles of speculators and hedgers in a derivatives market?
A. Speculators aim to minimize price variation by locking in a purchase price, while hedgers seek to profit from changes in futures prices
B. Speculators attempt to profit from changes in futures prices, while hedgers aim to avoid price variation by locking in purchase or sale prices
C. Speculators aim to stabilize market prices, while hedgers attempt to maximize price volatility
D. Speculators and hedgers both seek to profit from changes in futures prices, with no distinction in their roles
B. Speculators attempt to profit from changes in futures prices, while hedgers aim to avoid price variation by locking in purchase or sale prices
Which of ine following accurately describes an opton contract?
A. It allows the holder to buy or sell an asset at a specified price in the future, similar to a futures contract
B. It obligates the holder to buy or sell an asset at a specified price in the future, similar to a forward contract
C. It represents a fixed agreement to buy or sell an asset at the current market price, similar to a spot contract
D. It gives the holder the right, but not the obligation, to buy or sell an asset at a specified price in the future
D. It gives the holder the right, but not the obligation, to buy or sell an asset at a specified price in the future
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have you made or lost?
A. Lost $100
B. Made $100
C. Lost $50
D. Made $150
A. Lost $100
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Which of the following is true?
A. Some items that are a source of transaction exposure are also a source of translation exposure.
B. Some items that are a source of transaction exposure are not also a source of translation exposure.
C. Some items that are a source of transaction exposure are also a source of translation exposure, but some
items that are a source of transaction exposure are not also a source of translation exposure.
D. none of the options
C
Suppose a U.S.-based MNC maintains a vacation home for employees in the British countryside and the local price of this property is always moving together with the pound price of the U.S. dollar. As a result,
A. (i) whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion.
B. (ii) the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly.
C. Both (i) and (ii)
D. None of these
B. (ii) the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly.
When a currency trades at a discount in the forward market
A. the forward exchange rate is less than one dollar (e.g. €1.00 = $0.928).
B. the exchange rate is less than it was yesterday.
C. the forward rate is less than the spot rate.
D. the forward rate is more than the spot rate.
C
Generally speaking, any transaction that results in a payment to foreigners
A. will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
B. will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
C. will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
D. will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
A
Special drawing rights are used to settle payments by the following organizations except
A. (i) IMF member countries
B. (ii) prescribed organizations
C. (ili) central banks
D. (iv) multinational corporations
E. (i, (ii), and (iii)
D
The difference between a broker and a dealer is
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
b
The emergence of global financial markets is due in no small part to
A. advances in computer and telecommunications technology.
B. enforcement of the Soviet system of state ownership of resources of production.
C. government regulation and protection of infant industries.
D. none of the options
A
A fixed exchange rate____
A. (i) is an exchange rate which does not fluctuate or which changes within a predetermined band
B. (i) will have a par value
C. (iii) requires central banks to absorb currency surpluses and eliminate currency deficiencies
D. (ii) and (iii)
E. All of the above
A
When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in foreign direct investment. If Nestlé had only bought a non-controlling number of shares of the firm,
A. Nestlé would have been engaged in portfolio investment.
B. Nestlé would have been engaged in a cross-border acquisition.
C. it would depend if they bought the shares from an American or a Canadian.
D. none of the above
A
A U.S. parent firm, as result of its business activities in Germany, has a net exposure of €1,000,000. The consolidated reports were prepared at the year-end for the last two successive years. If the exchange rates on
these reporting dates changed from $1.00 = €1.10 to $1.00 = €1.00, then the translation exposure report will indicate a "reporting currency imbalance" of
A. $90,910.
B. SO.
C. - $90,910.
D. none of the options
A
Since a corporation can hedge exchange rate exposure at low cost
A. there is no benefit to the shareholders in an efficient market.
B. shareholders would benefit from the risk reduction that hedging offers.
C. the corporation's banker would benefit from the risk reduction that hedging offers.
D. none of the above
A. there is no benefit to the shareholders in an efficient market.
Transaction exposure is defined as
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 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.
A
The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetical order, as follows:
Bimetallism
(i)Bretton Woods system
(ii)Classical gold standard
(iii)Flexible exchange rate regime
(iv)Interwar period
The chronological order that they actually occurred is:
Options:
A. (iii), (i), (iv), (ii), and (v)
B. (i), (iii), (v), (ii), and (iv)
C. (vi), (i), (iii), (ii), and (v)
D. (v), (ii), (i), (iii), and (iv)
B
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?
A. $1.58 = €1.00
B. $1.62 = €1.00
C. $1.50 = €1.00
D. $1.68 = €1.00
A
The owners of a business are the
A. taxpayers.
B. workers.
C. suppliers.
D. shareholders.
D
If IRP fails to hold
A. pressure from arbitrageurs should bring exchange rates and interest rates back into line.
B. it may fail to hold due to transactions costs.
C. it may be due to government-imposed capital controls.
D. all of the above
D
Suppose that the pound is pegged to gold at 220 per ounce and the dollar is pegged to gold at 535 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.
A. (i) 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. (ii) 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. (i) and (ii) both work
D. None of the above
A
Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin was $3,750 (= 0.04 × €62,500 x $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?
A. $1.4720/€
B. $1.5280/€
C. $1.500/€
D. None of the above
A
1 Consider a U.S.-based MNC with manufacturing activities in Japan. The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is:
Exposed assets ¥700,000,000
Exposed liabilities ¥500,000,000
Ignoring transaction exposure in the yen, the translation exposure will indicate a possible
need for a "balance sheet hedge" of:
a) ¥200,000,000 more liabilities denominated in yen
b) ¥200,000,000 less assets denominated in yen
c) a) or b)
d) none of the above
C
From the perspective of the U.S. firm that owns an asset in Britain, the exposure that can be measured by the coefficient b in regressing the dollar value P of the British asset on the dollar/pound exchange rateS using the
regression equation is
A. asset exposure.
B. operating exposure.
C. accounting exposure.
D. none of the above
A
In recent years, the U.S. dollar has depreciated substantially against most major currencies of the world, especially against the euro.
A. (i) The stronger euro has made many European products more expensive in dollar terms, hurting sales of these products in the United States.
B. (ii) The stronger euro has made many American products less expensive in euro terms, boosting sales of U.S. products in Europe.
C. Both (i) and (ii)
D. None of these
C
Under the theory of comparative advantage, liberalization of international trade will
A. enhance the welfare of the world's citizens.
B. create unemployment and displacement of workers permanently.
C. result in higher prices in the long run as monopolists are able to charge higher prices after eliminating their competitors.
D. all of the above
A
Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be worth in U.S. dollars?
A. $29.40
B. $30.00
C. $0.83
D. $1.20
B
The €/$ spot exchange rate is $1.50/€ and the 120 day forward exchange rate is 1.45/€. The forward premium (discount) is
A) the dollar is trading at an 8% premium to the euro for delivery in 120 days.
B) the dollar is trading at a 5% premium to the Swiss franc for delivery in 120 days.
C) the dollar is trading at a 10% discount to the euro for delivery in 120 days.
D) the dollar is trading at a 5% discount to the euro for delivery in 120 days.
C
The common monetary policy for the euro zone is now formulated by
A. the Bundesbank in Germany.
B. the Federal Reserve Bank.
C. the World Bank.
D. the European Central Bank.
D
The current account includes
A) the export and import of goods and services.
B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
D) none of the above
A
Suppose the futures price is below the price predicted by IRP. What steps would assure an arbitrage profit?
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
A
If the spot rate of the Malaysian ringgit is $.30 and the six-month forward rate of the ringgit is $.32, what is the
forward premium or discount on an annual basis?
A. premium; about 14.5%
B. discount; about 14.5%
C. premium; about 13.3%
D. discount; about 13.3%
E. premium; about 16.7%
C
Comparing "forward" and "futures" exchange contracts, we can say that
A. they are both "marked-to-market" daily.
B. their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity.
C. a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while forward contract is tailor-made by an international bank for its clients and is traded OTC.
D. B and C are correct
D
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
d
The most direct and popular way of hedging transaction exposure is by
A) exchange-traded futures options.
B) currency forward contracts.
C) foreign currency warrants.
D) borrowing and lending in the domestic and foreign money markets.
B
Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the competitive effect of the depreciation?
A.The cash flow in euro could be altered due an alteration 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
A
When the Mexican peso collapsed in 1994, declining by 37 percent,
A. U.S. firms that exported to Mexico and priced in peso were adversely affected.
B. U.S. firms that exported to Mexico and priced in dollars were adversely affected.
C. U.S. firms were unaffected by the peso collapse, since Mexico is such a small market.
D. both a and b
D
A CME contract on €125,000 with September delivery
A) is an example of a forward contract.
B) is an example of a futures contract.
C) is an example of a put option.
D) is an example of a call option
B
The Exchange Rate Mechanism (ERM) is
A) the procedure by which ERM member countries collectively manage their exchange rates.
B) based on a "parity-grid" system, which is a system of par values among ERM countries.
C) a and b
D) none of the above
C
If the United States imports more than it exports, then this means that
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
A
Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use?
A. $1.85 = £1.00
B. $1.8750 = £1.00
C. $1.90 = £1.00
D. none of the above
C
An arbitrage is best defined as
A. A legal condition imposed by the CFTC.
B. The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits.
C. The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits.
D. None of the above
C
How many methods of foreign currency translation have been used in recent years? (U.S. GAAP.)
A. One
B. Two
C. Three
D. Four
D
FASB 8 is essentially the
A. current/noncurrent method.
B. monetary/nonmonetary method.
C. temporal method.
D. current rate method
C
Credit entries in the U.S. balance of payments
a) (i) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets.
b) (ii) result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets.
c) (iii) give rise to the demand for dollars.
d) both (i) and (iii)
D
A depreciation will begin to improve the trade balance immediately if
A) imports and exports are responsive to the exchange rate changes.
B) imports and exports are inelastic to the exchange rate changes.
C) consumers exhibit brand loyalty and price inelasticity.
D) b) and c)
A
The benefit to forecasting exchange rates:
a) Are greatest during periods of fixed exchange rates
b) Are nonexistent now that the euro and dollar are the biggest game in town
c) Accrue to and are a vital concern for MNCs formulating international sourcing, production, financing and marketing strategies.
d) All of the above.
C
For European currency options written on euro with a strike price in dollars, what of the effect of an increase in r$?
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
D
An "option" is
A. a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell . (put) a given quantity of an asset at a specified price at some time in the future.
B. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell . (put) a given quantity of an asset at a specified price at some time in the future.
C. a contract giving the owner (buyer) of the option the right, but not the oblig
B
Consider a U.S.-based MNC with manufacturing activities in Japan. The result of a change in the ¥-$ exchange rate on the assets and liabilities of the consolidated balance sheet is: Ignoring transaction exposure in the yen, the translation exposure will indicate a possible need for a "derivatives hedge" of
A. short position in ¥200,000,000 currency futures.
B. long position in ¥200,000,000 currency futures.
C. either a) or b)
D. none of the above
D
Which of the following is true?
A. The competitive effect is that a currency depreciation may affect operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace.
B. The conversion effect is defined as a given accounting cash value in a foreign currency will be converted into a lower dollar amount after currency depreciation.
C. The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation.
D. None of the above
A
The management of translation exposure is best described as
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.
A
The main approaches to forecasting exchange rates are
A) Efficient market, Fundamental, and Technical approaches.
B) Efficient market and Technical approaches.
C) Efficient market and Fundamental approaches.
D) Fundamental and Technical approaches.
A
