Finance Concepts Test 2

The theory of …. states that the difference in the interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency

interest rate parity

The …. concept posits that the disparity between nominal interest rates of securities with comparable risk

Interest Rate Parity

If an investor buys a U.S bond that has an annual nominal interest rate of 8% rather than British bond with a rate of 10% must be expecting the …. to … by 2% per year

dollar, go up

If an identical product can be sold in two different markets then the price of the product should be the same in both markets. This is known as

The law of one price

IF a country’s currency strengthened by more than that justified by the differential in inflation is said to be ….. in terms of PPP

Overvalued

An item that can be traded freely between two places without any barriers or transport constraints refers to the principle of…

The Law of one Price

According to the …., the stated interest rate in any nation equals the needed real return plus the expected inflation premium

The Fisher Effect

The concept of… implies that for similar-risk, same-maturity assets in two countries, the interest rate gap will match the forward premium or discount on that currency

Interest Rate Parity

Covered interest arbitrage moves the market ….. equilibrium in the market by ….. the currency differential through buying on the spot market and selling in the forward market

toward, narrowing

Under the international fisher effect, someone who opts for a 5% annual return on a U.S. bond over a 6% annual return on a British bond is essentially predicting that the … will …. by about 1% each year for 5 years.

U.S. dollar, appreciate

A call option whose exercise price exceeds the spot price is said to be…

out of money

A call option whose strike price is less than the spot price is said to be…

in the money

A put option whose exercise price exceeds the spot price is…

In the money

A put option whose strike price is below the spot price is…

out of money

If the strike of a call is higher than the current market price, that option is described as

out of money

The maximum gain for the purchaser of a call option contract is … while the maximum loss is …

unlimited, premium

A foreign currency … contract calls for the future deliver of a standard amount of foreign exchange at a fixed time, place, and price

Futures

A …. contract for foreign exchange involves the obligation to deliver a set quantity of currency on a particular date in the future, at an established location and price

Futures

If a firm has a variable rate loan outstanding and wishes to protect the firm against an unfavorable increase in interest rates, the firm could… an interest rate futures contract of a similar maturity to the loan

sell

When a large corporation has a divide between its owners and its executive management, it can lead to conflicting interests. This specific conflict is referred to as:

the agency problem

The total count of publicly traded companies peaked in what country and what year

In the U.S, 1996

The framework of realtionships between various stakeholders that dictates and manages the strategic path and overall performance of a business entity is known as

Corporate governance

Which piece of legislation mandates that the chief executive officers of public corporations must personally certify the accuracy of their company’s published financial reports

Sarbanes-Oxley

Argues that the exchange rates are determined by the supply and demand of a wide variety of financial assets

Asset Market Approach

Forecasting inadequacies of fundamental theories has led to the growth and popularity of…

technical analysis

When forecasting exchange rate, it is important to remember that parity condtions in the asset approach, and the balance of payments approaches are all …. theories and not competing theories

Complementary

The….. approach to exchange rate determination hypothesizes that the most important factors to look at are the relative real interest rate, and the country’s outlook for growth

Asset market

The …. provides a means to account for international cash flows in a standardized and systematic manner.

The balance of Payments

… intervention is the alteration of economic or financial fundamentals that are thought to be drivers of capital to flow in and out of specific currencies

Indirect intervention

….defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics. The slang for this is “Tequila effect”

Contagion

Where did the asian currency crisis begin?

Thailand

Which framework posits that currency values are driven by investors’ willingness to hold numerous financial instruments across the globe

Asset market