Intl Finance Test 1

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An example of political risk is:
a. Expropriation of assets
b. Adverse change in tax rules
c. The opposition party being elected
d. Both answers A and B

Both answers A and B

Recently, financial markets have become highly integrated. This development:
a. Allows investors to diversify their portfolios internationally
b. Allows minority investors to buy and sell stocks
c. Has increase the cost of capital for firms
d. Answers A and C are both correct

Allows investors to diversify their portfolios internationally

Suppose that Great Britain is a major export market for your firm, a U.S. based MNC. If the British pound
depreciates against the U.S. dollar,
a. Your firm will be able to charge more in dollar terms while keeping pound prices stable
b. Your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your
pound prices will rise
c. To protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price
the same.
d. Both B and C are correct

Both B and C are correct

Suppose Mexico is a major export market for your U.S. based company and the Mexican peso depreciates
drastically against the U.S. dollar, as it did in December 1994. This means:
a. Your company's products can be priced out of the Mexican market, as the peso price of American imports will
rise following the peso's fall
b. Your firm will be able to charge more in dollar terms while keeping peso prices stable
c. Your domestic competitors will enjoy a period of facing little price competition from Mexican Imports
d. Both B and C are correct

Your company's products can be priced out of the Mexican market, as the peso price of American imports will
rise following the peso's fall

The current exchange rate is euro 1.00 = $1.50. Compute the correct balances in Bank A's correspondent
account(s) with Bank B, if a currency trader employed at Bank A buys euros 100,000 from a currency trader
at bank B for $150,000 using its correspondent relationship with Bank B.
a. Bank A's dollar-denominated account at B will fall by $150,000
b. Bank B's dollar-denominated account at A will fall by $150,000
c. Bank A's euro-deonominated account at B will fall 100,000 euros
d. Bank B's euro-donominated account at A will rise by 100,000 euros

Bank A's dollar-denominated account at B will fall by $150,000

Know the order of the different ages for the evolution of the International Monetary System:

a. Bimetallism (1875)
b. Classical Gold Standard (1875-1914)
c. Interwar Period (1915-1944)
d. Bretton Woods System (1945-1972)
e. Flexible Exchange Rate Regime (1973-Present)

Under the Bretton Woods System, each country was responsible for maintaining its exchange rate within + or
- 1 percent of the adopted par value by:
a. Buying or selling foreign exchange as necessary
b. Buying or selling gold as necessary
c. None of the above

Buying or selling foreign exchange as necessary

Corporate governance structure:
a. Varies a great deal across countries
b. Is the same in every country
c. None of the above

Varies a great deal across countries

In countries with concentrated ownership...
a. The conflicts of interest are greater between large controlling shareholders and small outside shareholders
than between managers and shareholders
b.

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

The central issue of corporate governance is:
a. How to protect outside investors from the controlling insiders
b.

How to protect outside investors from the controlling insiders

The European Monetary System (EMS) has the following chief objectives:
a. To establish a zone of monetary stability in Europe
b. To coordinate exchange rate policies vis-à-vis the non-EMS currencies
c. To pave the way for the eventual European Monetary Union
d. All of the Above

All of the Above

The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$. The forward
premium (discount) is:
a. The dollar is trading at an 8% premium to the Swiss Franc delivery in 180 days
b. The dollar is trading at a 4% premium to the Swiss Franc delivery in 180 days
c. The dollar is trading at an 8% discount to the Swiss Franc delivery in 180 days
d. The dollar is trading at a 4% discount to the Swiss Franc delivery in 180 days

The dollar is trading at an 8% premium to the Swiss Franc delivery in 180 days

Computational problem over arbitrage. US treasury with $1,000,000 to invest. The $/euro exchange rate is
$1.60= 1.00 euro. The $/pound exchange rate is quoted at $2.00= 1.00 pound. The cross-rate is 1.00 pound=
1.20 euro.

Answer = $41,667

The separation of the company's ownership and control:
a. Is especially prevalent in such countries as the U.S. and U.K., where corporate ownership is highly diffused
b.

Is especially prevalent in such countries as the U.S. and U.K., where corporate ownership is highly diffused

Most shareholders are weak in that they give up control to the managers of the firm:
a. This may be rational since many shareholders find it easier to sell their shares in an underperforming firm
than to monitor the management
b. This may be rational when shareholder may be neither qualified nor interested in making business decisions
c. This may be rational to the extent that managers are answerable to the board of directors
d. All of the above are explanations for the separation of ownership and control

All of the above are explanations for the separation of ownership and control

English Common low countries tend to provide a stronger protection of shareholder rights than French Civil
law countries because:
a. The former countries tend to protect properties rights better than the latter
b.

The former countries tend to protect properties rights better than the latter

Suppose a bank customer with 1,000,0000 Euros wishes to trade out of euro and into Japanese Yen. The
dollar-euro exchange rate is quoted at $1.60 = 1.00 euros and the dollar-yen exchange rate is quoted at $1.00
= 120 Yen. How many yen will the customer get?
a. 192,000,000 Yen
b. 5,208,333 Yen
c. 75,000,000 Yen
d. 5,208.33 Yen

192,000,000 Yen

Suppose you observe the following exchange rates: 1 euro = $.85, 1 pound = $1.60, and 2 euros = 1 pound.
Starting with $1,000,000, how can you make money?
a. Exchange $1,000,000 for 625,000 pounds (at 1 pound = $1.60). Buy 1,250,000 euros (at 2 euros = 1 pound).
Trade for $1,062,500 (at 1 euro = $.85)
b. Start with dollars, exchange for euros at 1 euro = .85; exchange for pounds at 2 euros = 1 pound; exchange for
dollars at 1 pound = $1.60
c. Start with euros, exchange for pounds, exchange for dollars, exchange for euros
d. No arbitrage profit is possible

Exchange $1,000,000 for 625,000 pounds (at 1 pound = $1.60). Buy 1,250,000 euros (at 2 euros = 1 pound).
Trade for $1,062,500 (at 1 euro = $.85)

The forward market:
a. Involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today
b. Involves contracting today for the future purchase or sale of foreign exchange at the spot rate that will
prevail at the maturity of contract.
c. Involves the contracting today for the right but not obligation to the future purchase or sale of foreign
exchange at a price agreed upon today
d. None of the above

Involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today

Suppose that the one year interest rate is 5.00 % in the U.S., the spot exchange rate is $1.20/euro, and the one
year forward exchange rate is $1.16/euro. What must the interest rate in the euro zone be?
a. 5.0%
b. 6.09%
c. 8.62%
d. None of the above

8.62%

The spot exchange rate is $1.50/euro and the 90-day forward premium is 10%. Find the 90-day forward price.
a. $1.625/ euro
b. $1.5375/euro
c. $1.4234/euro
d. None of the above

$1.5375/euro

Suppose the one-year interest rate is 5% in the U.S. and 3.5% in Germany, and the one-year forward exchange
rate is $1.16/euro. What must the spot exchange be?
a. $1.1768/euro
b. $1.1434/euro
c. $1.12/euro
d. None of the above

$1.1434/euro

Purchasing Power Parity Theory states that:
a. The exchange rates between currencies of two countries should be equal to the ratio of the countries' price
levels.
b. As the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate
against stable currencies
c. The prices of standard commodity baskets in two countries are not related
d. Both A and B

Both A and B

Suppose that the annual interest rate is 5% in the U.S. and 3.5% in Germany and that the spot exchange rate is
$1.12/euro and the forward exchange rate, with one-year maturity, is $1.16/euro. Assume that an arbitrager
can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?
a. $10,690
b. $15,000
c. $46,207
d. $21,964

$21,964

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 transaction costs
c. It may be due to government-imposed capital grounds
d. All of the above

All of the above

Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros at
a cost of 512,100 euros. The U.S. importer will contact the U.S. bank (where of course he has an account
denominated in U.S. dollar) and inquire about the exchange rate, which the bank quotes as 1.0242euros/
$1.00. The importer accepts the price, so his bank will __________ the importer's account in the amount of
_____________.
a. Reduce. $500,000
b. Increase. 512,000 euros
c. Increase. $500,000
d. Reduce. 512,000 euros

Reduce. $500,000

The Singapore dollar - U.S. dollar spot exchange rate is S1.60/$1.00, the Canadian Dollar—U.S. dollar spot
rate is CD1.33/$1.00, and the S1.15/CD. Determine the triangular arbitrage profit that is possible if you have
$1,000,000.
a. $44,063 profit
b. $46,093 loss
c. No profit is possible
d. $46,093

$46,093

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