1. Recently, financial markets have become highly integrated.

| October 22, 2018

1. Undoubtedly, we
are now living in a world where all the major economic
functions—consumption, production, and investment (Points : 3)

are still inherently
are still regional
in nature.
are slowly becoming
are highly

Question 2.2. Balance
of payments (Points : 3)

is defined as the
statistical record of a country’s international transactions over a certain
period of time presented in the form of a double-entry bookkeeping.
provides detailed information
concerning the demand and supply of a country’s currency.
can be used to evaluate the
performance of a country in international economic competition.
all of the above

Question 3.3. 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 ____________. (Points
: 3)

debit, $500,000
credit, €512,100
credit, $500,000
debit, €512,100

Question 4.4. How
many methods of foreign currency translation have been used in recent
years? (U.S. GAAP.) (Points : 3)


Question 5.5. Suppose
you start with $100 and buy stock for £50 when the exchange rate is £1 =
$2. One year later, the stock rises to £60. You are happy with your 20
percent return on the stock, but when you sell the stock and exchange
your £60 for dollars, you only get $45 since the pound has fallen to £1 =
$0.75. This loss of value is an example of (Points : 3)

exchange rate
political risk.
market imperfections.
weakness in the dollar.

Question 6.6. At
the wholesale level (Points : 3)

most trading takes
place OTC between individuals on the floor of the exchange.
most trading takes place over the
trading flows over Reuters and EBS platforms.
most trading flows through
specialized “broking” firms.

Question 7.7. Recent
corporate scandals at firms such as Enron, WorldCom and the Italian firm
Parmalat (Points : 3)

show that managers
might be tempted to pursue their own private interests at the expense of
show that Italian shareholders
are better at monitoring managerial behavior than U.S. shareholders.
show that white-collar criminals
hardly ever get punished.
show that socialism is a better
way to go than capitalism.

Question 8.8. Most
interbank trades are (Points : 3)

speculative or
arbitrage transactions.
order processing for the retail client.
overnight loans from one bank to
brokered by dealers.

Question 9.9. The
owners of a business are the (Points : 3)


Question 10.10. 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 (Points : 3)

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.
your firm will be able to charge
more in dollar terms while keeping peso prices stable.
your domestic competitors will
enjoy a period of facing little price competition from Mexican imports.
both b) and c) are

Question 11.11. 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? (Points : 3)

Lost $0.04 per €
or $2,500
$0.04 per € or $2,500
Lost $0.06 per € or $3,750
None of the above

Question 12.12. The
balance of payments records (Points : 3)

only international
trade, (exports and imports).
only cross-border investments
(FDI and portfolio investment).
not only
international trade, (exports and imports) but also cross-border
none of the above

Question 13.13. The
difference between a broker and a dealer is (Points : 3)

dealers sell
drugs; brokers sell houses.
brokers bring
together buyers and sellers, but carry no inventory; dealers stand ready to
buy and sell from their inventory.
transact in stocks and bonds; currency is bought and sold through dealers.
none of the above

Question 14.14. Mislocated
funds are defined as: (Points : 3)

Funds being found
in the wrong account.
Funds being
denominated in the wrong currency.
Funds being invested with the
wrong maturity.
None of the above

Question 15.15. Deregulated
financial markets and heightened competition in financial services
provided an environment for financial innovations that resulted in the
introduction of various instruments. Examples of these innovative
instruments include (Points : 3)

currency futures
and options, foreign stock index futures and options.
multicurrency bonds.
international mutual funds,
country funds, exchange traded funds.
all of the above

Question 16.16. The
genius of public corporations stems from their capacity to allow
efficient sharing or spreading of risk among many investors, who can buy
and sell their ownership shares on liquid stock exchanges and let
professional managers run the company on behalf of shareholders. This
risk sharing stems from (Points : 3)

the liquidity of
the shares.
the limited
liability of shareholders.
limited liability of bondholders.
the limited ability of

Question 17.17. Suppose
that you are a U.S. producer of a commodity good competing with foreign
producers. Your inputs of production are priced in dollars and you sell
your output in dollars. If the U.S. currency depreciates against the
currencies of our trading partners, (Points : 3)

your competitive
position is likely improved.
your competitive position is likely
your competitive position is

Question 18.18. The
emergence of global financial markets is due in no small part to (Points
: 3)

advances in
computer and telecommunications technology.
enforcement of the Soviet system
of state ownership of resources of production.
government regulation and
protection of infant industries.
none of the above

Question 19.19. 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 (Points :

exchange rate
market imperfections.
none of the above, since $100,000
= €80,000´ $1.25/€1.00

Question 20.20. Translation
exposure refers to (Points : 3)

the effect that an unanticipated
change in exchange rates will have on the consolidated financial reports of
an MNC.
the change in the value of a
foreign subsidiaries assets and liabilities denominated in a foreign
currency, as a result of exchange rate change fluctuations, when viewed
from the perspective of the parent firm.
all of the above

Question 21.21. If
the United States imports more than it exports, then this means that
(Points : 3)

the supply of
dollars is likely to exceed the demand in the foreign exchange market,
ceteris paribus.
demand for dollars is likely to exceed the supply in the foreign exchange
market, ceteris paribus.
the U.S. dollar would be under
pressure to appreciate against other currencies.
both b) and c) are correct

Question 22.22. 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 (Points :

translation exposure.
economic exposure.
none of the above

Question 23.23. The
current exchange rate is €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 €100,000 from a currency trader at bank B for
$150,000 using its correspondent relationship with Bank B. (Points : 3)

Bank A’s
dollar-denominated account at B will fall by $150,000.
Bank B’s dollar-denominated
account at A will fall by $150,000.
Bank A’s pound-denominated
account at B will fall by €100,000.
Bank B’s pound-denominated
account at A will rise by €100,000.

Question 24.24. As
capital markets are becoming more integrated, the goal of shareholder
wealth maximization (Points : 3)

has been altered
to include other goals as well.
has lost out to other goals, even
in the U.S.
been given increasing importance by managers in Europe.
been shown to be a deterrent to raising funds abroad.

Question 25.25. Multinational
cash management (Points : 3)

is really no
different for a MNC than for a purely domestic firm in a closed economy.
concerns itself
with the size of cash balances, their currency denominations, and where
these cash balances are located among the MNC’s affiliates.
concerns itself with the size of
cash balances and their currency denominations, but not where these cash
balances are located among the MNC’s affiliates, since intra-affiliate
default risk is not an issue.
none of the above

Question 26.26. Deregulation
of world financial markets (Points : 3)

provided a natural
environment for financial innovations, like currency futures and options.
has promoted competition among
market participants.
has encouraged developing
countries such as Chile, Mexico, and Korea to liberalize by allowing
foreigners to directly invest in their financial markets.
of the above

Question 27.27. In
a public company with diffused ownership, the board of directors is
entrusted with (Points : 3)

monitoring the
auditors and safeguarding the interests of shareholders.
monitoring the shareholders and
safeguarding the interests of management.
monitoring the
management and safeguarding the interests of shareholders.
none of the above

Question 28.28. Corporate
governance can be defined as (Points : 3)

the economic,
legal, and institutional framework in which corporate control and cash flow
rights are distributed among shareholders, managers and other stakeholders
of the company.
general framework in which company management is selected and monitored.
the rules and regulations adopted
by boards of directors specifying how to manage companies.
the government-imposed rules and
regulations affecting corporate management.

Question 29.29. A
CME contract on €125,000 with September delivery (Points : 3)

is an example of a
forward contract.
is an example of a
futures contract.
is an example of a put option.
is an example of a call option.

Question 30.30. The
foreign exchange market closes (Points : 3)

p.m. EST (New York time).
4:00 p.m. GMT (London time).
4:00 p.m. (Tokyo time).

Question 31.31. When
corporate governance breaks down (Points : 3)

shareholders are
unlikely to receive fair returns on their investments.
managers may be tempted to enrich
themselves at shareholder expense.
the board of directors is not
doing its job.
of the above

Question 32.32. If
Japan exports more than it imports, then (Points : 3)

the supply of dollars
is likely to exceed the demand in the foreign exchange market, ceteris paribus.
one can infer that
the yen would be likely to appreciate against other currencies.
a) and b)
None of the above

Question 33.33. The
Japanese automobile company Honda decided to establish production
facilities in Ohio, mainly to (Points : 3)

circumvent trade
reduce transportation costs.
reduce transactions costs.
both a) and b)

Question 34.34. Comparing
“forward” and “futures” exchange contracts, we can
say that (Points : 3)

they are both
“marked-to-market” daily.
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.
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.
both b) and c)

Question 35.35. What
paradigm is used to define the futures price? (Points : 3)

Hedge Ratio
Black Scholes
Risk Neutral Valuation

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