Investment Planning - Module 5

Select a benefit of investing in foreign markets.

Diversification

Larry is looking to add a real estate investment to his portfolio that is publicly traded on the exchanges, thereby offering him diversification and marketability. He has decided that a real estate investment trust (REIT) is the best choice and asks his financial planner for information about the REITs available for purchase. Based on Larry's request, the financial planner explained the various investment choices. Which of these was incorrectly stated by his financial planner?

For the shareholders, income received is considered passive income.

Jay has recently learned that foreign investments are a good way to diversify a portfolio. Select which of these statements regarding the risks and benefits of foreign investments, specifically American depositary receipts (ADRs), is CORRECT.

Foreign taxes paid on income earned from an ADR are eligible for the foreign tax credit.

Your clients have invested in a variety of mutual funds, including foreign country funds. You expect the U.S. dollar to strengthen against the Japanese yen over the next year. Which of these actions would be most appropriate?

Hedge by taking a short position in yen futures.

Choose the CORRECT statements regarding option contracts. I. The buyer of a call option has the potential for unlimited gain. II. The seller of a put option is bullish. III. The writer of a naked call is exposed to an unlimited loss. IV. If the writer of a call option owns the underlying stock, the option is considered covered.

I, II, III, and IV

Which of these statements concerning the principles of real estate investing is CORRECT? I. Investors in undeveloped land are seeking returns primarily from capital appreciation. II. Effective real estate investing almost always involves a careful but extensive use of leverage. III. Investors in real estate are usually seeking tax benefits for mortgage interest, property taxes, and depreciation. IV. Generally, investors in developed land experience significant taxable income in the early years of ownership.

I, II, and III

The dollar has been declining against major world currencies for some time. A portion of your international equity holdings includes a sizable stake in Japanese stocks. As the dollar falls relative to the Japanese yen, which of these conditions would you expect to occur? I. U.S. investors in mutual funds that invest in Japanese securities increase their total returns. II. Companies that export products to Japan find that their products become more expensive to Japanese consumers. III. Japanese automobiles imported to the United States become more expensive to U.S. consumers. IV. The U.S. currency experiences a devaluation with respect to the yen.

I, III, and IV

Greg buys a call option on LMN Corporation's stock for an option premium of $1.50. Which of these statements is CORRECT? I. Greg hopes that the price of LMN stock will decline. II. Greg's maximum loss on the option is $150.

II only

On January 1, 20XX, one U.S. dollar could buy 105 Japanese yen; on December 31, 20XX, one U.S. dollar could buy 121 Japanese yen. Which one of these statements best illustrates what has happened to the U.S. dollar during year 20XX?

The U.S. dollar was revalued.

An investment, such as an option, whose value is based on that of another security is classified as

a derivative.

If an American investor holds foreign securities and is concerned about exchange rate risk, that investor may hedge by

buying a futures contract for delivery of dollars.

An investor fearing a bear market would hedge his or her position by

buying a put.

Which of these best describes a real estate mortgage conduit (REMIC)?

A REMIC is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities.

Choose the CORRECT statements concerning the futures market. I. A futures contract is a standardized, transferable agreement providing for the deferred delivery of either a designated commodity or financial instrument (or its cash value). II. Although a buy or sell commitment in futures trading is binding, a buyer or seller can eliminate the commitment by taking an opposite position in the same commodity or financial instrument for the same futures month.

Both I and II

Which of these statements regarding a real estate mortgage investment conduit (REMIC) is CORRECT? I. A REMIC is a self-liquidating, flow-through entity that invests exclusively in real estate mortgages or mortgage-backed securities. II. A REMIC terminates when the mortgages that constitute the investment of the REMIC are repaid.

Both I and II

Mike expects a certain stock to significantly rise in value in the near future. He is expecting a bond to mature in two months and does not want to miss out on any appreciation on the stock while waiting for the funds to become available. Which of these option strategies should be recommended to Mike?

Buy a call option

Select the INCORRECT statement regarding futures contracts.

To complete a futures contract, the delivery of the commodity is required.

Select the repayment period that subjects the investor to least amount of interest rate risk.

Tranche A

All of these positions are used to create a zero-cost collar except

purchasing a call option on the stock.

Calculate the intrinsic value of a call option that trades at $4, with an exercise price of $35, and has a current underlying stock price of $33.

$0

Jim is a paper maker who purchases lumber from tree farmers around his state. Which of these hedge positions should Jim consider if he is concerned with rising lumber prices?

A long hedge; Jim should buy lumber futures contracts to protect against rising lumber prices.

LTD Inc., a candy manufacturer, is considering the use of sugar futures contracts because sugar is a major ingredient in the manufacturing process. What type of hedge position should LTD take in the sugar futures market, and why?

A long hedge; the company should purchase sugar futures contracts because it is hedging against higher sugar prices.

Select the CORRECT statement regarding foreign investments.

American depositary receipts (ADRs) pay dividends in U.S. currency.

Which one of these statements regarding tangible or collectible assets is INCORRECT?

Investors in politically stable countries, such as the United States, cannot benefit from owning gold.

Art and oriental rugs may not be sold through which of the following methods?

On the NYSE

Which of these represents the best reason to include real estate as part of an investment portfolio?

Low correlation between real estate and equity investments

If the intrinsic value of a call option is $3, which of these statements is CORRECT?

The option is in-the-money.

Mary owns a put option with an exercise price of $20 per share. The option is currently trading for $0.53 and the underlying stock is currently trading for $19.67 per share in the secondary market. Based on this information, select the INCORRECT statement.

The option is out-of-the-money.

A Japanese bank has decided to use some of its U.S. dollar reserves, resulting from the U.S. merchandise trade deficit with Japan, to invest in U.S. Treasury bonds. The U.S. Treasury securities pay approximately 6% interest, compared to 2% interest paid on Japanese bonds. For the Japanese bank to retain at least this differential in interest income, which of these situations in the foreign exchange market would have to occur?

The yen would have to depreciate or remain steady relative to the dollar during the holding period of the bond.

Tangible assets might be suitable as an investment in the portfolio of an investor looking for

long-term capital gains.