FIN 3380 Exam 3
A convertible bond pays interest annually at a coupon rate of 5 percent on a par value of $1,000. The bond has 10 years maturity remaining and the discount rate on other-wise identical non-convertible debt is 5 percent. The bond is convertible into shares of common stock at a conversion price of $25 per share (i.e., the bond is exchangeable for 40 shares). Today's closing stock price was $31.25. What is the floor value of this bond? A. $800.00 B. $1,000 C. $1,250 D. none of the options
$1,250
A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/£ $2.00/£ $1.80/£ P* £3,000 £2,500 £2,000 P $6,600 $5,000 $3,600 where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset Suppose that you implement your hedge at F1($/£) = $2/£. Your cash flows in state 1, 2, and 3 respectively will be A. $5,100, $5,000, $5,100. B. $5,100, $5,100, $5,100. C. $5,000, $5,000, $5,000. D. none of the options
$5,100, $5,000, $5,100.
Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of 0.75 percent per annum on a three-month rollover basis from Barclays in London. Suppose that three-month LIBOR is currently 5 17⁄32 percent. Further suppose that over the second three-month interval LIBOR falls to 5 1⁄8 percent. How much will Teltrex pay in interest to Barclays over the six-month period for the Eurodollar loan? A. $79,921.875 B. $91,171.88 C. $96,174.39 D. $364,687.52
$91,171.88
A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/£ $2.00/£ $1.80/£ P* £3,000 £2,500 £2,000 P $6,600 $5,000 $3,600 where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset The variance of the exchange rate is A. 0.0200 B. 0.10 C. 0.002 D. none of the options
0.0200
In the bond market, there are brokers and market makers. Which of the following are true? A. Brokers accept buy or sell orders from market makers and then attempt to find a matching party for the other side of the trade; they may also trade for their own account. B. Brokers charge a small commission for their services to the market maker that engaged them. C. Brokers do not deal directly with retail clients. D. all of the options
all of the options
International banks are different from domestic banks in what way(s)? A. International banks can arrange trade financing. B. International banks can arrange for foreign exchange transactions. C. International banks can assist their clients in hedging exchange rate risk. D. all of the options
all of the options
Macroeconomic factors affecting international equity returns include A. exchange rate changes. B. interest rate differentials. C. changes in inflationary expectations. D. all of the options
all of the options
Which of the following steps Merck used for financial hedging describes the process of formulating an implementation strategy regarding the term of the hedge, the strike price of the currency options, and the percentage of income to be covered? A. Exchange forecasting B. Hedging rationale C. Assessing strategic plan impact D. Hedging program
Hedging program
Which of the following steps Merck used for financial hedging describes the process of focusing on the objective of maximizing long-term cash flows and on the potential effect of exchange rate movements on the firm's ability to meet its strategic objectives. A. Exchange forecasting B. Hedging rationale C. Assessing strategic plan impact D. Hedging program
Hedging rationale
The four currencies in which the majority of domestic and international bonds are denominated are A. U.S. dollar, the euro, the Indian rupee, and the Chinese yuan. B. U.S. dollar, the euro, the pound sterling, and the Swiss franc. C. U.S. dollar, the euro, the Swiss franc, and the yen. D. U.S. dollar, the euro, the pound sterling, and the yen.
U.S. dollar, the euro, the pound sterling, and the yen.
When the Mexican peso collapsed in 1994, declining by 37 percent, A. U.S. firms that exported to Mexico and priced in pesos, but not dollars, were adversely affected. B. U.S. firms that exported to Mexico and priced in dollars, but not pesos were adversely affected. C. U.S. firms were unaffected by the peso collapse, since Mexico is such a small market. D. U.S. firms that exported to Mexico and priced in peso were adversely affected, and U.S. firms that exported to Mexico and priced in dollars were adversely affected.
U.S. firms that exported to Mexico and priced in peso were adversely affected, and U.S. firms that exported to Mexico and priced in dollars were adversely affected.
A "primary" stock market is A. a big internationally-important market like the NYSE. B. a market where corporations issue new shares to initial investors. C. where brokers and market makers trade. D. none of the options
a market where corporations issue new shares to initial investors.
The exposure coefficient b=Cov(P,S)Var(S) in the regression P = a + b × S + e is A. a measure of how a change in the exchange rate affects the dollar value of a firm's assets. B. a value of zero if the value of the firm's assets is perfectly correlated with changes in the exchange rate. C. a measure of how a change in the exchange rate affects the dollar value of a firm's assets, and has a value of zero if the value of the firm's assets is perfectly correlated with changes in the exchange rate. D. none of the options
a measure of how a change in the exchange rate affects the dollar value of a firm's assets.
Many lessons should be learned from the credit crunch. A. One lesson is that credit rating agencies need to refine their models for evaluating esoteric credit risk created in MBS and CDOs. B. One lesson is that lenders must be more wary of putting complete faith in credit ratings. C. One lesson is that bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves. D. all of the options
all of the options
Studies examining the influence of industrial structure on foreign equity returns A. conclusively show a connection. B. have been inconclusive. C. show that industrialized economies outperform lesser developed economies. D. none of the options
have been inconclusive.
Many of the small foreign equity markets (e.g., Argentina, Sri Lanka) A. have poor liquidity at present. B. are very liquid stock markets, since the poor people living there are eager to sell their securities. C. have fairly high turnover ratios indicating strong liquidity. D. none of the options
have poor liquidity at present.
The first ADRs began trading ________ as a means of eliminating some of the risks, delays, inconveniences, and expenses of trading the actual shares. A. in 1997 B. in 1987 C. in 2017 D. in 1927
in 1927
Investment in foreign equity markets became common practice in the 1980s as investors became aware of the benefits of A. international portfolio diversification. B. debt forgiveness. C. international portfolio diversification and debt forgiveness. D. none of the options
international portfolio diversification.
Global bond issues were first offered in A. 1889. B. 1989. C. 1999. D. 2007.
1989.
Total market capitalization for exchanges increased nearly _____ percent over 2011 to 2015. A. 10 B. 20 C. 30 D. 40
40
A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/£ $2.00/£ $1.80/£ P* £3,000 £2,500 £2,000 P $6,600 $5,000 $3,600 where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset The "exposure" (i.e. the regression coefficient beta) is Hint: Calculate the expression Cov(P,S)Var(s) A. 7,500 B. 2,500 C. −2,500 D. none of the options
7,500
Domestic bonds account for the largest share of outstanding bonds, equaling approximately what percent of the total? A. 78 percent B. 45 percent C. 25 percent D. 15 percent
78 percent
The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at bank B for $90,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will rise by $90,000. B. Bank B's dollar-denominated account at A will fall by $90,000. C. Bank A's pound-denominated account at B will rise by £45,000. D. Bank B's pound-denominated account at A will rise by £45,000.
Bank A's pound-denominated account at B will rise by £45,000.
What is the objective of managing operating exposure? A. Stabilize accounting results in the face of fluctuating exchange rates. B. Selecting low cost production sites. C. Increase the variability of cash flows in the face of fluctuating exchange rates. D. Both A and C are correct.
Both A and C are correct.
A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/£ $2.00/£ $1.80/£ P* £2,000 £2,500 £3,000 P $4,400 $5,000 $5,400 where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset Which of the following would be an effective hedge? A. Sell £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. none of the options
Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
A U.S. firm holds an asset in Israel and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $0.30/IS $0.20/IS $0.15/IS P* IS2,000 IS5,000 IS3,000 P $600 $1,000 $4,50 where, P* = Israeli shekel (IS) price of the asset held by the U.S. firm P = Dollar price of the same asset Based on the information provided in Mc. Qu 48, which of the following conclusions are correct?
Most of the volatility of the dollar value of the Israeli asset cannot be removed by hedging exchange risk because b2[Var(S)] and Var(e) are 8.22 ($)2 and 59,211 ($)2, respectively.
By far the most important international finance centers are A. Zurich and Moscow. B. Paris, London, and Tokyo. C. New York, London, Tokyo, Paris, and Zurich. D. New York, London, Tokyo, Paris, Zurich, and Frankfurt.
Paris, London, and Tokyo.
A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.20/£ $2.00/£ $1.80/£ P* £3,000 £2,500 £2,000 P $6,600 $5,000 $3,600 where, P* = Pound sterling price of the asset held by the U.S. firm P = Dollar price of the same asset Which of the following would be an effective hedge? A. Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. B. Buy £2,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero. C. Sell £25,000 forward at the 1-year forward rate, F1($/£), that prevails at time zero. D. none of the options
Sell £7,500 forward at the 1-year forward rate, F1($/£), that prevails at time zero.
What is the objective of managing operating exposure? A. Stabilize cash flows in the face of fluctuating exchange rates. B. Selecting low cost production sites. C. Increase the variability of cash flows in the face of fluctuating exchange rates. D. Both A and C are correct.
Stabilize cash flows in the face of fluctuating exchange rates.
Consider a U.S.-based MNC with a wholly-owned French subsidiary. Following a depreciation of the dollar against the euro, which of the following best describes the mechanism of any effect of the depreciation? A. The change in the cash flow in euro due an alteration in the firm's competitive position in the marketplace is in part a function of the elasticity of demand for the firm's product. B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow regardless of the firm's hedging program. C. Both A and B are correct. D. none of the options
The change in the cash flow in euro due an alteration in the firm's competitive position in the marketplace is in part a function of the elasticity of demand for the firm's product.
Suppose a U.S. firm has an asset in Britain whose local currency price is random. For simplicity, suppose there are only three states of the world and each state is equally likely to occur. The future local currency price of this British asset (P*) as well as the future exchange rate (S) will be determined, depending on the realized state of the world. State Probability P* S S × P* 1 1/3 £1,000 $1.40/£ $1,400 2 1/3 £933 $1.50/£ $1,400 3 1/3 £875 $1.60/£ $1,400 Which of the following statements is most correct?
The firm faces no exchange rate risk since the local currency price of the asset and the exchange rate are negatively correlated.
A "registered bond" is one that A. shows the owner's name on the bond. B. the owner's name is recorded by the issuer. C. the owner's name is assigned to a bond serial number recorded by the issuer. D. all of the options
all of the options
A firm may cross-list its share to A. establish a broader investor base for its stock. B. establish name recognition in foreign capital markets, thus paving the way for the firm to source new equity and debt capital from investors in different markets. C. expose the firm's name to a broader investor and consumer groups. D. all of the options
all of the options
A firm's operating exposure is A. defined as the extent to which the firm's operating cash flows would be affected by the random changes in exchange rates. B. determined by the structure of the markets in which the firm sources its inputs, such as labor and materials, and sells its products. C. determined by the firm's ability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing. D. all of the options
all of the options
Advantages of cross-listing include A. providing their shareholders with a higher degree of protection than may be available in the home country. B. a possible signal of the company's commitment to shareholder rights. C. possibly making investors, both at home and abroad, more willing to provide capital and to increase the value of the pre-existing shares. D. all of the options
all of the options
Factors affecting international equity returns are A. macroeconomic variables that influence the overall economy. B. exchange rate changes. C. the industrial structure of the country. D. all of the options
all of the options
Proceeding the Asian crisis, A. domestic price bubbles in East Asia, particularly in real estate, were fostered by capital inflows from bankers from the G-10 countries. B. the liberalization of financial markets coupled with capital inflows from bankers from the G-10 countries contributed to bubbles in financial asset prices. C. the close interrelationships common among commercial firms and financial institutions in Asia resulted in poor investment decision making. D. all of the options
all of the options
The lead manager will sometimes invite co-managers to form a managing group to: A. help negotiate terms with the borrower B. ascertain market conditions C. manage the issuance D. all of the options
all of the options
The role of an underwriter is to A. help negotiate terms with the borrower. B. ascertain market conditions. C. manage the issuance. D. all of the options
all of the options
The secondary stock markets A. are the markets for "pre-owned" or "used" shares of stock. B. provide marketability to shares. C. provide price discovery or share valuation. D. all of the options
all of the options
Which of the following are principles of sound banking behavior? A. Avoid an undue concentration of loans to single activities. B. Control mismatches between assets and liabilities. C. Expand cautiously into unfamiliar activities. D. all of the options
all of the options
Who benefits from debt-for-equity swaps? A. The creditor bank B. The LDC C. The market maker D. all of the options
all of the options
The vast majority of new international bond offerings A. are straight fixed-rate notes. B. are callable and convertible. C. are convertible adjustable rate. D. are adjustable rate, with interest rate caps and collars.
are straight fixed-rate notes.
The exposure coefficient in the regression P = a + b × S + e is given by A. b=Cov(P,S)VAR(S) B. P = a + b × S + e C. b=Cov(P,S)VAR(P) D. none of the options
b=Cov(P,S)VAR(S)
In reference to capital requirements, A. bank capital adequacy refers to the amount of equity capital a bank holds as reserves against impaired loans. B. bank capital adequacy refers to the amount of debt capital a bank holds as reserves against risky assets to reduce the probability of bank failure. C. most bank regulators agree with the doctrine of "less is more." D. none of the options
bank capital adequacy refers to the amount of equity capital a bank holds as reserves against impaired loans.
One enduring truth of banking is that A. bankers always seem willing to lend huge amounts to borrowers with a limited potential to repay. B. credit ratings work, but only in the aggregate. C. when liquidity dries up, bankers are typically able to ride out the storm by buying up other investors debt at pennies on the dollar, holding it until the crisis is over, and then selling at a huge profit. D. none of the options
bankers always seem willing to lend huge amounts to borrowers with a limited potential to repay.
One lesson from the credit crunch is that A. in the aggregate, credit scores tend to understate the probability of default—thereby a pool of subprime mortgages is actually quite a safe investment since not every borrower defaults. B. moral hazard, while an issue in the market for used cars, does not seem to affect the U.S. financial system due to the effective regulatory environment. C. bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves. D. none of the options
bankers seem not to scrutinize credit risk as closely when they serve only as mortgage originators and then pass it on to MBS investors rather than hold the paper themselves.
Eurobonds are usually A. registered bonds. B. bearer bonds. C. floating-rate, callable and convertible. D. denominated in the currency of the country that they are sold in.
bearer bonds.
Companies domiciled in countries with weak investor protection can reduce agency costs between shareholders and management A. by moving to a better county. B. by listing their stocks in countries with strong investor protection. C. by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act. D. having a press conference and promising to be nice to their investors.
by listing their stocks in countries with strong investor protection.
Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate A. can have significant economic consequences for U.S. firms only. B. can have significant economic consequences for Japanese firms only. C. can have significant economic consequences for both U.S. and Japanese firms. D. none of the options
can have significant economic consequences for both U.S. and Japanese firms.
There are two types of equity related bonds: A. convertible bonds and dual currency bonds. B. convertible bonds and kitchen sink bonds. C. convertible bonds and bonds with equity warrants. D. callable bonds and exchangeable bonds.
convertible bonds and bonds with equity warrants.
Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €160,000. 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 €0.6250/$1.00. The importer accepts this price, so his bank will proceed to __________ the importer's account in the amount of __________. A. debit; $256,000 B. credit; €512,100 C. credit; $500,000 D. debit; €100,000
debit; $256,000
"Dragon" bonds are A. dollar-denominated foreign bonds originally sold to U.S. investors. B. dollar-denominated bonds originally sold in Asia with non-Japanese issuers. C. pound sterling-denominated foreign bonds originally sold in the U.K. D. none of the options
dollar-denominated bonds originally sold in Asia with non-Japanese issuers.
"Yankee" bonds are A. dollar-denominated foreign bonds originally sold to U.S. investors. B. yen-denominated foreign bonds originally sold in Japan. C. pound sterling-denominated foreign bonds originally sold in the U.K. D. none of the options
dollar-denominated foreign bonds originally sold to U.S. investors.
"Yankee" stock offerings are A. shares in foreign companies originally sold to U.S. investors. B. dollar-denominated shares in foreign companies originally sold to U.S. investors. C. U.S. stocks held abroad. D. none of the options
dollar-denominated shares in foreign companies originally sold to U.S. investors.
A purely domestic firm that sources and sells only domestically, A. faces exchange rate risk to the extent that it has international competitors in the domestic market. B. faces no exchange rate risk. C. should never hedge since this could actually increase its currency exposure. D. faces no exchange rate risk and should never hedge since this could actually increase its currency exposure.
faces exchange rate risk to the extent that it has international competitors in the domestic market.
A potentially significant factor in slowing or preventing a deterioration of sovereign creditworthiness in times of stress is (are) A. stringent monetary policy. B. flexible monetary policy. C. large credit lines. D. liquid assets.
flexible monetary policy.
Consider a British pound—U.S. dollar dual currency bonds that pay £581.40 at maturity per $1,000 of par value. If at maturity, the exchange rate is $1.80 = £1.00, A. you should insist on getting paid in dollars. B. it is an advantageous situation for investors holding this bond. C. it is a disadvantageous situation for the issuer of the bond. D. investors holding this bond are better off for the exchange rate and the issuer of the bond is worse off for the exchange rate.
investors holding this bond are better off for the exchange rate and the issuer of the bond is worse off for the exchange rate.
A market order A. is an instruction from a customer to a broker to buy or sell at the best price available when the order is received (immediately). B. is an instruction from a customer to a broker to buy or sell in a particular market (e.g., NYSE). C. is always and everywhere "fill-or-kill." D. is always and everywhere "good-till-cancelled."
is an instruction from a customer to a broker to buy or sell at the best price available when the order is received (immediately).
A liquid stock market A. is one in which prices reflect all relevant information quickly. B. is one in which prices reflect all publicly available information quickly. C. is one in which prices reflect price and volume information quickly. D. is one in which investors can buy and sell stocks quickly at close to the current quoted prices.
is one in which investors can buy and sell stocks quickly at close to the current quoted prices.
A domestic bank that becomes a multinational bank to prevent erosion by foreign banks of the traveler's checks, touring, and foreign business market A. is playing the role of the desperate housewife in this relationship. B. is pursuing a wholesale defensive strategy. C. is pursuing a retail defensive strategy. D. none of the options
is pursuing a retail defensive strategy.
The LIBOR rate for euro A. is EURIBOR. B. is a government set rate. C. is the rate at which Interbank deposits of euro are offered by one prime bank to another in the euro zone. D. is the rate at which Interbank deposits of euro are offered by one prime bank to another in the London Eurocurrency market.
is the rate at which Interbank deposits of euro are offered by one prime bank to another in the London Eurocurrency market.
LIBOR A. is the rate at which prime banks in London will offer Eurocurrency in the interbank market. B. is a government set rate, like the discount rate. C. is the rate at which prime banks in London will accept interbank deposits. D. none of the options
is the rate at which prime banks in London will offer Eurocurrency in the interbank market.
The credit rating of an international borrower A. depends on the volatility of the exchange rate. B. depends on the volatility, but not absolute level, of the exchange rate. C. is usually never higher than the rating assigned to the sovereign government of the country in which it resides. D. is unrelated to the rating assigned to the sovereign government of the country in which it resides.
is usually never higher than the rating assigned to the sovereign government of the country in which it resides.
A firm that is committed to keeping manufacturing facilities in only the home country (and not developing multiple production sites in a variety of countries) can A. lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in which the firm's products are sold. B. not mitigate the effects of exchange rate changes. C. lessen the effect of exchange rate changes by pursuing a strategy of selling commodity products without product differentiation. D. pursue a strategy of increasing its products price elasticity of demand.
lessen the effect of exchange rate changes by pursuing a strategy of diversifying the markets in which the firm's products are sold.
A limit order is an order away from the market price that is held in a __________ until it can be executed at the desired price. A. continuous order book B. limit order book C. dealer book D. none of the options
limit order book
The secondary equity markets of the world serve two major purposes. They provide A. marketability and share valuation. B. liquidity and price support. C. price discovery and arbitrage. D. safety and stability.
marketability and share valuation.
So-called subprime mortgages were typically A) mortgages granted to borrowers with less-than-perfect credit. B) backed by the full faith and credit of the U.S. government. C) held to maturity by the originating lender, thereby assuring that default risk was priced into the rate of return. D) none of the options
mortgages granted to borrowers with less-than-perfect credit.
The European Stock Exchange, comparable in volume to the NYSE A. is located in Milan. B. is located in London. C. is located in Frankfurt. D. none of the options
none of the options
A "foreign bond" issue is A. one denominated in a particular currency but sold to investors in national capital markets other than the country that issued the denominating currency. B. one offered by a foreign borrower to investors in a national market and denominated in another nation's currency. C. for example, a German MNC issuing euro-denominated bonds to U.S. investors. D. one offered by a foreign borrower to investors in a national market and denominated in that nation's currency (e.g., a German MNC issuing dollar-denominated bonds to U.S. investors).
one offered by a foreign borrower to investors in a national market and denominated in that nation's currency (e.g., a German MNC issuing dollar-denominated bonds to U.S. investors).
Eurodollars refers to dollar deposits when the depository bank is located A. in Europe. B. in Europe, and the Caribbean. C. outside the United States. D. in the United States.
outside the United States.
The models that the credit rating firms (e.g., Moody's, S&P, and Fitch) used to evaluate the risk of the various tranches of MBS debt and thereby assign a credit rating (e.g. AAA, AA-BB, or unrated) were A. right on target, but only in the aggregate. B. poorly specified. C. superfluous, since the CDOs turned out to be backed by the full faith and credit of the U.S. Treasury. D. super models, and while as a group they were not so good at evaluating credit risk, they made up for it with their good looks and impeccable fashion sense.
poorly specified.
A "bearer bond" is one that A. shows the owner's name on the bond. B. the owner's name is recorded by the issuer. C. possession is evidence of ownership. D. shows the owner's name on the bond, and the owner's name is recorded by the issuer.
possession is evidence of ownership.
Currency risk A. is the same as currency exposure. B. represents random changes in exchange rates. C. measure "what the firm has at risk." D. is the same as currency exposure and represents random changes in exchange rates.
represents random changes in exchange rates.
Euro credits A) are credit cards that work in the euro zone. B) are denominated in currencies that are the same as the home currency of the Euro bank. C) short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations. D) none of the options
short- to medium-term loans of Euro currency extended by Euro banks to corporations, sovereign governments, non prime banks, or international organizations.
Stock in Daimler AG, the famous German automobile manufacturer trades on both the Frankfurt Stock Exchange in Germany and on the New York Stock Exchange. On the Frankfurt bourse, Daimler closed at a price of €54.34 on Wednesday, March 5, 2008. On the same day, Daimler closed in New York at $83.55 per share. To prevent arbitrage trading between the two exchanges, the shares should trade at the same price when adjusted for the exchange rate. The $/€ exchange rate on March 5 was $1.5203/€1.00. Thus, €54.34 × $1.5203/€ = $82.61, while the closing price in New York was $83.55. The difference is easily explainable by the fact that
the New York market closes several hours after the Frankfurt exchange, and thus market prices or exchange rates had changed slightly.
A U.S. firm holds an asset in Great Britain and faces the following scenario: State 1 State 2 State 3 Probability 25% 50% 25% Spot rate $2.50/£ $2.00/£ $1.60/£ P* £1,800 £2,250 £2,812.50 Where P* = Pound sterling price of the asset held by the U.S. firm The CFO decides to hedge his exposure by selling forward the expected value of the pound denominated cash flow at F1($/£) = $2/£. As a result, A. the firm's exposure to the exchange rate is made worse. B. he has a nearly perfect hedge. C. he has a perfect hedge. D. none of the options
the firm's exposure to the exchange rate is made worse.
Generally, the higher the turnover ratio, A. the less liquid the secondary stock market, indicating ease in trading. B. the more liquid the secondary stock market, indicating ease in trading. C. the more liquid the primary stock market, indicating ease in trading. D. the more efficient the stock market is.
the more liquid the secondary stock market, indicating ease in trading.
On the basis of regression equation P = a + b × S + e, we can decompose the variability of the dollar value of the asset, Var(P), into two separate components: Var(P) = b2 × Var(S) + Var(e). The first term in the right-hand side of the equation, b2 × Var(S) represents A. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate. B. the residual part of the dollar value variability that is independent of exchange rate movements. C. the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate, as well as the residual part of the dollar value variability that is independent of exchange rate movements. D. none of the options
the part of the variability of the dollar value of the asset that is related to random changes in the exchange rate.
The sale of new common stock by corporations to initial investors occurs in A. the primary market. B. the secondary market. C. the OTC market. D. the dealer market.
the primary market.
A measure of liquidity for a stock market is the turnover ratio; defined as A. the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market. B. the ratio the size, or market capitalization, of the stock market divided by the value of the stock market transactions over a period of time. C. the ratio of aggregate company sales over a period of time divided by the size, or market capitalization, of the stock market. D. none of the options
the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market.
The sale of previously issued common stock traded between investors occurs in A. the primary market. B. the secondary market. C. the on-the-run market. D. the dealer market.
the secondary market.
Before you can use the hedging strategies such as a forward market hedge, options market hedge, and so on, you should consider running a regression of the form P = a + b × S + e . When reviewing the output, you should initially focus on A. the intercept a. B. the slope coefficient b. C. mean square error, MSE. D. R2.
the slope coefficient b.
Since international banks have the facilities to trade foreign exchange, A. they generally also make a market as a dealer in foreign exchange. B. they generally also make a market as a dealer in foreign exchange derivatives. C. they generally also trade foreign exchange products for their own account. D. none of the options
they generally also trade foreign exchange products for their own account.
OTC stocks are generally A. unlisted stocks. B. listed stocks. C. traded at a discount due to their high risk. D. none of the options
unlisted stocks.
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. whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion. B. the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly. C. whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion. Additionally, the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly. D. none of the options
whenever the pound depreciates against the dollar, the local currency price of this property goes up by the same proportion. Additionally, the firm is not exposed to currency risk even if the pound-dollar exchange rate fluctuates randomly.
"Samurai" bonds are A. dollar-denominated foreign bonds originally sold to U.S. investors. B. yen-denominated foreign bonds originally sold in Japan. C. pound sterling-denominated foreign bonds originally sold in the U.K. D. none of the options
yen-denominated foreign bonds originally sold in Japan.
Find the price of a 30-year zero coupon bond with a €1,000 par value that has a yield to maturity of i€ = 5 percent. A. €231.38 B. €432.20 C. €4,321.94 D. none of the options
€231.38
