Fin 420 Test 1 Study Guide
The bid price A) is the price that the dealer has just paid for something, his historical cost of the most recent trade. B) is the price that a dealer stands ready to pay. C) refers only to auctions like eBay, not over-the-counter transactions with dealers. D) is the price that a dealer stands ready to sell at.
B
Foreign direct investment (FDI) occurs A) when an investor acquires a measure of control of a foreign business. B) when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business. C) with sales and purchases of foreign stocks and bonds that do not involve a transfer of control. D) Both A and B.
D
Governance mechanisms that exist to alleviate or remedy the agency problem include: A) independent board of directors & incentive contracts. B) concentrated ownership & Accounting transparency C) shareholder activism & overseas stock listings D) all of the options
D
It is important for society as a whole to solve the agency problem, since the agency problem: A) leads to waste of scarce resources. B) hampers capital market functions. C) retards economic growth. D) all of the options
D
MNCs can use their global presence to: a. take advantage of underpriced labor services available in certain developing countries. b. gain access to special R&D capabilities residing in advanced foreign counties. c. boost profit margins and create shareholder value. d. all of the options
D
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. 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, and 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
The European Monetary System (EMS) has the chief objective(s): 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 options
D
The international monetary system can be defined as the institutional framework within which A) international payments are made. B) movement of capital is accommodated. C) exchange rates among currencies are determined. D) all of the options
D
The key strength(s) of the public corporation is/are: A) their capacity to allow efficient risk sharing among many investors. B) their capacity to raise large amounts of funds at relatively low cost. C) their capacity to consolidate decision-making. D) all of the options
D
Under the Bretton Woods system: A) each country established a par value for its currency in relation to the dollar. B) the U.S. dollar was pegged to gold at $35 per ounce. C) each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary. D) all of the options
D
What major dimension sets apart international finance from domestic finance? a. Foreign exchange and political risks b. Market imperfections c. Expanded opportunity set d. all of the options
D
When company ownership is diffuse: A) a "free rider" problem encourages shareholder activism. B) the large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group, there's almost always someone who will to incur the costs of monitoring management. C) most shareholders will have a strong enough incentive to incur the costs of monitoring management. D) a "free rider" problem discourages shareholder activism and few shareholders have a strong enough incentive to incur the costs of monitoring management.
D
According to the "Trilemma" a country can attain only two of the following three conditions: (1) A fixed exchange rate, (2) free international flows of capital, and (3) an independent monetary policy. This difficulty is also known as: A) the incompatible trinity. B) the Iron Triangle. C) the Tobin tax. D) none of the options
A
Concentrated ownership of a public company: A) can be an effective way to alleviate the agency problem between shareholders and managers. B) is the norm in Great Britain. C) tends to be an ineffective way to alleviate conflicts of interest between groups of shareholders. D) none of the options
A
The emergence of global financial markets is due in no small part to: a. advances in computer and telecommunications technology. b. enforcement of the Soviet system of state ownership of resources of production. c. government regulation and protection of infant industries. d. none of the options
A
Corporate governance can be defined as: A) 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. B) the general framework in which company management selects and monitors the Board of Directors. C) the rules and regulations adopted by boards of directors specifying how to manage companies. D) the government-imposed rules and regulations affecting corporate management.
A
Country: Bid Ask Switzerland Franc 0.7648. .7652 Euro 1.4000 1.4200 (In USD Equivalent form) What is the BID cross-exchange rate for Swiss Francs priced in euro? Hint: Find the price that a currency dealer will pay in euros to buy Swiss francs. A) €0.5386/CHF B) €0.5389/CHF C) €0.5463/CHF D) €0.5466/CHF
A
Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. A) €1.25/£1.00 B) $1.25/£1.00 C) £1.25/€1.00 D) €0.80/£1.00
A
Gresham's Law states that A) bad money drives good money out of circulation. B) good money drives bad money out of circulation. C) if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. D) none of the options.
A
Most interbank trades are A) speculative or arbitrage transactions. B) simple order processing for the retail client. C) overnight loans from one bank to another. D) brokered by dealers.
A
Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is A) €1.00 = $1.25. B) €0.80 = $1.00. C) £1.00 = $1.80. D) none of the options
A
Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment. A) Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360. B) Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce. C) both of the options D) none of the options
A
The "J-curve effect" shows: A) the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation. B) the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation. C) the trade balance's lack of responsiveness to the exchanges rate changes. D) none of the options
A
The SF/$ spot exchange rate is SF1.25/$ and the 180-day forward exchange rate is SF1.30/$. The forward premium (discount) on annualized basis is A) the dollar trading at an 8% premium to the Swiss franc. B) the dollar trading at a 4% premium to the Swiss franc. C) the dollar trading at an 8% discount to the Swiss franc. D) the dollar trading at a 4% discount to the Swiss franc.
A
The current account includes: A) the export and import of goods and services. B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). D) capital transfers and the cross-border acquisition and disposal of nonproduced non¬financial assets such as natural resources and marketing assets
A
The forward market A) involves contracting today for the future purchase or sale of foreign exchange at the spot rate that will prevail at the maturity of the contract. B) involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today. C) involves contracting today for the right but not the obligation for the future purchase or sale of foreign exchange at a price agreed upon today. D) none of the options
A
The main cost of European monetary union is: A) the loss of national monetary and exchange rate policy independence. B) increased exchange rate uncertainty. C) lessened political integration. D) none of the options
A
The spot market A) involves the almost-immediate purchase or sale of foreign exchange. B) involves the sale of futures, forwards, and options on foreign exchange. C) takes place only on the floor of a physical exchange. D) all of the options
A
When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, the financial account, and the reserves account must be zero and are illustrated by the equation: A) BCA+BKA+BFA+BRA=0 B) BCA+BFA=−BKA C) BCA+BKA+BFA=BRA D) BRA = −BCA
A
You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.50, how much money can an astute trader make? A) No arbitrage is possible B) $1,160,000 C) $500,000 D) $250,000
A
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) by having a press conference and promising to be nice to their investors.
B
Free cash flow refers to A) a firm's cash reserve in excess of tax obligation. B) a firm's funds in excess of what's needed for undertaking all profitable projects. C) a firm's cash reserve in excess of interest and tax payments. D) a firm's income tax refund that is due to interest payments on borrowing.
B
The capital account includes: A) the export and import of goods and services. B) capital transfers and acquisitions and disposals of nonpro¬duced, nonfinancial assets between U.S. residents and foreigners. C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). D) goods trade, services, primary income, and secondary income
B
The difference between a broker and a dealer is A) dealers sell drugs; brokers sell houses. B) brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to buy and sell from their inventory. C) brokers transact in stocks and bonds; currency is bought and sold through dealers. D) none of the options.
B
The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 = $1.00. What is the euro-yen cross rate? A) €125 = ¥1.00 B) €1.00 = ¥125 C) €1.00 = ¥0.80 D) none of the options
B
The financial account measures: A) the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets. B) the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets. C) the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products. D) none of the options
B
The goal of shareholder wealth maximization: a. is not appropriate for non-U.S. business firms. b. means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially. c. is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met. d. is in conflict with the privatization process taking place in third-world countries.
B
The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: 1. (i) Bimetallism2. (ii) Bretton Woods system3. (iii) Classical gold standard4. (iv) Flexible exchange rate regime 5. (v) Interwar period The chronological order that they actually occurred is: A) (iii), (i), (iv), (ii), and (v) B) (i), (iii), (v), (ii), and (iv) C) (vi), (i), (iii), (ii), and (v) D) (v), (ii), (i), (iii), and (iv)
B
The key requirements of the Cadbury Code of Best Practice state that: A) the compensation, nominating, and audit committees to be entirely composed of independent directors. B) the positions of CEO and chairman of the board should not reside in the same individual. C) listed companies to have boards of directors with a majority of independents. D) none of the options
B
A "good" (or ideal) international monetary system should provide: A) liquidity, elasticity, and flexibility. B) elasticity, sensitivity, and reliability. C) liquidity, adjustments, and confidence. D) none of the options
C
Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input. Which of the following statements is true? a. Country A is relatively more efficient than Country B in the production of food. b. Country B is relatively more efficient than Country A in the production of textiles. c. Country A is relatively more efficient than Country B in the production of textiles. d. none of the options
C
In 2012, the United States had a current account deficit. The current account deficit implies that the United States A) had a surplus on legal consulting and engineering services. B) produced more output than it consumed. C) consumed more output than it produced. D) had a financial account surplus
C
Intervention in the foreign exchange market is the process of A) a central bank requiring the commercial banks of that country to trade at a set price level. B) commercial banks in different countries coordinating efforts in order to stabilize one or more currencies. C) a central bank buying or selling its currency in order to influence its value. D) the government of a country prohibiting transactions in one or more currencies.
C
Monetary policy for the countries using the euro as a currency is now conducted by: A) the Federal Reserve. B) the Bundesbank. C) European Central Bank. D) none of the options
C
The agency problem refers to the possible conflicts of interest between A) self-interested managers as principals and shareholders of the firm who are the agents. B) altruistic managers as agents and shareholders of the firm who are the principals. C) self-interested managers as agents and shareholders of the firm who are the principals. D) dutiful managers as principals and shareholders of the firm who are the agents.
C
The key weakness of the public corporation is: A) too many shareholders, which makes it difficult to make corporate decisions. B) relatively high corporate income tax rates. C) conflicts of interest between managers and shareholders. D) conflicts of interests between shareholders and bondholders.
C
The objective of corporate governance reform should be what? A) Strengthen the protection of outside investors from expropriation by managers. B) Strengthen the protection of outside investors from expropriation by controlling insiders. C) Strengthen the protection of outside investors from expropriation by managers and controlling insiders. D) none of the options
C
The theory of comparative advantage: a. claims that economic well-being is enhanced if each country's citizens produce only a single product. b. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries. c. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production. d. claims that no country has an absolute advantage over another country in the production of any good or service.
C
Under the pure flexible exchange rate regime, a current account surplus or deficit (assuming the capital account is negligible) must be matched by a financial account deficit or surplus, and vice versa. this is illustrated by the equation: A) BCA+BKA+BFA+BRA=0 B) BCA+BKA+BFA=−BRA C) BCA+BKA=−BFA D) BRA = −BCA
C
A country experiencing a significant balance-of-payments surplus would be likely to: A) expand imports, offering marketing opportunities for domestic enterprises. B) encourage imposing foreign exchange restrictions. C) expand exports, offering international marketing opportunities for domestic enterprises. D) expand imports, offering marketing opportunities for foreign enterprises, and encourage imposing foreign exchange restrictions.
D
A multinational firm can be defined as a firm that: a. invests short-term cash inflows in more than one currency. b. has sales affiliates in several countries. c. is incorporated in more than one country. d. incorporated in one country and has production and sales operations in several other countries.
D
American Terms Bid European Terms Bid Bank Quotations Bid Ask Bid Ask British pounds $ 1.9712 $ 1.9717 P .5072 P .5073 Euros $ 1.4738 $ 1.4742 E .6783 E .6785 Using the table above, what is the ask price of euro in terms of pounds? A) €1.3371/£ B) €1.3378/£ C) £0.7475/€ D) £0.7479/€
D
An example(s) of a political risk is: a. expropriation of assets. b. adverse change in tax rules. c. the opposition party being elected. d. both the expropriation of assets and adverse changes in tax rules are correct.
D
Balance of payments: A) 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. B) provides detailed information concerning the demand and supply of a country's currency. C) can be used to evaluate the performance of a country in international economic competition. D) all of the options
D
Consider the following spot and forward rate quotations for the Swiss franc. S($/SFr) = 0.85 F1 ($/SFr) = 0.86 F2 ($/SFr) = 0.87 F3 ($/SFr) =0.88 Which of the following is true? A) The Swiss franc is definitely going to be worth more dollars in six months. B) The Swiss franc is probably going to be worth less in dollars in six months. C) The Swiss franc is trading at a forward discount. D) The Swiss franc is trading at a forward premium.
D
Deregulation of world financial markets: a. provided a natural environment for financial innovations, like currency futures and options. b. has promoted competition among market participants. c. has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly invest in their financial markets. d. all of the options
D
The major components of the Sarbanes-Oxley Act are: A) accounting regulation: The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients. B) audit committee: The company should appoint independent "financial experts" to its audit committee. C) internal control assessment: Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention. D) executive responsibility: Chief executive and finance officers (CEO and CFO) must sign off on the company's quarterly and annual financial statements. If fraud causes an overstatement of earnings, these officers must return any bonuses. E) all of the options
E