FIN 362-Exam 3
A ______ trade is an agreement to exchange currency at some time in the future.
forward
The use of _______ exchange agreements can help reduce the short-term exposure to exchange rate risk.
forward
The profitability index is calculated by dividing the PV of the _________ cash flows by the initial investment.
future
British and Irish government securities are called
gilts
Warrants _____.
give the owner the right to buy shares at a fixed price
When NPV is used to evaluate independent projects, projects should be accepted when NPV is _____.
greater than zero
Relative purchasing power parity says that the expected percentage change in an exchange rate is equal to the difference in the ____ rates between the two countries.
inflation
Which of the following refer to a firm with a large portion of its business outside of its parent country?
An international corporation A multinational
Which of the following are features of an option contract?
An option contract gives a right to the owner.
Define an option contract:
An option contract gives the owner the right to buy or sell some asset at a fixed price on or before a given date
Which of these exist if identical securities are listed at two different prices on two different exchanges?
Arbitrage Riskless profits Inefficient markets
What is the impact of arbitrage trade on option prices?
Arbitrage restores prices to equilibrium.
The AAR is calculated by taking the average net income and dividing it by the average _ value.
Blank 1: book
Marketable securities are also called equivalents.
Blank 1: cash
A minimum _ balance is a requirement that imposes a lower limit on the level of cash a firm holds.
Blank 1: compensating
The rate is the rate at which the NPVs of two projects are equal.
Blank 1: crossover
Electronic funds transfers (increase/decrease) the transaction demand for cash
Blank 1: decrease
Electronic funds transfers (increase/decrease) the transaction demand for cash.
Blank 1: decrease
Based on the payback rule, an investment is acceptable if its payback is less than some prespecified number of years.
Blank 1: discounted Blank 2: discounted
An independent project (does/doesn't) rely on the acceptance or rejection of another project.
Blank 1: doesn't
The AAR (does/doesn't) incorporate time value of money.
Blank 1: doesn't
Which of the following are specified in a warrant?
The exercise price for the shares The expiration date The number of shares that can be bought
When compared to the home currency approach, which of the following are true for the foreign currency approach to capital budgeting?
The foreign currency approach computes NPV in both foreign and domestic currencies. The foreign currency approach is computationally easier.
What are the two main determinants of the straight bond value?
The general level of interest rates Default risk
What are the two minimum values for convertible bonds?
The straight bond value The conversion value
Which of the following is true if we consider equity as a call option when the firm is levered?
The total principal and interest on the debt is the exercise price. If the value of the firm is less than the amount owed to the bondholders, the equity holders can walk away from the firm.
Which of the following factors affect the call option value?
The volatility of the underlying asset's price The risk-free rate of return
When the value of the firm is very high, the ______ primarily determines the value of its convertible bonds.
conversion value
A call option is "out of the money" if the ___.
exercise price is greater than the current market price
The cash balance in a firm's bank account that can be spent is called its ______ balance.
a decrease; no change
The internal rate of return is a function of ____.
a project's cash flows
According to the average accounting return rule, a project is acceptable if its average accounting return exceeds:
a target average accounting return
Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project.
required return
The need to hold cash in order to take advantage of favorable changes in interest or currency rates is called the _____ motive.
speculative
An agreement to trade currencies within two business days at today's exchange rate is called a _____ trade.
spot
The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.
suggests accepting
The point at which the NPV profile crosses the vertical axis is the:
sum of the cash flows of the project
The theory that real interest rates are equal across countries is called _________.
the international Fisher effect
The three attributes of NPV are that it:
uses all the cash flows of a project. uses cash flows. discounts the cash flows properly.
Capital Corp is considering a project whose internal rate of return is 14%. If Capital's required return is 14%, the project's NPV is:
zero
What is a call option?
A call option gives the owner the right to buy a stock at a fixed price.
Which of the following is an example of an option to delay?
A firm purchases land today but decides to construct the plant in two years based on future demand for its product
What is a put option?
A put option gives the owner the right to sell the underlying asset at a fixed price.
Net value is a measure of how much value is created or added today by undertaking an investment.
Blank 1: present
An option that involves assets that are not financial assets is called a option.
Blank 1: real
The payback period method allows lower management to make (smaller/larger), everyday financial decisions effectively.
Blank 1: smaller
Which of the following are goals of cash disbursement?
Control payments Minimize payment costs
______ option contracts can be exercised only on the expiration date while ______ option contracts can be exercised anytime up to and including the expiration date.
European; American
Which of the following are correct when describing purchasing power parity? (Select all that apply.)
Exchange rates adjust to keep purchasing power level between currencies. Purchasing power parity is a major factor in the rate of change in exchange rates. Parity is expressed as both absolute and relative.
In order to use option pricing models to value gold mines, we need to determine the exercise price. What would be a reasonably good proxy for the exercise price?
Extraction costs
True or false: Backdating ESOs is illegal.
False
True or false: For multinational firms, it is important to have decentralized departments for managing exchange rate risks so that there is a different team for each type of currency exposure.
False
True or false: In a cash concentration system, only one concentration bank is typically used.
False
True or false: It is not a good strategy to carry temporary cash surpluses because cash does not generate any return.
False
True or false: Most warrants cannot be detached from the bond.
False
True or false: Political risk refers only to problems for U.S. companies caused by foreign governments.
False
True or false: The MIRR function eliminates multiple IRRs and should replace NPV.
False
True or false: The decision to use a bank cash management service depends on a firm's WACC.
False
True or false: There is an active secondary market for commercial paper.
False
Which of the following is not an additional consideration in regards to cash management?
For large firms, trading costs of buying/selling securities are high compared to opportunity costs of holding cash.
Bonds that are issued in a single country and are usually denominated in that country's currency are called _____.
Foreign bonds
______ refers to any difference in interest rates between two countries for some period offset by just the change in the relative value of the currencies, thus eliminating any arbitrage possibilities.
IRP
Which of the following are ways for a firm to slow down disbursements?
Increasing processing float Increasing mail float
Match the following currencies to their country of origin.
Inda->rupee Japan-> Yen Mexico->peso Canada-> dollar UK-> pound Switzerland->franc
Which of the following are true about commercial paper?
It has no especially active secondary market. Its marketability can be low.
Which of the following is true about commercial paper?
It is unsecured.
How does exercising warrants affect earnings per share (EPS)?
It reduces EPS by increasing the number of shares outstanding.
Why is disbursement float desirable?
It slows down payments
What is the acronym for the interest rate most international banks charge one another for overnight Eurodollar loans?
LIBOR
Which of the following are true about lockboxes?
Lockboxes are maintained by a local bank. Customers mail checks to post office boxes rather than to a firm.
The different types of exchange rate risk include which of the following?
Long-term exposure Short-term exposure Translation exposure
If a project has multiple internal rates of return, which of the following methods should be used?
MIRR NPV
What is the impact of an increase in the discount rate on NPV?
NPV will decrease
Which of the following are features of warrants?
Warrants allow the owner to buy shares directly from the company. Warrants give the owner the right to buy shares.
The number of U.S. dollars required to buy one unit of foreign currency is referred to as ___.
a direct quote
An agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called
a forward trade
Money market securities generally have _____.
a low default risk
One of the weaknesses of the payback period is that the cutoff date is a(n) ______ standard.
arbitrary
Fully diluted earnings per share are calculated by dividing net income by the total number of shares outstanding _____.
assuming all warrants are exercised
While a check the firm wrote is clearing, the ______ could be temporarily invested in marketable securities.
available balance
Funds from a foreign subsidiary that cannot currently be remitted are sometimes said to be ___.
blocked
Convertible bonds are _____.
bonds that can be converted to stock
The cash balance that a firm shows on its books is called the firm's ______ balance.
book
EDI stands for _____.
electronic data interchange
Interest rate parity ___.
eliminates covered interest arbitrage opportunities
Over-the-counter collection reduces float by _____.
eliminating mailing delay using local banks
The point at which the NPV profile crosses the horizontal axis is the:
internal rate of return
If you buy a European call option with an exercise price of $175, you will not exercise the call option if the underlying stock price is ______ than $175 on the expiration date.
less
Many firms use special post office locations called ______ to intercept payments and speed up cash collection.
lockboxes
The IRR rule can lead to bad decisions when cash flows are _____ or projects are mutually exclusive.
not conventional
A conversion ratio is the _____.
number of shares received for each convertible bond
The foreign exchange market is where ____.
one country's currency is traded for another country's currency
In capital budgeting, the net ______ determines the value of a project to the company.
present value
The Blank______ of one currency based on another country's currency is known as the exchange rate.
price
of one currency based on another country's currency is known as the exchange rate.
price
A straightforward model that is useful for illustrating the factors in cash management and current asset management is the _____ model.
BAT
The Interbank Offered Rate is the rate that most international banks charge one another for loans of Eurodollars overnight in the market.
Blank 1: London Blank 2: London
Determining the firm's target cash balance involves a trade-off between the carrying costs and the shortage costs, which are also called the costs.
Blank 1: adjustments or adjustment
Trading costs (fall/rise) as the cash balance grows.
Blank 1: fall
Unlike Eurobonds, bonds are issued in a single country and are usually denominated in that country's currency.
Blank 1: foreign
A(n) (decrease/increase) in the size of the first cash inflow will decrease the payback period, all else held constant.
Blank 1: increase
The profitability index will be bigger than one for a (negative/positive) NPV investment and less than one for a (negative/positive) NPV investment.
Blank 1: positive Blank 2: negative
Based on the average accounting return rule, a project is acceptable if its average accounting return exceeds a average accounting return.
Blank 1: target or goal
The Miller-Orr model assumes that the cash balances fluctuate randomly and that the average change is .
Blank 1: zero, 0, nothing, or nil
To which security is a warrant generally attached?
Bonds
From a firm's perspective, which of the following could be considered a real option when analyzing potential investments?
Delaying a decision until more information is available
Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period?
Discounted payback period
What are some reasons for rewarding employees with options (ESOs)?
ESOs have no immediate upfront costs. ESOs align the interests of employees with that of the shareholders.
What type of option can be exercised only on the expiration date?
European options
______ delay is the time it takes the receiver of a check to process the payment and deposit it in a bank for collection.
Processing
A foreign subsidiary can remit funds to the parent company in which of the following ways?
Royalties Management fees Dividends
In a two-state world, the value of a call option is equal to _____.
S0 - E/(1+Rf)
A call option has an exercise price of $50. There are two potential future scenarios. Scenario 1: 50/50 chance the stock will be worth either $40 or $20; Scenario 2: 50/50 chance the stock will be worth either $60 or $0. Which scenario is more valuable for a call buyer?
Scenario 2 is more valuable because the stock price might exceed the exercise price.
Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks?
Short-run exposure to exchange rate risk
Using the payback period rule will bias toward accepting which type of investment?
Short-term investment
Repricing of employee stock options is controversial because _____.
a lowered stock price is, in essence, a reward for failing if employees know that options will be repriced then incentive effect is lost
The PI rule for an independent project is to ______ the project if the PI is greater than 1.
accept
The basic NPV investment rule is:
accept a project if the NPV is greater than zero. reject a project if its NPV is less than zero. ` if the NPV is equal to zero, acceptance or rejection of the project is a matter of indifference
A project should be __________ if its NPV is greater than zero.
accepted
Payback period tells the time it takes to break even in an ____ sense. Discounted payback period tells the time it takes to break even in an ______ or financial sense.
accounting; economic
FASB 52 requires that assets and liabilities be translated at the current exchange rate and that the gains and losses be recorded ____.
against shareholders' equity
Capital ______ is the decision-making process for accepting and rejecting projects.
budgeting
The use of local financing from the government of the foreign country where the operation is located ___.
can reduce political risk
Marketable securities are sometimes referred to as _____.
cash equivalents
Checks received by the firm create ______ float.
collection
The basic cost of ______ float to the firm is simply the opportunity cost of not being able to use the cash.
collection
EDI helps _____.
companies electronically transfer financial information consumers pay bills with automatic debiting
Cash balances are often held at commercial banks in order to _____.
compensate for banking services
The movement of cash from different banks and different accounts into a main account is called cash Blank______.
concentration
The conversion price depends upon the _____.
conversion ratio face value of bond
Exploiting a disequlibrium between spot rates, forward rates, and differences in interest rates is called _____.
covered interest arbitrage
Over-the-counter collection involves paying by ______ at the point of sale.
credit card check cash
The decision to use a bank cash management service that incorporates lockboxes and concentration banks depends on _____.
customer location the speed of the postal system
Firms may accumulate temporary investments in marketable securities for _____.
dividend payments plant construction programs
Stated concisely, the basic objective in cash management is to collect _____.
early and pay late
Absolute purchasing power parity should hold more closely for items that are ___.
easily transported
The natural consequences of international operations in a world where relative currency values move up and down is called ____.
exchange rate risk
The price of one country's currency expressed in terms of another country's currency is called the:
exchange rate.
If a company finds, after implementation, that a project is more valuable than it expected, the managers have the option to:
expand
The ______ represents the net effect of checks in the process of clearing.
float
When valuing convertible bonds, the "straight bond value" refers to the value of the bonds _____.
if the bonds were not convertible into common stock
The advantages of pooling cash are that it
improves negotiating ability on short-term investments reduces the number of accounts to be tracked
The present value of all cash flows (after the initial investment) is divided by the ______ to calculate the profitability index.
initial investment
The change in value of securities due to changes in interest rates is known as _____ risk.
interest rate
The increased change in value that occurs because longer maturity investments are affected more by interest rate changes than are shorter maturity investments is called _____ risk.
interest rate
The foreign exchange market ___.
is an over-the-counter market
The target cash balance trades off the __________ cost of holding too much cash with the costs of holding too little cash.
opportunity
When a firm holds cash in excess of some necessary minimum, it incurs a(n) ______ cost.
opportunity
When using the simple two-state model to value a call option, suppose that in one of the states the call is "out of the money," and in the other state the call is "in the money." In order to replicate the payoffs to the underlying asset, one must purchase call options and invest the present value of the _____ price in a riskless asset.
out-of-the-money stock
The ____________ method differs from NPV because it evaluates a project by determining the time needed to recoup the initial investment.
payback
The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.
payback
Firms may accumulate temporary investments in marketable securities for _____.
plant construction programs dividend payments
Changes in the value of international investments due to the actions of governments is referred to as ______ risk.
political
When a U.S. company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to ___ exposure to exchange rate risk.
translation
A situation in which taking one investment prevents the taking of another is called a mutually investment decision.
Blank 1: exclusive
Which of the following transactions is equivalent to entering a forward contract for an importing firm?
Borrowing domestically and investing in the foreign currency of interest for the length of the forward contract
According to the international Fisher effect, if real returns are higher in Brazil than in the United States, money would flow out of the U.S. financial markets into Brazilian markets and the result would be that asset prices in ___.
Brazil would rise and their returns would fall
Gilts are securities issued by the ___.
British and Irish governments
Which of the following are types of money market securities?
Certificates of deposit U.S. T-bills
How is the conversion price computed?
Conversion price = Face value of bond/Conversion ratio
How do convertible preferred stock and convertible bonds differ?
Convertible preferred stock has no maturity date, while convertible bonds have a specific maturity date.
Which of the following are ways to increase disbursement float?
Mailing checks from remote post offices Writing checks on geographically distant banks
Which of the following is a good business disbursement practice?
Maintaining no more than the minimum amount of money necessary to pay bills
What are some ways in which a foreign subsidiary can remit cash flows to a parent?
Management fees for central services Dividends Royalties for the use of trade names and patents
Which of the following is not an implication of the BAT and Miller-Orr models?
The greater the order cost, the lower the target cash balance.
Which method employs uncovered interest parity to project future exchange rates?
The home currency approach
What is one of the main determinants of a call option's value?
The market price of the underlying stock
What is the basic cost of the collection float?
The opportunity cost of not being able to use the cash
Which of the following are true about U.S. Treasury bills?
They mature in 30, 90, or 180 days. They are obligations of the U.S. government.
What is the main objective of cash management?
To keep the investment in cash as low as possible
True or false: Based on the discounted payback rule, an investment is acceptable if its discounted payback is less than some prespecified number of years.
True
True or false: Some projects, such as mines, have cash outflows followed by cash inflows, which are then followed by cash outflows, giving the project multiple rates of return.
True
True or false: The Tax Cuts and Jobs Act of 2017 eliminates the tax issue about repatriating overseas profits.
True
How do warrants and options differ in terms of the life of the security?
Warrants have a relatively longer time to maturity.
When will a call option on a stock be classified as an "underwater" call option?
When the market price of stock is far below the exercise price.
Bond ratings by major agencies, such as Standard and Poor's, rate bonds on their ______ risk.
default
One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are:
ignored.
The payback period can lead to incorrect decisions if it is used too literally because it ____.
ignores cash flows after the cutoff date
A higher stock price will generally ______ the value of a call option.
increase
An executive has been awarded 5,000 stock options in his company, KJL. If KJL's stock price becomes more volatile, the value of the options will tend to _____.
increase
A(n) ______ project does not rely on the acceptance or rejection of another project.
independent
The amount of foreign currency required to purchase one U.S. dollar is called the ______ exchange rate.
indirect
The management of exchange rate risk should probably be centralized so that the firm has an understanding of ___.
its overall positions in foreign currency
ESO backdating occurs when companies search the past in order to find a stock price to use as the exercise price that is _____.
low
The IRR rule can lead to bad decisions when _____ or _____.
projects are mutually exclusive cash flows are not conventional
Based on the average return rule, a project is acceptable if its average return exceeds a target average return.
Blank 1: accounting Blank 2: accounting Blank 3: accounting
The IRR can lead to the wrong decision when cash (inflows/outflows) occur before cash (inflows/outflows).
Blank 1: inflows Blank 2: outflows
With nonconventional cash flows, there is a possibility that more than one discount rate will make the NPV of an investment zero. This is called the rates of return problem.
Blank 1: multiple
By ignoring time value, the payback period rule may incorrectly accept projects with a (positive/negative) NPV.
Blank 1: negative
The spreadsheet NPV function actually calculates present value, not present value, as the name suggests.
Blank 1: net
In formulas involving the relationship between spot exchange rates, forward exchange rates, and interest rates, the T-bill rate can be used for the U.S. _ risk-free rate.
Blank 1: nominal
The discounted payback period has which of these weaknesses?
Arbitrary cutoff date Exclusion of some cash flows Loss of simplicity as compared to the payback method
Where is the exercise price of an employee stock option generally set when issued?
At the current market price of the stock
______ delay refers to the time required to clear a check through the banking system.
Availability
A is a bond issued in multiple countries, but denominated in a single currency, typically the issuer's home currency.
Blank 1: Eurobond
A is a bond issued in multiple countries, but denominated in a single currency, typically the issuer's home currency. (Enter one word in the blank.)
Blank 1: Eurobond
In covered interest , you are covered in the event of a change in the exchange rate because you lock in the forward exchange rate today.
Blank 1: arbitrage
The discounted payback is the time it takes to break even in an or financial sense.
Blank 1: economic
A call option contract is considered to be in the money if the ___.
market price is greater than the strike price
Corporations with significant foreign operations are often called ___.
multinationals
The straight bond value of a default-free convertible bond will _____.
not be affected by an increase in the stock price
For a project with conventional cash flows, the NPV is ______ if the required return is less than the IRR, and it is ______ if the required return is greater than the IRR.
positive, negative
The conversion __________ is the difference between the conversion price and the current price of stock divided by the current price of the stock.
premium
Lockboxes enable a firm to get its receipts ______ faster.
processed cleared deposited
If the market value of assets is $50 million and the face value of debt is $75 million, what is the value of equity as a call option?
$0
You own a call option contract with an exercise price of $70 that expires in three weeks. Assume the underlying stock price on the expiration date will be $62. What is the expected value of this contract on the expiration date?
$0
If a firm receives a check for $50,000, its collection float will change by _____.
-$50,000
What are some of the other options that may exist in the modern corporation?
Put bonds The call provision on a bond
_________ PPP explains the exchange rate change over time.
Relative
You are using the two-state model to value a call option. In one of the states, the option is out of the money, and in the other state, the call is in the money. In order to replicate the payoffs to the underlying asset, one must purchase call options and invest the present value of the out-of-the-money stock price in a(n) _____.
riskless asset
If cash levels are too low, a firm will _____.
run out of cash too often
Two of the most important reasons firms have temporary cash surpluses are _____.
seasonal firm activities financing of planned expenditures
The day-to-day fluctuations in exchange rates create _____ exposure.
short-term exchange rate risk
If a firm sets aside some cash to take advantage of an anticipated favorable change in oil prices, the firm has a ________ motive for holding cash:
speculative
In a two-state world, where there are only two possible payoffs on a share of stock at the end of a year, the stock payoffs can be exactly duplicated using a combination of a call option on the stock and _____.
the risk-free asset
The unbiased forward rate condition may not hold if ___.
traders in the forward market are willing to pay a premium to avoid uncertainty
The effect of electronic funds transfers and other high-speed paperless payment mechanisms reduces the ______ demand for cash.
transaction
The IRR is the discount rate that makes the NPV of a project equal to ______.
zero
Currently $1 buys ¥89 on the spot market. The 6-month forward rate is ¥90. According to the unbiased forward rate condition, the expected spot rate for the yen in 6 months is ___.
¥90
The formula for determining the number of call options to buy in order to replicate the stock's payoffs in the simple two-state model is _____.
ΔS/ΔC
Arrange the steps involved in the discounted payback period in order starting with the first step.
1. Discount the cash flows using the discount rate 2. Add the discounted cash flows 3. Accept if the discounted payback period is less than some pre-specified number of years
Which of the following agreements is a spot exchange rate for the Norwegian krone?
6NKr for $1 settled in 2 days
Which of the following are features of a American call option?
The option can generally be exercised at any time until the maturity date. A call contract is executed with another investor through an options exchange.
What are the advantages of the payback period method for management?
The payback period method is easy to use. It allows lower level managers to make small decisions effectively. The payback period method is ideal for short projects.
Which of the following are motives for holding cash?
The precautionary motive The transaction motive The speculative motive
What considerations does borrowing cash introduce?
The probability that borrowing is more expensive than selling marketable securities Borrowing will depend on management's desire to hold low cash balances.
Which of the following are components of total collection time?
Availability delay Mailing time Processing delay
Which of the following is not a component of collection time?
Bad debt collection delay
Which of the following is not a part of the disbursement float?
Bad debt collection time
BAT in the BAT model stands for _____.
Baumol-Allais-Tobin
Why are warrants referred to as equity kickers?
Because they are issued in combination with bonds.
Which of the following are true?
Before a firm writes a check, its float equals zero. When a firm writes a check, its book balance immediately falls.
The Tax Cuts and Jobs Act of 2017 introduced a new flat tax rate of percent which reduced the incentive for companies to leave cash overseas. (Enter a numerical value in the blank.)
Blank 1: 21
budgeting is the decision-making process for accepting and rejecting projects.
Blank 1: Capital
The call option buyer has the right to buy while the put option buyer has the right to sell.
Blank 1: Chicago
To avoid interest rate risk, firms often limit their investment maturities to ______ days.
90
The spreadsheet function for calculating net present value is ____.
=NPV()
You bought an option on Wal-Mart that gives you the right to buy 100 shares at $50 each on or before January 15, 20XX. What type of option did you buy?
A call option
You are holding an option contract on Amazon.com Corporation (AMZN) to sell AMZN stock at $135 on or before January 15, 20XX. What type of option contract gives you the right to sell AMZN stock?
A put option contract
The CEO of JNL Corporation has been recently awarded 10,000 stock options. What are some factors that may influence the value of these options?
Number of months to expiration The exercise price of the stock options The volatility of JNL stock
Why is it more challenging to manage long-term exchange rate risk exposure than to hedge short-term risks?
Organized forward markets do not exist for long-term needs of corporations.
This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively.
Payback method
Which of the following are not forms of other options that may exist in the modern corporation?
Political risk
Firms use lockboxes to accelerate collections. Where are the lockboxes set up?
Post offices
Grand International Corporation (GIC) issued securities that gave the holder the right to buy shares in GIC within the next 3 years at a fixed price of $37. What type of security is this?
A warrant
You are holding two call option contracts. The ABC call has an exercise price of $35 while the DEF call has an exercise price of $45. If the current stock price of ABC is $37 and the current stock price of DEF is $44, which option contract is in the money?
ABC only
Match the international corporate finance terminology below with its correct definition. Instructions
ADR->A security issued in the US that represents shares of a foreign stock Cross-Rate->The implicit exchange rate between two currencies quoted in a third currency Eurobond->A bond issued in multiple countries but denominated in a single currency Eurocurrency->Money deposited in a financial center outside of the country with the involved currency
A security issued in the United States that represents shares of a foreign stock is called a(n) ___.
American Depository Receipt
An option contract gives the owner the right to buy or sell some asset at a fixed price on or before a given date
American options can be exercised at any time while European options can be exercised only on the expiration date.
Why are American options more valuable than European options?
American options can be exercised at any time while European options can be exercised only on the expiration date.
What type of option contract can be exercised at any time up to and including the expiration date?
An American option
How does the timing and the size of cash flows affect the payback method? Assume the project does pay back within the project's lifetime.
An increase in the size of the first cash inflow will decrease the payback period, all else held constant.
What type of risk is rated by bond ratings?
Default risk
What type of risk refers to the probability that interest and principal will not be paid in the promised amounts on the due dates?
Default risk
A bond issued in multiple countries, but denominated in a single currency is called _____.
Eurobond
If U.S. dollars are deposited in banks outside the U.S. banking system, they are referred to as ___.
Eurocurrency
Money deposited in a financial center outside the country whose currency is involved is called ___.
Eurocurrency
What are some strategies for hedging long-term exchange rate risk?
Matching foreign currency inflows and outflows
The ______ model assumes that the cash balances fluctuate randomly and that the average change is zero.
Miller-Orr
How is the conversion value on a convertible bond computed?
Multiply the number of shares of common stock obtained on conversion by the current market price of stock.
Which of the following are advantage(s) of AAR?
Needed information is usually available. Is easy to compute.
Which of the following are conditions necessary for absolute purchasing power parity?
No trade barriers Identical goods No transaction costs
In which of the following scenarios would IRR always recommend the wrong decision?
Starting cash flow: 1000 Ending cash flow: -2000
Which one of these will help align the interests of management with the interests of shareholders?
Stock options awarded to management
The _______ rate is generally used for the U.S. nominal risk-free rate (RUS).
T-bill
What is the largest organized options exchange in the USA?
The Chicago Board Options Exchange
Which of the following issuers is not an example of a short-term tax-exempt seller?
The U.S. Treasury
Which of the following is not a motive for holding cash?
The acquisitive motive
What is the difference between the contractual rights of a call option buyer and the contractual rights of a put option buyer?
The call option buyer has the right to buy while the put option buyer has the right to sell.
What is the implicit exchange rate between two currencies when both are quoted in a third currency?
The cross-rate
How does awarding options to employees align the interests of employees with the interests of shareholders?
The employees and the shareholders share a common goal of maximizing stock prices.
A firm has debt and equity on its balance sheet. The face value of the debt due at maturity is $200 million. If the value of the firm is only $150 million, what will happen if we consider equity as a call option?
The equity holders will walk away.
Conditions that must be present for absolute purchasing power to exist include which of the following?
The goods must be identical. There must be no trade barriers.
Which of the following is true about certificates of deposit (CDs)?
There are active markets in CDs with maturities of 3, 6, 9, and 12 months.
Which of the following are true about short-term tax-exempt securities?
They are less marketable than U.S. Treasury issues. They have more default risk than U.S. Treasury issues.
Which of the following are true with regard to the sale of U.S. Treasury bills?
They are sold by auction. They are sold weekly.
Which of the following are true with regard to the sale of U.S. Treasury bills?
They are sold weekly. They are sold by auction.
How are convertible preferred stock and convertible bonds similar?
They both are issued by the firm. They both allow conversion to common stock.
Certificates of deposits in excess of $100,000 are called ______ CDs.
jumbo
If an international firm borrows money in the foreign country where it has operations it can reduce ___.
long-run exchange rate exposure
Unanticipated changes in relative economic conditions that affect the value of a foreign operation are known as ___.
long-term exposures to exchange rate risk
For both the BAT and Miller-Orr models, all else being equal, the greater the interest rate, the _____.
lower the target cash balance
Which of the following are mutually exclusive investments?
Two different choices for the assembly lines that will make the same product. A restaurant or a gas station on the same piece of land.
Which of the following are types of money market securities?
U.S. T-bills Certificates of deposit
Which of the following are ways for a U.S. corporation to reduce political risk in a foreign country?
Use local financing
How is the value of a convertible bond expressed?
Value = Greater of (straight bond value, conversion value) + Option value
The greater the __________ of the return on the underlying asset, the higher the value of the call option.
Variability
Which one of the following securities generally has a longer time to maturity at the time of issue?
Warrants
Which of the following is true about warrants?
Warrants are rights to buy shares.
How do convertible bonds and bonds with warrants differ?
Warrants can be detached from bonds but the conversion feature cannot be detached from a convertible bond.
You have warrants on Catona Corporation (CC) with an exercise price of $39. When will it be profitable to exercise the warrants?
When the stock price of CC is greater than $39
The value of convertible bonds is significantly influenced by the straight bond value when the value of the firm is very ______ and is significantly influenced by the conversion value when the value of the firm is very ______.
low; high
Both options and warrants are profitable to exercise when the exercise price is ______ than the market price of the underlying asset.
lower
When using the formula for determining the number of call options to buy in order to replicate the stock's payoffs in the simple two-state model is the difference in the possible stock prices divided by the difference in the possible option values. When the stock is certain to finish in the money, then this formula is _____.
always equal to 1
Warrants give the owner the right to ______ shares at a fixed price within a specified period.
buy
If a call option is out of the money at expiration, the owner of the option ___.
can just walk away from the option
The implicit exchange rate between two currencies when both are quoted in a third currency is called the ____.
cross-rate
The risk that the corporation may not be able to repay the principal amount due on debt is known as ______ risk.
default
Relative purchasing power parity tells us that the exchange rate will rise if the U.S. inflation rate is lower than that of a foreign country. That foreign currency will then ______ in value relative to the US dollar.
depreciate
Checks written by a firm generate ______ float.
disbursement
Writing checks on geographically distant bank can increase ______ float.
disbursement
NPV ______ cash flows properly.
discounts
An increase in the time to expiration of the option contract will ______ the value of a call option.
increase
The value of convertible bonds will ______ as the conversion value increases.
increase
The embedded option value in a convertible bond ______ the value of a convertible bond.
increases
The opportunity cost of holding cash balances at banks is the _____.
interest income that could be earned from the next best use of those funds
The London Interbank Offer Rate is the cornerstone in pricing money markets and short-term debt because ___.
interest rates are usually quoted as some spread over this rate
The foreign currency approach to capital budgeting analysis _____.
produces the same results as the home currency approach is computationally easier than the home currency approach computes the NPV of a project in both the foreign and domestic currency
The concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as ______.
purchasing power parity
An option on an asset that is not a financial asset is known as a(n) _____ option.
real
The international Fisher effect asserts that ______ interest rates are equal across countries.
real
According to the basic IRR rule, we should _____.
reject a project if the IRR is less than the required return
If the IRR is greater than the _______ ________, we should accept the project.
required return