FINA 4324 Exam 1 (hw 1)
Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns sells the main company's output to this company. He would be tempted to set the transfer price A. below market prices. B. above market prices. C. at the market price. D. in accordance with GAAP.
A. below market prices.
Since its inception the euro has brought about revolutionary changes in European finance. For example, A. by redenominating corporate bonds and stocks from several different currencies into one common currency, the euro has precipitated the emergence of continent wide capital markets in Europe that are comparable to U.S. markets in depth and liquidity. B. Swiss bank accounts are all denominated in euro. C. the European banking sector has become much more important as a source of financing for European firms. D. there have actually not been any revolutionary changes.
A. by redenominating corporate bonds and stocks from several different currencies into one common currency, the euro has precipitated the emergence of continent wide capital markets in Europe that are comparable to U.S. markets in depth and liquidity.
If the interest rate rises in the U.S. while other variables remain constant A. capital inflows into the U.S. will increase. B. capital inflows into the U.S. may not materialize. C. capital will flow out of the U.S. D. none of the above
A. capital inflows into the U.S. will increase.
Question 56-57 The entries in the "current account" and the "capital account", combined together, can be outlined (in alphabetic order) as: (i) - direct investment (ii) - factor income (iii) - merchandise (iv) - official transfer (v) - other capital (vi) - portfolio investment (vii) - private transfer (viii) - services 56. Current account includes A. (i), (ii), and (iii) B. (ii), (iii), and (vii) C. (iv), (v), and (vii) D. (i), (v), and (vi) 57. Capital account includes A. (i), (ii), and (iii) B. (ii), (iii), and (vii) C. (iv), (v), and (vii) D. (i), (v), and (vi)
56. B. (ii), (iii), and (vii) 57. D. (i), (v), and (vi)
Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 6 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system? A. 1 German mark = $2 B. 1 German mark = $0.50 C. 1 German mark = $3 D. 1 German mark = $1
A. 1 German mark = $2
The strongest protection for investors is provided by A. English common law countries, such as Canada, the United States, and the U.K. B. French civil law countries, such as Belgium, Italy, and Mexico. C. a weak board of directors. D. socialized firms.
A. English common law countries, such as Canada, the United States, and the U.K.
Put the following in correct date order: A. Jamaica Agreement, Plaza Agreement, Louvre Accord. B. Plaza Agreement, Jamaica Agreement, Louvre Accord. C. Louvre Accord, Jamaica Agreement, Plaza Agreement. D. Jamaica Agreement, Louvre Accord, Plaza Agreement.
A. Jamaica Agreement, Plaza Agreement, Louvre Accord.
The difference between Foreign Direct Investment and Portfolio Investment is that A. Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control. B. Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds. C. Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds. D. All of the above
A. Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.
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. a and b both work D. None of the above
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.
The gold standard still has ardent supporters who believe that it provides A. an effective hedge against price inflation. B. fixed exchange rates between all currencies. C. monetary policy autonomy. D. all of the above
A. an effective hedge against price inflation.
Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of ___ and the loss is___ A. exchange rate risk;55%. B. Exchange rate risk;45%. C. Political risk;55%. D. Political risk;45%.
A. exchange rate risk;55%.
The separation of the company's ownership and control, A. is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused. B. is especially prevalent in such countries as the Italy and Mexico, where corporate ownership is highly concentrated. C. is a rational response to the agency problem. D. none of the above
A. is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused.
While the corporate governance problem is not confined to the United States, A. it can be a much more serious problem in many other parts of the world, where legal protection of shareholders is weak or nonexistent. B. it has reached its high point in the United States. C. the U.S. legal system, with lawsuits used only as a last resort, ensured that any conflicts of interest will soon be a thing of the past. D. none of the above
A. it can be a much more serious problem in many other parts of the world, where legal protection of shareholders is weak or nonexistent.
The factors of production are A. land, labor, capital, and entrepreneurial ability. B. interest, wages and dividends. C. payments and receipts of interest, dividends, and other income on foreign investments that were previously made. D. none of the above
A. land, labor, capital, and entrepreneurial ability.
Corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat A. show that managers might be tempted to pursue their own private interests at the expense of shareholders. B. show that Italian shareholders are better at monitoring managerial behavior than U.S. shareholders. C. show that white-collar criminals hardly ever get punished. D. show that socialism is a better way to go than capitalism.
A. show that managers might be tempted to pursue their own private interests at the expense of shareholders.
Under a purely flexible exchange rate system A. supply and demand set the exchange rates. B. governments can set the exchange rate by buying or selling reserves. C. governments can set exchange rates with fiscal policy. D. answers b and c are correct.
A. supply and demand set the exchange rates.
Under the fixed exchange rate regime A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves. B. the balance on the current and capital accounts will be equal in size, but opposite in sign. C. a current account surplus or deficit must be matched by an official reserves deficit or surplus. D. a capital account surplus or deficit must be matched by an official reserves deficit or surplus.
A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves.
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 is selected and monitored. 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. 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.
Suppose that the British pound is pegged to gold at £6 per ounce, whereas one ounce of gold is worth €12. Under the gold standard, any misalignment of the exchange rate will be automatically corrected by cross border flows of gold. Calculate the possible gains for buying €1,000, if the British pound becomes undervalued and trades for €1.80. (Assume zero shipping costs). (Hint: Gold is first purchased using the devalued British pound from the Bank of England, then shipped to France and sold for €1,000 to the Bank of France). A. £55.56 B. £65.56 C. £75.56 D. £85.56
A. £55.56
The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i) - Bimetallism (ii) - Bretton Woods system (iii) - Classical gold standard (iv) - Flexible exchange rate regime (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. (i), (iii), (v), (ii), and (iv)
The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regime A. BCA + BKA + BRA = 0 B. BCA = -BKA C. BCA + BKA = -BRA D. BRA = -BCA
B. BCA = -BKA
National income, or Gross National Product is given by A. GNP ≡ Y ≡ C + I + G + X + M B. GNP ≡ Y ≡ C + I + G + X - M C. GNP ≡ I ≡ C + Y + G + X - M D. GNP ≡ Y ≡ C + I + X + M - G
B. GNP ≡ Y ≡ C + I + G + X - M
The "J-curve effect" A. happens most of the time, in the short run. B. actually only occurs in about 40 percent of the cases according to a study by Sebastian Edwards. C. is a long-run phenomenon, not a short-run one. D. none of the above.
B. actually only occurs in about 40 percent of the cases according to a study by Sebastian Edwards.
Since the end of the fixed exchange rate system of the Smithsonian agreement A. exchange rates were revalued in the Bretton Woods agreement. B. exchange rates have been allowed to float. C. the United States returned to a gold standard. D. the zone of monetary stability has been limited to the U.S., Canada, and Mexico.
B. exchange rates have been allowed to float.
Advantages of a flexible exchange rates include which of the following? A. National policy autonomy. B. Easier external adjustments. C. The government can use monetary and fiscal policies to pursue whatever economic goals it chooses. D. All of the above
D. All of the above
Currently, international reserve assets are comprised of A. gold, platinum, foreign exchanges, and special drawing rights (SDRs). B. gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF). C. gold, diamonds, foreign exchanges, and special drawing rights (SDRs). D. reserve positions in the International Monetary Fund (IMF), only.
B. gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).
Japan has experienced large trade surpluses. Japanese investors have responded to this by A. liquidating their positions in stocks to buy dollar denominated bonds. B. investing heavily in U.S. and other foreign financial markets. C. lobbying the U.S. government to depreciate its currency. D. lobbying the Japanese government to allow the yen to appreciate.
B. investing heavily in U.S. and other foreign financial markets.
In Germany the corporate board is A. legally charged with representing the interests of shareholders exclusively. B. legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders. C. legally charged as a supervisory board only. D. legally charged as a management board only.
B. legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders.
In countries like France and Germany, A. managers have often made business decisions with regard maximizing market share to the exclusion of other goals. B. managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth. C. managers have often regarded the prosperity and growth of their combines, or families of related firms, as their critical goal. D. managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal.
B. managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.
The advent of the euro marks the first time that sovereign countries have voluntarily given up their A. national borders to foster economic integration. B. monetary independence to foster economic integration. C. fiscal policy independence to foster economic integration. D. national debt to foster economic integration.
B. monetary independence to foster economic integration.
Transactions in currency, bank deposits and so forth A. tend to be insensitive to both changes in relative interest rates and the anticipated change in exchange rate. B. tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate. C. tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change in exchange rate. D. tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change in exchange rate.
B. tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.
Under the pure flexible exchange rate regime A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves. B. the balance on the current and capital accounts will be equal in size, but opposite in sign. C. a current account surplus or deficit must be matched by an official reserves deficit or surplus. D. a capital account surplus or deficit must be matched by an official reserves deficit or surplus.
B. the balance on the current and capital accounts will be equal in size, but opposite in sign.
In many countries with concentrated ownership A. the conflicts of interest between shareholders and managers are worse than in countries with diffuse ownership of firms. B. the conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders. C. the conflicts of interest are greater between managers and shareholders than between large controlling shareholders and small outside shareholders. D. corporate forms of business organization with concentrated ownership are rare.
B. the conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders.
When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally, A. they trade one market imperfection, information asymmetry, for another, exchange rate risk. B. they benefit from an expanded opportunity set. C. they should not bother to read or to understand the prospectus, since its probably written in a foreign language. D. they should invest only in dollars or euros.
B. they benefit from an expanded opportunity set.
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. 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 has an absolute advantage over Country B in the production of food and textiles. D. Country B has an absolute advantage over Country A in the production of food and textiles.
C. Country A has an absolute advantage over Country B in the production of food and textiles.
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. 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.
A country's international transactions can be grouped into the following three main types: A. current account, medium term account, and long term capital account. B. current account, long term capital account, and official reserve account. C. current account, capital account, and official reserve account. D. capital account, official reserve account, trade account.
C. current account, capital account, and official reserve account.
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 above
C. liquidity, adjustments, and confidence.
In a public company with diffused ownership, the board of directors is entrusted with A. monitoring the auditors and safeguarding the interests of shareholders. B. monitoring the shareholders and safeguarding the interests of management. C. monitoring the management and safeguarding the interests of shareholders. D. none of the above
C. monitoring the management and safeguarding the interests of shareholders.
During the period between World War I and World War II, the political reality was characterized by A. halfhearted attempts and failure to restore the gold standard. B. political instabilities and bank failures. C. panicky flights of capital across borders. D. all of the above
C. panicky flights of capital across borders.
Accounting Transparency A. can only be achieved when managers commit to serving on their own audit committee. B. occurs when the accounting department has translucent cubicles for their workers. C. promises to reduce the information asymmetry between corporate insiders and the public. D. none of the above
C. promises to reduce the information asymmetry between corporate insiders and the public.
The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals, A. the metal with a commercial value lower than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). B. the metal with a commercial value higher than the currency value tends to be used as money (Gresham's Law). C. the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). D. none of the above
C. the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law).
Benetton, an Italian clothier, is listed on the New York Stock Exchange. A. This decision provides their shareholders with a higher degree of protection than is available in Italy. B. This decision can be a signal of the company's commitment to shareholder rights. C. This may make investors both in Italy and abroad more willing to provide capital and to increase the value of the pre-existing shares. D. All of the above
D. All of the above
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 above
D. All of the above
Which factors are related to the collapse of the Argentine currency board system and ensuing economic crisis? A. The lack of fiscal discipline on the part of the Argentine government B. Labor market inflexibility C. Contagion from the financial crises in Russia and Brazil D. All of the above
D. All of the above
To avoid currency crisis in the face of fully integrated capital markets, a country can have a A. floating exchange rate. B. fixed exchange rate. C. fixed exchange rate that adjusts. D. a and b can both help to avoid currency crises.
D. a and b can both help to avoid currency crises.
Most governments at least try to make it difficult for people to cross their borders illegaly. This barrier to the free movement of labor is an example of A. information asymmetry. B. excessive transactions costs. C. racial discrimination. D. a market imperfection.
D. a market imperfection.
Advantages of a fixed exchange rates include A. reduction in exchange rate risk for businesses. B. reduction in transactions costs. C. reduction in trading frictions. D. all of the above
D. all of the above
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 above
D. all of the above
Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments. Examples of these innovative instruments include A. currency futures and options, foreign stock index futures and options. B. multicurrency bonds. C. international mutual funds, country funds, exchange traded funds. D. all of the above
D. all of the above
Special Drawing Rights (SDR) are A. an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF. B. a "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of. C. used in addition to gold and foreign exchanges, to make international payments. D. all of the above
D. all of the above
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 above
D. all of the above
The statistical discrepancy in the balance-of-payments accounts A. arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods. B. arise since some transactions (illegal transactions) occur "off the books". C. represents omitted and misreported transactions. D. all of the above
D. all of the above
Under the Bretton Woods system A. there was an explicit set of rules about the conduct of international monetary policies. B. 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. C. the U.S. dollar was the only currency that was fully convertible to gold. D. all of the above
D. all of the above
A MNC may gain from its global presence by A. spreading R&D expenditures and advertising costs over their global sales. B. pooling global purchasing power over suppliers. C. utilizing their technological and managerial know-how globally with minimum additional costs. D. all of the above are potential gains
D. all of the above are potential gains
In the United States A. boards of directors are legally responsible for representing the interests of the shareholders. B. due to the diffused ownership structure of the public company, management often gets to choose board members who are likely to be friendly to management. C. there is a correlation between underperforming firms and boards of directors who are not fully independent. D. all of the above are true, in the United States.
D. all of the above are true, in the United States.
In the reality of corporate governance at the turn of this century, A. boards of directors are often dominated by management-friendly insiders. B. a typical board of directors often has relatively few outside directors who can independently and objectively monitor the management. C. managers of one firm often sit on the boards of other firms, whose managers are on the board of the first firm. Due to the interlocking nature of these boards, there can exist a culture of "I'll overlook your problems if you overlook mine." D. all of the above have been true to a greater or lesser extent in the recent past.
D. all of the above have been true to a greater or lesser extent in the recent past.
The Mexican peso crisis is significant in that A. it is perhaps the first serious international financial crisis touched off by cross-border flight of portfolio capital. B. selling by international portfolio managers had a highly destabilizing, contagious effect on the world financial system. C. it provides a cautionary tale that as the world's financial markets are becoming more integrated, this type of contagious financial crisis is likely to occur more often. D. all of the above.
D. all of the above.
If the United States imports more than it exports, then this means that A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. B. the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus. C. the U.S. dollar would be under pressure to appreciate against other currencies. D. both b and c are correct
D. both b and c are correct
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. both b and c are correct
D. both b and c are correct
When a country must make a net payment to foreigners because of a balance-of-payments deficit, the central bank of the country A. should do nothing. B. should run down its official reserve assets (e.g. gold, foreign exchanges, and SDRs). C. should borrow anew from foreign central banks. D. either b or c will work.
D. either b or c will work.
A firm with concentrated ownership A. may give rise to conflicts of interest between dominant shareholders and small outside shareholders. B. may enjoy more accounting transparency than firms with diffuse ownership structures. C. is a partnership, never a corporation. D. tends to exist overseas but not in the U.S.
D. tends to exist overseas but not in the U.S.
Credit entries in the U.S. balance of payments A. result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets. B. result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets. C. give rise to the demand for dollars. D. give rise to the supply of dollars. E. both a and c
E. both a and c