SU 6
You are currently holding a call option on a stock with an exercise price of $100. If the current stock price is $90, your net proceeds by exercising this option will be
$(10)
If a U.S. firm can buy £20,000 for $100,000, the rate of exchange for the pound is
$5
If the U.S. dollar-peso exchange rate is $1 for 9 pesos, a product priced at 45 pesos will cost a U.S. consumer
$5
How much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $60 and the call premium was $3?
$63.00
The demand and supply curves for a product are given by the equations below (P = price; Q = quantity): Demand: P = 16 - 1.2Q Supply: P = 4 + .8Q The equilibrium price and quantity are
$8.80 6
One euro will buy U.S. $1.48, and a British pound will buy U.S. $2.06. What is the cross rate of euros per pound?
1.39 $2.06/x÷$1.48/x = $2.06/x*x/1.48 =1.39
A company considers investing $20 million in a foreign company whose local currency is under pressure. The company suspects that the exchange rate may fluctuate soon. The exchange rate at the time of the investment is 2.57 to $1.00. After the investment, the exchange rate changes to 3.15 to $1.00. What is the change in the value of the company's investment in U.S. dollars?
18.4% decrease.
A U.S. manufacturer has a production operation in Mexico. The product costs 116.50 pesos to produce and ship to Europe, where the product sells for 20 euros. If 0.1099 U.S. dollars are required to buy one Mexican peso, and 0.8928 U.S. dollars are required to buy one euro, what amount of U.S. dollars is the profit on the sale?
5.06
A U.S. company has invested in the U.K. The exchange rate at the time of investment is £2.5 to $1, but after the investment it increases to £2.7 to $1. What is the percentage change in the value of the investment in dollars?
7.4% decrease.
A U.S. company is purchasing inventory components from a company in a foreign country. The price of the company's routine inventory order is 100,000 foreign currency units (FCUs), and the exchange rate at the time of the last order was $1.45 per one FCU. The exchange rate changes to $1.60 per one FCU, and the U.S. company orders half of its normal quantity. What is the invoice difference from the last order?
A decrease of $65,000. 100,000 × $1.45 50,000 × $1.60 145,000 - $80,000
Each of the following financial instruments is a derivative except
A fixed interest, 5-year note payable.
A shift of the demand curve for a country's currency to the right could be caused by which of the following?
A rise in consumer incomes in another country.
If risk is purposely undertaken in the foreign currency market, the investor in foreign currency then becomes
A speculator.
A flowchart of a client's revenue cycle appears below. Symbol A most likely represents
Accounts receivable master file.
The following is a section of a system flowchart for a payroll application: Symbol X could represent
An error report.
A firm must pay an invoice denominated in a foreign currency in 30 days. Which one of the following is an appropriate strategy for mitigating the associated exchange rate risk?
Buy a call option.
A company has a foreign-currency-denominated trade payable, due in 60 days. In order to eliminate the foreign currency exchange-rate risk associated with the payable, the company could
Buy foreign currency forward today.
An American importer of English clothing has contracted to pay an amount fixed in British pounds 3 months from now. If the importer worries that the U.S. dollar may depreciate sharply against the British pound in the interim, it would be well advised to
Buy pounds in the forward exchange market.
An American importer expects to pay a British supplier 500,000 British pounds in 3 months. Which of the following hedges is best for the importer to fix the price in dollars?
Buying British pound call options.
If employee paychecks are distributed by hand to employees, which one of the following departments should be responsible for the safekeeping of unclaimed paychecks?
Cashier department.
The U.S. dollar has a freely floating exchange rate. When the dollar has fallen considerably in relation to other currencies, the
Cheaper dollar helps U.S. exporters of domestically produced goods.
An accountant using the Black-Scholes model to value stock options has input the exercise price of the options, the time to expiration for the options, and an interest rate. Which of the following variables also is required for the model?
Common stock price.
This flowchart depicts the processing of daily cash receipts for Rockmart Manufacturing. Please note that some procedures are not shown in this flowchart. The appropriate description that should be placed in symbol D is
Compare batch total and correct as necessary.
Which of the following factors that occur in country X's economy contribute to domestic currency appreciation?
Decrease Ease of Capital Flow Increase Demand for Securities Increase
When the rate of inflation in country A rises relative to the rates of foreign countries, which of the following will occur?
Demand for Currency A Decrease Foreign Currency Value in Relation to Currency A Increase
Which of the following is both a trade-related and financial factor in currency exchange rate determination?
Demand for and supply of currency.
Which of the following correctly matches the relationship between the trade-related factor and the domestic currency value?
Demand for currency; direct.
The value of the U.S. dollar in relation to other foreign currencies is
Determined by the forces of supply and demand on the foreign exchange markets.
An issuer is preparing to file its annual report prior to adopting a code of ethics for its senior financial officers. What action, if any, must the issuer take to comply with the Sarbanes-Oxley Act of 2002?
Disclose in the annual report the lack of the code of ethics and the reason(s).
Each of the following is a method to evaluate internal controls based on the framework set by the Committee of Sponsoring Organizations (COSO), except
Distinguishing economy risk from industry risk and enterprise risk.
Which of the following is true regarding international trade when a domestic currency depreciates?
Domestic firms are likely to expand operations.
A massive inflation across the entire economy of one of a firm's trading partners has benefited the firm greatly by making its fixed amount of payables denominated in that country's currency much cheaper. This exemplifies exchange rate risk stemming from
Economic exposure.
Platinum Co. has a receivable due in 30 days for 30,000 euros. The treasurer is concerned that the value of the euro relative to the dollar will drop before the payment is received. What should Platinum do to reduce this risk?
Enter into a forward contract to sell 30,000 euros in 30 days.
An exporter enters into a contract to supply goods to a foreign buyer. The contract requires the payment in foreign currency 120 days after delivery. Recently the foreign currency has experienced many fluctuations. The exporter may incur a loss on this contract at the time payment is received due to such fluctuations. Which of the following actions should the exporter take to avoid such loss?
Enter into a forward contract with a bank.
Which one of the following is not a determinant in valuing a call option?
Forward contract price.
Which one of the tools listed below for addressing transaction exposure to currency exchange rate risk is available only to large entities with established banking relationships?
Forward contracts.
An importing partnership has experienced a dramatic surge in its exporting business and is looking for ways to minimize its risks from foreign currency fluctuations. The partnership's imports and exports to European Union countries are at similar levels. Which of the following methods most effectively minimizes risk?
Hold payables and receivables due in the same currency and amount.
If the Brazilian real becomes weaker compared to the U.S. dollar, which of the following descriptions about the Brazilian real are correct?
Import Prices Increase Currency Value Decreases Demand for Real Increases Purchasing Power Decreases
What is the effect on prices of U.S. imports and exports when the dollar depreciates?
Import prices will increase and export prices will decrease.
Currency A's spot rate for currency B is 2.5 (i.e., A = 2.5B). Currency C's spot rate for currency A is 2. Which of the following is a correct statement?
Imports of country B's goods are more affordable than imports of country A's goods.
The appropriate remedy for the dumping of products by a foreign firm in the U.S. market would be to
Impose countervailing duties or tariffs.
If the central bank of a country raises interest rates sharply, the country's currency will likely
Increase in relative value.
The accompanying graph depicts the supply of and demand for U.S. dollars in terms of euros at a moment in time. Currently, the equilibrium exchange rate is $1 to 0.65 €. If inflation of the dollar exceeds that of the euro, the new equilibrium exchange rate would most likely settle at
Indeterminate Price 0.60 €
The initiation of the purchase of materials and supplies would be the responsibility of the
Inventory control department.
If a call option is "out-of-the-money,"
It is not worth exercising because the value of the underlying asset is less than the exercise price.
A currency trader is willing to give 100 Japanese yen today in exchange for one U.S. dollar. After 30 days, 110 Japanese yen are required to buy a dollar. Which of the following is a correct statement?
Japan is expected to lose purchasing power in 30 days.
A U.S.-based company decides to invest capital in an emerging market operation that has a lower expected return rate compared to the expected return for an alternative domestic operation. Which of the following statements correctly supports this decision?
Management expects the U.S. dollar to decline in value relative to the foreign location's currency.
An Indian company is owed €5 million from a German company payable in 30 days. To mitigate the risk of the euro depreciating against the rupee over the next month, the Indian company has taken out a 30-day loan from an Italian bank and converted it to rupees. The payoff amount of the loan on the due date is €5 million. The hedging tool being used by the Indian company is known as a
Money market hedge.
A market with many independent firms, low barriers to entry, and product differentiation is best classified as
Monopolistic competition.
Which of the following is least likely to influence corporate governance?
Number of authorized shares of stock.
The use of derivatives to either hedge or speculate results in
Offsetting risk when hedging and increased risk when speculating.
A forward contract involves a commitment today to purchase a product
On a specific future date at a price determined today.
Which of the following describes the most effective preventive control to ensure proper handling of cash receipt transactions?
One employee issues a prenumbered receipt for all cash collections; another employee reconciles the daily total of prenumbered receipts to the bank deposits.
In which of the following situations should a U.S.-based company consider hedging its transaction because it is in a short position?
One receiving shipments from Japan and owing 800,000,000 yen in 60 days.
Which of the following options is (are) worth exercising? Exercise Price Price of Underlying Asset Put Option A $30 $27 Call Option B $29 $26 Put Option C $25 $25 Call Option D $20 $24
Options A and D.
The Sarbanes-Oxley Act of 2002 established which of the following bodies to regulate the accounting profession?
PCAOB
A supply curve illustrates the relationship between
Price and quantity supplied.
If the value of the U.S. dollar in foreign currency markets changes from $1 = .75 euros to $1 = .70 euros,
Products imported from Europe to the U.S. will become more expensive.
An Australian firm is consulting for a Chinese company. The Chinese company must pay for the project's final report in 30 days using Australian dollars. The most likely hedge for the Chinese company to enter into in the 30-day forward market in response to the transaction exposure inherent in this situation is
Purchase dollars.
A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. However, it is somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible decline in the stock's market price by
Purchasing a put option on that stock.
If the price elasticity of demand for a normal good is estimated to be 1.5, a 10% reduction in its price would cause
Quantity demanded to rise by 15%.
Generally, a corporation's articles of incorporation must include all of the following except the
Quorum requirements.
Which of the following are not directly involved in the revenue cycle?
Receiving department clerk.
A company with significant sales in a particular foreign country has recently been subjected to extreme variations in the exchange rate with that country's currency. These variations are expected to continue. To mitigate the resulting economic exposure, a likely strategy for the company to implement would be to
Reduce sales to that country.
Country A and country B have been trading partners for years. Recently, country B's currency greatly depreciated against country A's currency. Which of the following factors that occur in country A's economy could contribute to currency B's depreciation?
Relative Interest Rate Increase Relative Income Level Decrease Relative Inflation Rate Decrease
All of the following are trade-related factors affecting currency exchange rates except
Relative interest rates.
Two countries have flexible exchange rate systems and an active trading relationship. If incomes <List A> in Country 1, everything else being equal, then the currency of Country 1 will tend to <List B> relative to the currency of Country 2.
Rise Depreciate
A manufacturing firm identified that it would have difficulty sourcing raw materials locally, so it decided to relocate its production facilities. According to COSO, this decision represents which of the following responses to the risk?
Risk reduction.
A company headquartered in Vancouver, British Columbia, is building a pipeline for a company in Russia. The invoice amount is due in 90 days and is denominated at 28 million rubles. The Canadian dollar is trading for 28 rubles currently and 29 rubles 90 days forward. Which of the following strategies will the Canadian firm most likely pursue in the 90-day forward market to hedge the transaction exposure inherent in this situation?
Sell 28,000,000 rubles.
A put is an option that gives its owner the right to do which of the following?
Sell a specific security at fixed conditions of price and time.
A manufacturer located in the Philippines has sold computer components to a Japanese electronics firm. The invoice amount is due in 60 days, and the Japanese firm has sufficient economic clout to require that the invoice be denominated in yen. Which of the following strategies will the Filipino firm most likely pursue to hedge the transaction exposure inherent in this situation?
Sell yen in the 60-day forward market.
An adequate system of internal controls is most likely to detect a fraud perpetrated by a
Single employee.
When the U.S. dollar is expected to rise in value against foreign currencies, a U.S. company with foreign currency denominated receivables and payables should
Speed up collections and slow down payments.
Exchange rates are determined by
Supply and demand in the foreign currency market.
A company has several long-term, floating-rate bonds outstanding. The company's cash flows have stabilized, and the company is considering hedging interest rate risk. Which of the following derivative instruments is recommended for this purpose?
Swap agreement.
A company manufactures goods in Esland for sale to consumers in Woostland. Currently, the economy of Esland is booming and imports are rising rapidly. Woostland is experiencing an economic recession, and its imports are declining. How will the Esland currency, $E, react with respect to the Woostland currency, $W?
The $E will decline with respect to the $W.
Over the past year, Russia's ruble supply has increased. Today's spot rate with respect to the U.S. dollar is $1 = 30 rubles. Which one of the following statements is consistent with these facts?
The Russian ruble has decreased in value.
Which of the following could increase the quantity of Canada's exports to the U.S. market?
The U.S. dollar becomes stronger compared to the Canadian dollar.
The spot rate for one Australian dollar is $0.92685 and the 60-day forward rate is $0.93005. Which one of the following statements is consistent with these facts?
The U.S. dollar is trading at a forward discount with respect to the Australian dollar.
Internal control should follow certain basic principles to achieve its objectives. One of these principles is the segregation of functions. Which one of the following examples does not violate the principle of segregation of functions?
The chief financial officer has the authority to sign checks but gives the signature block to the assistant chief financial officer to run the check-signing machine.
A fall in the demand for a country's currency can be caused by any of the following except:
The country's inflation rate decreases.
If consumers in Japan decide they would like to increase their purchases of consumer products made in the United States, in foreign currency markets there will be a tendency for
The demand for dollars to increase.
A director of an automobile dealership is presented with an offer to purchase a competing dealership. The director presents the opportunity to the board of directors. The entire board rejects the opportunity, because the competitor's pending bankruptcy makes it an unattractive acquisition. Which of the following is true if the director accepts the competitor's offer?
The director acted properly.
If the dollar price of the euro rises, which of the following will occur?
The dollar depreciates against the euro.
What is the effect when a foreign competitor's currency becomes weaker compared to the U.S. dollar?
The foreign company will have an advantage in the U.S. market.
Given a spot exchange rate for the U.S. dollar against the pound sterling of $1.4925 per pound and a 90-day forward rate of $1.4775 per pound,
The forward dollar is at a premium against the pound.
Which of the following is not a principle related to the information, communication, and reporting component of the COSO ERM framework?
The organization identifies risks that disrupt operations of the ERM.
A distinguishing feature of a futures contract is that
The price is marked to market each day.
Which one of the following changes will cause the demand curve for gasoline to shift to the left?
The price of cars increases.
If on the expiration day a put option is "in-the-money,"
The price of the underlying asset is lower than the exercise price.
A company based in West Palm Beach, Florida, is building a resort in Jamaica. The Jamaican property owners must make a progress payment of US $1 million in 30 days. The spot rate for the U.S. dollar is 88 Jamaican dollars (J $), and the 30-day forward rate is J $90. The most likely hedge in response to the transaction exposure inherent in this situation is
The property owners will purchase US $1,000,000 in the 30-day forward market.
All of the directors on an issuer's audit committee are independent. However, none of the directors on the committee is an audit committee financial expert. The issuer disclosed this fact in its most recent annual filing. The issuer has complied with the Sarbanes-Oxley Act of 2002 if it also disclosed
The reason(s) its audit committee lacks an audit committee financial expert.
Which of the following is a true statement about a service auditor's SOC 1 report?
The report should include an opinion.
Which one of the following statements supports the conclusion that the U.S. dollar has gained purchasing power against the Japanese yen?
The yen's spot rate with respect to the dollar has just fallen.
Freely fluctuating exchange rates perform which of the following functions?
They automatically correct a lack of equilibrium in the balance of payments.
A U.S. manufacturer sold a piece of equipment to an engineering firm in New Zealand. The New Zealand firm must pay the invoice in U.S. dollars in 30 days and would like to mitigate the risk that the New Zealand dollar will depreciate against the U.S. dollar in the meantime. The type of exchange rate risk contemplated by the New Zealand firm is known as
Transaction exposure.
A Chinese conglomerate owns a construction subsidiary that is building a port in Mozambique. The firm pays its workers in the Mozambican metical but keeps its books for the project in the South African rand. At the end of the fiscal year, the conglomerate must report consolidated financial statements denominated in the yuan. The exchange rate risk encountered by the conglomerate in the currency conversions leading up to its consolidated financial statements is known as
Translation exposure.
If the U.S. dollar declines in value relative to the currencies of many of the U.S. trading partners, the likely result is that
U.S. exports will tend to increase.