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FIN 640, Midterm Exam: Each question 1 point. Dat...

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FIN 640, Midterm Exam: Each question 1 point. Date March 4, 2011 Due Date March 6, 2011 11:59 PM Please enter the answers in the attached answer sheet and then submit Maximum points 25. No negative marking. Good luck! Question 1: A important reason for firms to issue equity abroad is to: A) benefit from the lesser information about the firm possessed by foreign investors. B) increase the pool of available capital. C) obtain access to qualified directors. D) none of the above. Question 2: Interest rates paid by central banks across countries that are on the euro can be different due to different rates of default. A) True B) False Question 3: If interest rate parity exists, and the domestic nominal (riskless) rate of return increases by 1%, then ceteris paribus (that is other things kept equal) the futures price for the domestic currency should: A) fall by 1% B) rise by 1% C) remain unchanged D) fall by 1% if the country runs a trade deficit, rise by 1% if it runs a trade surplus. Question 4: Which economic theory supports trade between nations: A) Comparative Advantage B) Marginal Utility C) Economies of Scope D) None of the Above Question 5: Which of the following is not true with respect to spot market liquidity? A) The more willing buyers and sellers there are, the more liquid a market is. B) The spot markets for heavily traded currencies such as the Japanese yen are very liquid. C) A currency?s liquidity affects the ease with which an MNC can obtain or sell that currency. D) If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. Question 6: Forward markets for currencies of developing countries are: A) prohibited. B) less liquid than markets for developed countries. C) more liquid than markets for developed countries. D) only available for use by government agencies. Question 7: If one nation experiences higher growth then ceteris paribus (other things equal) it current account balance should increase. A) True B) False Question 8: If one nation experiences higher growth leading to greater consumption of foreign goods, then ceteris paribus (other things equal) its currency should appreciate. A) True B) False Question 9: The spot rate for the Japanese Yen is currently Y120 to $1. ABC Bank holds Japanese government bonds. It expects that the Japanese Yen will depreciate against the US by an amount greater than given by IRP. It should: A) do nothing. B) enter into a forward contract where it will sell Yens for dollars. C) enter into a forward contract where it will sell dollars for Yens. D) enter into a swap where it will swap its Japanese government bonds for Japanese corporate bonds. Question 10: Suppose you have the following exchange rates (C$ is short for Canadian dollars): $1 equals C$ 0.95 C$ 1 equals Euro 0.7 $1 equals Euro 0.65 Then if you have dollars for triangular arbitrage you will: A) convert dollars to C$, then C$ to Euros, and Euros back to dollars. B) convert dollars to C$, then C$ to Euros, then Euros back to C$, and C$ back to dollars. C) convert dollars to C$, then C$ back to dollars. D) convert dollars to Euros, then Euros to C$, and C$ back to dollars. Information for questions 11 to 13: ABC Bank expects the C$ will appreciate against the dollar from $1.20 to $1.25 over the next 6 months. The annualized rates (that is the 6-month rate multiplied by 2) for ABC are: Lending Borrowing Dollars 4% 5% C$ 3% 4% ABC has the ability to borrow up to $100 M, or C$ 80 M. It can lend as much as it wishes. Question 11: ABC should borrow: A) $100 M B) C$80 M C) $50 M and C$41.66 M D) $30M and C$55 M Question 12: ABC should lend (note the currency it lends at can be different from the currency it borrowed as it can convert at the spot market): A) C$80 M B) $30 M and C$55 M C) C$83.33 M D) $96 M Question 13: The maximum profit ABC can make in the 6 month period (assume it does not have any money other than that provided by the borrowing capacity set in the question): A) $4.167 M B) $7.292 M C) $1.663 M D) $3.292 M Question 14: Suppose Brazilian inflation increased whereas US inflation decreased. Ceteris paribus this would lead to an increased demand for dollars. A) True B) False Question 15: Suppose Brazilian inflation increased whereas US inflation decreased. Ceteris paribus this would lead to an appreciation of the Brazilian Real against the dollar. A) True B) False Question 16: If you expect the Yen to appreciate then you should buy Yen call options. A) True B) False Question 17: Suppose the International Fisher Effect is true. The annual nominal (riskless) rates of return in US and Mexico are 4% and 3% respectively. The annual inflation rates in US and Mexico are 3% and 4.5% respectively. Then over a year we expect that against the peso: A) the dollar will appreciate by about 1% B) the dollar will depreciate by about 1% C) the dollar will appreciate by about 1.5% D) the dollar will depreciate by about 1.5% Question 18: You expect the euro to depreciate substantially. You would speculate by _______ euro call options or _______ euros forward in the forward exchange market. A) selling; selling B) selling; purchasing C) purchasing; purchasing D) purchasing; selling Question 19: The shorter the time to the expiration date for a currency, the _______ will be the premium of a call option, and the _______ will be the premium of a put option, other things equal. A) greater; greater B) greater; lower C) lower; lower D) lower; greater Question 20: A weak dollar is normally expected to cause: A) high unemployment and high inflation in the U.S. B) high unemployment and low inflation in the U.S. C) low unemployment and low inflation in the U.S. D) low unemployment and high inflation in the U.S. Question 21. A US firm has a foreign subsidiary. The risk that items like equity, assets etc. in the firm?s balance sheet may change in value is: A) Translation exposure B) Transaction exposure C) Currency exposure D) None of the above Question 22. A US firm has a foreign subsidiary. The risk to its cash flows from changes in exchange rates is: A) Translation exposure B) Transaction exposure C) Currency exposure D) None of the above Question 23: A call option on Euros has a strike price of $.68. The spot rate is Euro 1 for $.70. This call option is: A) in the money. B) out of the money. C) at the money. D) at a premium. Question 24. Given a home country and a foreign country, purchasing power parity (PPP) suggests that: A) a home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate. B) a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate. C) a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate. D) a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate. Question 25. Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to _______ their imports from New Zealand and New Zealand consumers to _______ their imports from the U.S. According to purchasing power parity (PPP), this will results in a(n) _______ of the New Zealand dollar (NZ$). A) reduce; increase; appreciation B) increase; reduce; appreciation C) reduce; increase; depreciation D) reduce; increase; appreciation

 

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