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FINC 4326 International Finance Exam 1 Student Name: ______________________________ Grade: ____________ Instruction: This is a take-home exam. You must follow the university regulations regarding exams throughout the exam period. Discussion with any people other the instructor is strictly restricted. Good luck! Multiple choice questions: Please select the best choice that answers the following 45 question. For calculation questions, show your procedures. Partial credits may be given if the procedure is correct, but your answer is not. Each question is 3 points. Total: 120 points. (Note: only your best 40 answers will be recorded) 1. Which of the following could reduce agency problems for an MNC? a. stock options as managerial compensation. b. hostile takeover threat. c. investor monitoring. d. all of the above are forms of corporate control that could reduce agency problems for an MNC. 2. Which of the following industries would most likely take advantage of lower costs in some less developed foreign countries? a. assembly line production. b. specialized professional services. c. nuclear missile planning. d. planning for more sophisticated computer technology. 3. Which of the following theories identifies specialization as a reason for international business? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above 4. Which of the following is an example of direct foreign investment? a. exporting to a country. b. establishing licensing arrangements in a country. c. purchasing existing companies in a country. d. investing directly (without brokers) in foreign stocks. 5. A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase 6. An increase in the use of quotas is expected to: a. reduce the country's current account balance, if other governments do not retaliate. b. increase the country's current account balance, if other governments do not retaliate. c. have no impact on the country's current account balance unless other governments retaliate. d. increase the volume of a country's trade with other countries. 7. The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time. a. increased; increased b. increased; decreased c. decreased; decreased d. decreased; increased 8. Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance of trade position (increase its exports or reduce its imports). a. It could attempt to reduce its home currency's value. b. The government could require firms to engage in outsourcing. c. The government could require that its local firms pursue outsourcing. d. All of the above are mentioned. 9. The demand for U.S. exports tends to increase when: a. economic growth in foreign countries decreases. b. the currencies of foreign countries strengthen against the dollar. c. U.S. inflation rises. d. none of the above. 10. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is: a. about 4.99%. b. about 4.88%. c. about 4.65%. d. about 4.43%. 11. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: a. obtain a 90-day forward purchase contract on Canadian dollars. b. obtain a 90-day forward sale contract on Canadian dollars. c. purchase Canadian dollars 90 days from now at the spot rate. d. sell Canadian dollars 90 days from now at the spot rate. 12. 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. 13. The international money market is primarily served by: a. the governments of European countries, which directly intervene in foreign currency markets. b. government agencies such as the International Monetary Fund that enhance development of countries. c. several large banks that accept deposits and provide loans in various currencies. d. small banks that convert foreign currency for tourists and business visitors. 14. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward. a. depreciate; buying b. depreciate; selling c. appreciate; selling d. appreciate; buying 15. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this situation: a. Buy dollars forward b. Sell dollars forward c. Purchase call option d. Purchase put option 16. You observe a quotation of the Japanese yen () of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ /$. a. direct; 142.86 b. indirect; 142.86 c. indirect; 150 d. direct; 150 e. indirect; 0 17. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%. a. depreciated; 5.80 b. depreciated; 4.00 c. appreciated; 5.80 d. appreciated; 4.00 18. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____. a. increase; appreciate b. increase; depreciate c. decrease; depreciate d. decrease; appreciate 19. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Currency Dollars New Zealand dollar (NZ$) Lending Rate 7.10% 6.80% Borrowing Rate 7.50% 7.25% Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)? a. $521,325. b. $500,520. c. $104,262. d. $413,419. e. $208,044. 20. If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most. a. interest rate differentials; interest rate differentials b. inflation and interest rate differentials; interest rate differentials c. income and interest rate differentials; inflation differentials d. interest rate differentials; inflation and income differentials e. inflation and income differentials; interest rate differentials 21. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; increase; upward b. decrease; decrease; upward c. increase; decrease; downward d. decrease; increase; downward e. increase; decrease; upward 22. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value. a. decrease; increase; upward b. decrease; decrease; upward c. increase; decrease; downward d. decrease; increase; downward e. increase; decrease; upward 23. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances? a. purchase Canadian dollars forward. b. purchase Canadian dollar futures contracts. c. purchase Canadian dollar put options. d. purchase Canadian dollar call options. 24. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would: a. convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate. b. convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate. d. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate. 25. Which of the following is true? a. The futures market is primarily used by speculators while the forward market is primarily used for hedging. b. The futures market is primarily used for hedging while the forward market is primarily used for speculating. c. The futures market and the forward market are primarily used for speculating. d. The futures market and the forward market are primarily used for hedging. 26. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by: a. selling futures in francs. b. buying futures in francs. c. buying franc put options. d. buying franc call options. 27. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.63; $1.63 b. $1.63; $1.60 c. $1.63; $1.57 d. $1.57; $1.63 e. none of the above 28. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is: a. $.08. b. $.03. c. $.05. d. $.08. e. none of the above 29. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount. 30. Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? a. no; $0.01. b. yes; $0.01. c. yes; $0.01. d. yes; $0.03. 31. If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. a. selling; buying; buying b. buying; selling; buying c. selling; buying; selling d. buying; buying; buying 32. If you have a position where you might be obligated to sell pounds, you are: a. a call writer. b. a call buyer. c. a put writer. d. a put buyer. 33. Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that exercise price of call and put options are the same. The most appropriate method for speculation is ____and it may be achieved by ____. a. straddle; purchase put option and purchase call option. b. strangle; purchase put option and sell call option. c. strangle; sell put option and sell put option. d. straddle; sell put option and buy call option. 34. To force the value of the pound to appreciate against the dollar, the Federal Reserve should: a. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. b. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market. c. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene. d. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market. 35. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z. a. more; more b. less; less c. more; less d. less; more 36. When using indirect intervention, a central bank is likely to focus on: a. inflation. b. interest rates. c. income levels. d. expectations of future exchange rates. 37. From a financial management perspective, which of the following is true regarding the introduction of the Euro? a. U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros. b. The euro is pegged to all other European currencies. c. Transactions costs decline for MNCs that conduct transactions within Europe. d. The euro replaced the British pound. 38. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros. a. inward shift in demand for; outward shift in supply of b. inward shift in demand for; inward shift in supply of c. outward shift in supply of; outward shift in demand for d. outward shift in supply of; inward shift in demand for 39. If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention. a. purchase euro put options b. purchase euro futures contracts c. purchase yen call options d. sell U.S. Treasury bonds 40. Among the reasons for government intervention are: a. to smooth exchange rate movement. b. to establish implicit exchange rate boundaries. c. to respond to temporary disturbances. d. all of the above 41. Due to ____, market forces should realign the spot rate of a currency among banks. a. forward realignment arbitrage b. triangular arbitrage c. covered interest arbitrage d. locational arbitrage 42. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate: a. U.S. investors could possibly benefit from covered interest arbitrage. b. British investors could possibly benefit from covered interest arbitrage. c. neither U.S. nor British investors could benefit from covered interest arbitrage. d. A and B 43. Assume the following information: You have $1,000,000 to invest: Current spot rate of pound 90-day forward rate of pound 3-month deposit rate in U.S. 3-month deposit rate in Great Britain = = = = $1.30 $1.28 3% 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,024,000. b. $1,030,000. c. $1,040,000. d. $1,034,000. e. none of the above 44. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? a. $11,764. b. $11,964. c. $36,585. d. $24,390. e. $18,219. 45. Assume the following information: Current spot rate of Australian dollar Forecasted spot rate of Australian dollar 1 year from now 1-year forward rate of Australian dollar Annual interest rate for Australian dollar deposit Annual interest rate in the U.S. = = = = = $.64 $.59 $.62 9% 6% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 6.00 b. about 9.00 c. about 7.33 d. about 8.14 e. about 5.59