Studying material for chapter 4

1. 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.

2. When managerial self-dealings are excessive and left unchecked, A. they can have serious negative effects on share values. B. they can impede the proper functions of capital markets. C. they can impede such measures as GDP growth. D. all of the above

3. Corporate governance structure A. varies a great deal across countries. B. has become homogenized following the integration of capital markets. C. has become homogenized due to cross-listing of shares of many public corporations. D. none of the above

4. The genius of public corporations stems from their capacity to allow efficient sharing or spreading of risk among many investors, who can buy and sell their ownership shares on liquid stock exchanges and let professional managers run the company on behalf of shareholders. This risk sharing stems from A. the liquidity of the shares. B. the limited liability of shareholders. C. the limited liability of bondholders. D. the limited ability of shareholders.

5. 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

6. The key weakness of the public corporation is A. too many shareholders, which makes it difficult to make corporate decision. B. relatively high corporate income tax rates. C. conflicts of interest between managers and shareholders. D. conflicts of interests between shareholders and bondholders.

7. When company ownership is diffuse, A. a "free rider" problem discourages shareholder activism. B. the large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group, there's almost always someone who will to incur the costs of monitoring management. C. few shareholders have a strong enough incentive to incur the costs of monitoring management. D. both a) and c) are correct

8. 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.

9. In what country do the three largest shareholders control, on average, about 60 percent of the shares of a public company? A. United States B. Canada C. Great Britain D. Italy

10. The public corporation A. is jointly owned by a (potentially) large number of shareholders. B. offers shareholders limited liability. C. separates the ownership and control of a firm's assets. D. all of the above

11. The public corporation has a key weakness: A. the conflicts of interest between bondholders and shareholders. B. the conflicts of interest between managers and bondholders. C. the conflicts of interest between stakeholders and shareholders. D. the conflicts of interest between managers and shareholders.

12. 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

12. In the United States, managers are legally bound by the "duty of loyalty" to A. the board of directors. B. to the shareholders. C. to the bondholders. D. to the government.

13. In the United States, managers are bound by the "duty of loyalty" to serve the shareholders. A. This is an ethical, not legal, obligation. B. This is a legal obligation. C. This is only a moral obligation; there are no penalties.

14. Outside the United States and the United Kingdom, A. concentrated ownership of the company is more the exception than the rule. B. diffused ownership of the company is more the exception than the rule. C. partnerships are more important than corporations. D. none of the above

15. A complete contract between shareholders and managers A. would specify exactly what the manager will do under each of all possible future contingencies. B. would be an expensive contract to write and a very expensive contract to monitor. C. would eliminate any conflicts of interest (and managerial discretion). D. all of the above

16. Managerial entrenchment efforts are clear signs of the agency problem. They include A. anti-takeover defenses. B. poison pills. C. changes in the voting procedures to make it more difficult for the firm to be taken over. D. all of the above

17. In high-growth industries where companies' internally generated funds fall short of profitable investment opportunities, A. managers are less likely to waste funds in unprofitable projects. B. managers are more likely to waste funds in unprofitable projects.

18. The agency problem tends A. to be more serious in firms with free cash flows. B. to be more serious in firms with excessive amounts of excess cash. C. to be less serious in firms with few numbers of shareholders. D. all of the above

19. Free cash flow refers to A. a firm's cash reserve in excess of tax obligation. B. a firm's funds in excess of what's needed for undertaking all profitable projects. C. a firm's cash reserve in excess of interest and tax payments. D. a firm's income tax refund that is due to interest payments on borrowing.

20. The investors supply funds to the company but are not involved in the company's daily decision making. As a result, many public companies come to have A. strong shareholders and weak managers. B. strong managers and weak shareholders. C. strong managers and strong shareholders. D. weak managers and weak shareholders.

Studying materials for chapter 5

1. On average, worldwide daily trading of foreign exchange is A. impossible to estimate. B. $15 billion. C. $504 billion. D. $3.21 trillion.

2. The foreign exchange market closes A. Never. B. 4:00 p.m. EST (New York time). C. 4:00 p.m. GMT (London time). D. 4:00 p.m. (Tokyo time).

3. Most foreign exchange transactions are for A. intervention by central banks. B. interbank trades between international banks or nonbank dealers. C. retail trade. D. purchase of hard currencies.

4. The difference between a broker and a dealer is A. dealers sell drugs; brokers sell houses. B. brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to buy and sell from their inventory. C. brokers transact in stocks and bonds; currency is bought and sold through dealers. D. none of the above

5. Most interbank trades are A. speculative or arbitrage transactions. B. simple order processing for the retail client. C. overnight loans from one bank to another. D. brokered by dealers.

6. At the wholesale level A. most trading takes place OTC between individuals on the floor of the exchange. B. most trading takes place over the phone. C. most trading flows over Reuters and EBS platforms. D. most trading flows through specialized "broking" firms.

7. Intervention in the foreign exchange market is the process of A. a central bank requiring the commercial banks of that country to trade at a set price level. B. commercial banks in different countries coordinating efforts in order to stabilize one or more currencies. C. a central bank buying or selling its currency in order to influence its value. D. the government of a country prohibiting transactions in one or more

8. The current exchange rate is 1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys 100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B. A. Bank A's dollar-denominated account at B will fall by $150,000. B. Bank B's dollar-denominated account at A will fall by $150,000. C. Bank A's pound-denominated account at B will fall by 100,000. D. Bank B's pound-denominated account at A will rise by 100,000.

9. The spot market A. involves the almost-immediate purchase or sale of foreign exchange. B. involves the sale of futures, forwards, and options on foreign exchange. C. takes place only on the floor of a physical exchange. D. all of the above.

10. The Bid price A. is the price that the dealer has just paid for something, his historical cost of the most recent trade. B. is the price that a dealer stands ready to pay. C. refers only to auctions like eBay, not over the counter transactions with dealers. D. is the price that a dealer stands ready to sell at.

11. Spot foreign exchange trading A. accounts for about 5 percent of all foreign exchange trading. B. accounts for about 20 percent of all foreign exchange trading. C. accounts for about 33 percent of all foreign exchange trading. 29. A dealer in British pounds who thinks that the pound is about to appreciate A. may want to widen his bid-ask spread by raising his ask price. B. may want to lower his bid price. C. may want to lower his ask price. D. none of the above

12. A dealer in British pounds who thinks that the pound is about to depreciate A. may want to widen his bid-ask spread by raising his ask price. B. may want to lower his bid price and his ask price. C. may want to lower his ask price. D. none of the above.

13. A dealer in pounds who thinks that the exchange rate is about to increase in volatility A. may want to widen his bid-ask spread. B. may want to decrease his bid-ask spread. C. may want to lower his ask price. D. none of the above.

14. Market microstructure refers to A. the basic mechanics of how a marketplace operates. B. the basics of how to make small (micro-sized) currency trades. C. how macroeconomic variables such as GDP and inflation are determined. D. none of the above

15. A recent survey of U.S. foreign exchange traders measured traders' perceptions about how fast news events that cause movements in exchange rates actually change the exchange rate. The survey respondents claim that the bulk of the adjustment to economic announcements regarding unemployment, trade deficits, inflation, GDP, and the Federal funds rate takes place within A. ten seconds. B. one minute. C. five minutes. D. one hour.

16. The forward price A. may be higher than the spot price. B. may be the same as the spot price. C. may be less than the spot price. D. all of the above

17. Relative to the spot price the forward price will be A. usually less than the spot price. B. usually more than the spot price. C. usually equal to the spot price. D. usually less than or more than the spot price more often than it is equal to the spot price.

18. For a U.S. trader working in American quotes, if the forward price is higher than the spot price A. the currency is trading at a premium in the forward market. B. the currency is trading at a discount in the forward market. C. then you should buy at the spot, hold on to it and sell at the forwardit's a built-in arbitrage. D. all of the aboveit really depends if you're talking American or European quotes.

19. Intervention in the foreign exchange market is the process of A. a central bank requiring the commercial banks of that country to trade at a set price level. B. commercial banks in different countries coordinating efforts in order to stabilize one or more currencies. C. a central bank buying or selling its currency in order to influence its value. D. the government of a country prohibiting transactions in one or more currencies.

20. The standard size foreign exchange transactions are for A. $10 million U.S. B. $1 million U.S. C. 1 million.

Studying for chapter 6

1. An arbitrage is best defined as A. A legal condition imposed by the CFTC. B. The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. C. The act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits. D. None of the above

2. Interest Rate Parity (IRP) is best defined as A. When a government brings its domestic interest rate in line with other major financial markets. B. When the central bank of a country brings its domestic interest rate in line with its major trading partners. C. An arbitrage condition that must hold when international financial markets are in equilibrium. D. None of the above

3. When Interest Rate Parity (IRP) does not hold A. there is usually a high degree of inflation in at least one country. B. the financial markets are in equilibrium. C. there are opportunities for covered interest arbitrage. D. both b) and c)

4. Covered Interest Arbitrage (CIA) activities will result in A. an unstable international financial markets. B. restoring equilibrium quite quickly. C. a disintermediation. D. no effect on the market.

5. Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/ and the one-year forward exchange rate, is $1.16/. Assume that an arbitrageur can borrow up to $1,000,000. A. This is an example where interest rate parity holds. B. This is an example of an arbitrage opportunity; interest rate parity does NOT hold. C. This is an example of a Purchasing Power Parity violation and an arbitrage opportunity. D. None of the above

6. If IRP fails to hold A. pressure from arbitrageurs should bring exchange rates and interest rates back into line. B. it may fail to hold due to transactions costs. C. it may be due to government-imposed capital controls. D. all of the above

7. Although IRP tends to hold, it may not hold precisely all the time A. due to transactions costs, like the bid ask spread. B. due to asymmetric information. C. due to capital controls imposed by governments. D. both a) and c)

8. If a foreign county experiences a hyperinflation, A. its currency will depreciate against stable currencies. B. its currency may appreciate against stable currencies. C. its currency may be unaffectedit's difficult to say. D. none of the above

9. As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail? A. 1.00 = $1.2379 B. 1.00 = $1.2623 C. 1.00 = $0.9903 D. $1.00 = 1.2623

10. If you could accurately and consistently forecast exchange rates A. this would be a very handy thing as girls prefer guys with skills. B. you could impress your dates. C. you could make a great deal of money. D. all of the above

11. The main approaches to forecasting exchange rates are A. Efficient market, Fundamental, and Technical approaches. B. Efficient market and Technical approaches. C. Efficient market and Fundamental approaches. D. Fundamental and Technical approaches.

12. The benefit to forecasting exchange rates A. are greatest during periods of fixed exchange rates. B. are nonexistent now that the euro and dollar are the biggest game in town. C. accrue to, and are a vital concern for, MNCs formulating international sourcing, production, financing and marketing strategies. D. all of the above

13. The Efficient Markets Hypothesis states A. markets tend to evolve to low transactions costs and speedy execution of orders. B. current asset prices (e.g. exchange rates) fully reflect all the available and relevant information. C. current exchange rates cannot be explained by such fundamental forces as money supplies, inflation rates and so forth. D. none of the above

14. Good, inexpensive, and fairly reliable predictors of future exchange rates include A. today's exchange rate. B. current forward exchange rates (e.g. the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today). C. esoteric fundamental models that take an econometrician to use and no one can explain. D. both a) and b)

15. Which of the following is a true statement? A. While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there is no theoretical reason why exchange rates should follow a pure random walk. B. While researchers found it easy to reject the random walk hypothesis for exchange rates on empirical grounds, there are strong theoretical reasons why exchange rates should follow a pure random walk. C. While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there are compelling theoretical reasons why exchange rates should follow a pure random walk. D. None of the above

16. If the exchange rate follows a random walk A. the future exchange rate is unpredictable. B. the future exchange rate is expected to be the same as the current exchange rate, S_t = E(S_t+1). C. the best predictor of future exchange rates is the forward rate F_t = E(S_t+1|I_t). D. both b) and c)

17. One implication of the random walk hypothesis is A. given the efficiency of foreign exchange markets, it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is not yet reflected in the current exchange rate. B. given the efficiency of foreign exchange markets, it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is already reflected in the current exchange rate. C. given the relative inefficiency of foreign exchange markets, it is difficult to outperform the technical forecasts unless the forecaster has access to private information that is not yet reflected in the current futures exchange rate. D. none of the above

18. The random walk hypothesis suggests that A. the best predictor of the future exchange rate is the current exchange rate. B. the best predictor of the future exchange rate is the current forward rate. C. both a) and b) are consistent with the efficient market hypothesis. D. None of the above

19. With regard to fundamental forecasting versus technical forecasting of exchange rates A. the technicians tend to use "cause and effect" models. B. the fundamentalists tend to believe that "history will repeat itself" is the best model. C. both a) and b) D. none of the above

20. Generating exchange rate forecasts with the fundamental approach involves A. looking at charts of the exchange rate and extrapolating the patterns into the future B. estimation of a structural model C. substituting the estimated values of the independent variables into the estimated structural model to generate the forecast D. both b) and c)