Fin 470 – Moore
Exam 1 – 1
Fall 2005
First Examination – Finance 470
Fall 2005 (Moore)
Student Class Time: __________________
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____________________
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Multiple Choice (4 points each): Circle the Best response
1. The primary objective of the multinational corporation is to
a. maximize shareholder wealth
b. maximize world production
c. minimize debt
d. minimize the cost of doing business globally
2. ____________ is defined as the purchase of assets or commodities on one market for
immediate resale on another in order to profit form a price discrepancy.
a. internationalization
b. arbitrage
c. financing
d. total risk
3.
___________ are a recent category of multinationals that seek out and invest in lower
cost production sites overseas.
a. Cost minimizers
b. Market seekers
c. Raw-material seekers
d. High tech firms
4. Which of the following is a failing of the theory of comparative advantage?
a. it ignores the role of uncertainty and economies of scale
b. it assumes that factors of production are immobile
c. it assumes that there are no differentiated products
d. all of the above
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Fin 470 – Moore
Exam 1 – 1
Fall 2005
5. Exchange rates depend on
a. relative inflation rates
b. relative interest rates
c. relative trade deficits
d. a and b
6. When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize
the impact of their foreign exchange market interventions, it is referred to as a(n)
________ operation.
a. floating currency
b. spot rate
c. revaluation
d. open market
7. If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the
euro by
a. 55%
b. 100%
c. 200%
d. 1,000%
8. If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates
against the dollar by
a. 60%
b. 75%
c. 125%
d. 300%
9. If a foreigner purchases a U.S. government security
a. the supply of dollars rises
b. the federal government deficit declines
c. the demand for dollars rises
d. the U.S. money supply rises
10. The current exchange rate system can best be characterized as a
a. free float
b. managed float
c. hybrid system
d. fixed-rate system
11. A weak peso is most likely to cause
a. added employment and inflation in Mexico
b. less unemployment but more inflation in Mexico
c. more unemployment but less inflation in Mexico
d. less unemployment and less inflation in Mexico
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Fin 470 – Moore
Exam 1 – 1
Fall 2005
12.Governments intervene in the foreign exchange markets for all of the following except to
a. earn foreign exchange
b. reduce economic uncertainty
c. improve the nation's export competitiveness
d. reduce inflation
13. In
a.
b.
c.
d.
order to boost the value of the dollar relative to the euro
the ECB (EU) should sell euros for dollars and the Fed should buy dollars with euros
the ECB (EU) should sell euros for dollars and the Fed should buy euros with dollars
the ECB (EU) should sell dollars for euros and the Fed should sell euros for dollars
the ECB (EU) should sell dollars for euros and the Fed should buy dollars with euros
14.Trading on the foreign exchange market is
a. located in a physical headquarters in London
b. takes place within an organized exchange
c. conducted by licensed brokers from the London stock exchange
d. an electronically linked network of banks, brokers, and dealers
15.A ___________ between a bank and a customer calls for a fixed delivery date, at a fixed
exchange rate for a specified amount of one currency against another currency payment.
a. spot quotation
b. currency option
c. currency swap
d. forward contract
16.Suppose the spot direct quotes for the pound sterling and French franc are $1.3981-89
and $.1130-33, respectively. What is the direct quote for the pound in Paris?
a. 12.3398-3796
b. 12.3469-3726
c. .0808-12
d. .0976-87
17.Suppose sterling is quoted at $1.4419-36, and the Swiss franc is quoted at $0.6250-67.
What is the direct quote for the pound in Zurich?
a. 2.3035-70
b. 2.3018- 88
c. 2.3008-98
d. 2.3020-50
18.
Suppose the quote for DM is DM 2.9865-92. Then the percent spread is
a. 2.31%
b. 0.97%
c. 0.62%
d. 0.09%
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Fin 470 – Moore
Exam 1 – 1
Fall 2005
19.
Based on discussion of the Wall Street Journal (in class), which one of the following
currencies was revalued this past summer in terms of no longer being pegged directly
to the US dollar?
a. Brazilian Real
b. Chinese Yuan
c. Australian Dollar
d. Euro
20.
Based on discussion of the Wall Street Journal (in class), what was the expected
immediate impact on the US Dollar resulting from supply shock in petroleum products
that took place with the destruction caused by Hurricane Katrina
a. Strengthening of the dollar due to increased expected core inflation
b. Weakening of the dollar due to increased industrial production of petroleum
c. Strengthening of the dollar due to higher oil and gas prices
d. Weakening of the dollar due to increased uncertainty in the US economy
Problem 1 (show all work) – 10 Points
Assume the 90 day Euro future contract that trades in New York is stated in direct terms
(dollars per Euro) is currently selling for $1.2441 (today’s direct quote for the future price).
Current interest rates set by the Fed and the ECB are 4.319% and 3.301%, respectively.
Using the Continuous compounding model, compute what the currently observed spot price on
the dollar and Euro should be if the model is correct. Show both the direct and indirect
implied spot quotes from the US York perspective.
Recall,
(r(d)−r(f) )·T
F0 = S0 · e
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Fin 470 – Moore
Exam 1 – 1
Fall 2005
Problem 2 (show all work) – 10 Points
The New York Direct Quote on the Australian Dollar is $(US)0.7539-42 and the Sydney,
Australia direct quote on the US dollar is $(AU) 1.3263-68. Determine whether or not an
arbitrage opportunity exists for you (a non-dealer). Provide the computation for both “trips” in
the attempt to capture arbitrage profits. Finally, show (relative to the currency of your choice)
the magnitude of the profits or losses in your attempt to gain arbitrage profits.
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