Complete Quiz Questions with Answers
Multiple Choice Questions (1–20)
1. 1. According to the capital asset pricing model
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A. only the systematic component of risk affects the required return (✔)
B. foreign investments whose returns are uncorrelated with the market's return should
have a higher required return than comparable domestic investments
C. total risk of the investment is most relevant for small to medium-sized firms
D. diversification is secondary to risk levels of the investment
2. 2. When the home currency price of a certain fixed quantity of the foreign currency is
quoted, it is referred to as the
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A. indirect quotation
B. direct quotation (✔)
C. European quotation
D. American quotation
3. 3. Suppose the spot direct quotes for the pound sterling and euro are $1.3981-89 and
$.1230-33, respectively. What is the direct quote for the pound in Paris?
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A. €11.339-73/£ (✔)
B. €.8793-.8819/£
C. £.0808 12/€
D. £.0976 87/€
4. 4. Suppose the following direct quotes are received for spot and one month French
francs in New York: .1260-68 4-6. Then the outright 30 day forward quote for the
French is:
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A. .1256-62
B. .1264-74 (✔)
C. .1266-72
D. .1254-64
5. 5. The basic difference(s) between forward and futures contracts is that
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A. forward contracts are individually tailored while futures contracts are standardized
B. forward contracts are negotiated with banks whereas futures contracts are bought
and sold on an organized exchange
C. forward contracts have no daily limits on price fluctuations whereas futures contracts
have a daily limit on price fluctuations
D. all of the above (✔)
6. 6. Suppose you are holding a long position in a euro futures contract that matures in 76
days. The agreed upon price is $1.15 for 125,000 euro. At the close of trading today, the
futures price has risen to $1.155. Under marking to market, you now
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A. hold a futures contract that has risen in value by $1,250
B. hold a futures contract that has fallen in value by $625
C. will receive $625 and a new futures contract priced at $1.155 (✔)
D. must pay over $1,250 to the seller of the futures contract
7. 7. If the world capital market were fully integrated, the incentive to swap would be ____
because ____ arbitrage opportunities would exist.
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A. increased; more
B. reduced; fewer (✔)
C. increased; fewer
D. reduced; more
8. 8. What is the maximum possible cost savings to Axil from engaging in a currency swap
with Bevel?
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A. 1%
B. 75%
C. 2% (✔)
D. 1.25%
9. 9. What is the maximum possible cost savings to Bevel from engaging in a currency
swap with Axil?
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A. 1%
B. 75%
C. 2% (✔)
D. 1.25%
10. 10. Suppose a bank charges 0.8% to arrange the swap and Axil and Bevel split the
resulting cost savings. Then Axil will pay ___ for its floating rate money and Bevel will
pay ___for its fixed rate money.
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A. LIBOR - 0.7%; 7.5%
B. LIBOR + 0.4%; 7.15% (✔)
C. LIBOR; 7.45%
D. LIBOR + 0.5%; 6.75%
11. 11. On March 1, 1998, Bechtel submits a franc denominated bid on a project in France.
Bechtel will not learn until June 1 whether it has won the contract. What is the most
appropriate way for Bechtel to manage the exchange risk on this contract?
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A. sell the franc amount of the bid forward for U.S. dollars
B. buy French francs forward in the amount of the contract
C. buy a put option on francs in the amount of the franc exposure (✔)
D. sell a call option on francs in the amount of franc exposure
12. 12. Suppose that the spot rate and the 90 day forward rate on the pound sterling are
$1.35 and $1.30, respectively. Your company, wishing to avoid foreign exchange risk,
sells £500,000 forward 90 days. Assuming that the spot rate remains the same 90 days
hence, your company would
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A. receive £500,000 90 days hence
B. receive more than £500,000 in 90 days
C. have been better off not to have sold pounds forward (✔)
D. receive nothing
13. 13. Which of the following products is most likely to benefit from depreciation of the
U.S. dollar?
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A. high end signal processor from Hewlett Packard that faces minimal competition
B. Chevrolet automobile with a highly price elastic demand (✔)
C. Mercedes Benz auto facing price inelastic demand
D. low end Japanese machine tools
14. 14. Nissan, the Japanese car manufacturer, exports a substantial fraction of its output to
the United States. What financial measures would be suitable for Nissan to take to
reduce its currency risk?
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A. borrow only yen to finance its operations
B. borrow dollars to finance part of its operations (✔)
C. sell yen forward in the amount of its annual shipments to the U.S.
D. buy yen forward in the amount of its annual shipments to the U.S.
15. 15. The cost of capital for a General Foods Jell-O (US firm) plant in Venezuela is likely to
be
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A. lower than for a comparable plant in the U.S., because there is less significant risks
associated with operating in Venezuela
B. higher than for a comparable U.S. plant because of the added risks associated with the
unstable economic and political environment (✔)
C. about the same because the systematic risk is likely to be very similar
D. greatly impacted by the change in political parties in neighboring Colombia
16. 16. Suppose that a foreign project has a beta of 1.12, the risk free return is 9.3% and the
required return on the market is estimated at 18%. Then the cost of capital for the
project is
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A. 17.21%
B. 21.37%
C. 19.04% (✔)
D. 20.03%
17. 17. The rate(s) at which investors capitalize the returns on foreign projects depends on
all of the following EXCEPT
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A. whether shareholders are internationally diversified
B. the relative costs of international diversification for the MNC and for individual
investors
C. the extent to which domestic systematic risk is unsystematic from a global standpoint
D. the correlation between equity returns on different markets (✔)
18. 18. Suppose that a foreign project has a beta of 0.85, the risk free return is 12%, and the
required return on the market is estimated at 19%. Then the cost of capital for the
project is
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A. 16.15%
B. 17.95% (✔)
C. 19%
D. 21.23%
19. 19. Suppose the euro is expected to appreciate by 4% annually against the dollar. If a
company can borrow dollars at 9.3%, what is the highest interest rate it should be
willing to pay to borrow euro?
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A. 5.1% (✔)
B. 4.3%
C. 7.2%
D. 8.9%
20. 20. The choice of whether to sell abroad by exporting, licensing foreign producers, or
manufacturing abroad depends on all of the following EXCEPT
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A. the nature of government regulations
B. whether the firm's competitive advantage can be transferred abroad in the products
it sells or can be written down and clearly transmitted
C. whether customers are looking for some signals as to the firm's commitment to the
local market
D. transfer pricing policies of the parent MNC (✔)
Open-Ended Questions with Full Answers
A Polish corporate treasurer expects to receive a €11 million payment in 90 days from a
German customer. The Polish currency is the Zloty (Z). The current spot rate is €0.29870:Z1
and the 90-day forward rate is €0.29631:Z1. In addition, the annualized three-month euro
and zloty interest rates are 9.8% and 12.3%, respectively
21. 21. What is the hedged value of the euro receivable using the forward contract?
Answer: By selling the euro receivable forward, the Polish treasurer can lock in revenue of
Z37,123,283.05. This is calculated as 11,000,000 euros / 0.29631 (forward rate) =
Z37,123,283.05.
22. 22. How could the Polish treasurer use a money market hedge to lock in the zloty value
of the euro receivable? What is the hedged value of the euro receivable? What is the
effective forward rate?
Answer: The treasurer would borrow the present value of the €11 million receivable, which
equals €10,736,945 (discounted at 2.45% quarterly interest, i.e., 11,000,000 / 1.0245).
Then convert these euros to zloty at the spot rate of €0.29870:Z1, resulting in Z35,945,580.
This amount is invested at the quarterly interest rate of 3.075% (12.3%/4), yielding
Z37,050,907 in 90 days. The effective forward rate using the money market hedge is
11,000,000 / 37,050,907 = 0.29689.
23. 23. Given your answers in parts a and b, is there an arbitrage opportunity? How could
the treasurer take advantage of it?
Answer: Yes, there is a potential arbitrage opportunity, assuming negligible transaction
costs. The arbitrage strategy would involve borrowing zloty, converting to euros at the spot
rate, investing the euros, and simultaneously selling them forward. However, since the
forward market hedge gives Z72,376 more than the money market hedge, this small gain
may be offset by bid-ask spreads or transaction fees, potentially eliminating any arbitrage
profit.
24. 24. At what 90-day forward rate would interest rate parity hold?
Answer: Interest rate parity holds when the return on zloty investments equals the return
on euro investments, hedged with the forward rate. The zloty return is 1 + 0.123/4 =
1.03075. The euro return is: (1.0246 / f90) * 0.29870. Solving for f90, we get: f90 = (1.0246
/ 1.03075) * 0.29870 = €0.29692.
US-based firm Liz Claiborne contracts out much of its production to foreign manufacturers.
As such, the company faces currency risk.
25. 25. What currency risk does Liz Claiborne face?
Answer: If foreign manufacturers invoice in their local currencies, Liz Claiborne faces
uncertainty about the dollar cost of its current and future orders. If Liz insists on dollar
invoicing, it reduces currency risk in current orders, but may face unstable pricing in future
orders due to exchange rate volatility.
26. 26. How might Liz Claiborne go about hedging its currency risk? Provide three
instruments and briefly explain how these instruments work.
Answer: 1. Forward Contracts: Lock in the exchange rate for a future transaction, reducing
uncertainty.
2. Money Market Hedge: Borrow in one currency and invest in another to lock in future cash
flows.
3. Currency Options: Purchase the right, but not the obligation, to exchange at a certain rate.
Offers protection while allowing for upside.
27. 27. On January 1, the U.S. dollar:Japanese yen exchange rate is $1 = ¥250. During the
year, U.S. inflation is 4% and Japanese inflation is 2%. On December 31, the exchange
rate is $1 = ¥235. What are the likely competitive effects of this exchange rate change on
Caterpillar Tractor, the American earth moving manufacturer, whose toughest
competitor is Japan's Komatsu?
Answer: The real value of the yen appreciated from $.004000 (1/250) to $.004173 (1/235 ×
1.02/1.04), a 4.34% increase. This appreciation raises Komatsu’s real costs in dollar terms,
giving Caterpillar a competitive advantage. Komatsu’s domestic costs (like labor) will
increase in USD terms, while raw materials may not if sourced globally.
28. 28. Although the one year interest rate is 10% in the United States, one year, yen
denominated corporate bonds in Japan yield only 5%. Does this present a riskless
opportunity to raise capital at low yen interest rates? Explain which parity condition
you use in your answer.
Answer: No, this does not present a riskless opportunity. According to the International
Fisher Effect, the lower Japanese interest rate reflects the market's expectation that the yen
will appreciate by approximately 5% over the year, offsetting the interest savings when
converted back to dollars.
29. 29. Suppose the current exchange rate is ¥140 = $1. What is the lowest future exchange
rate at which borrowing yen would be no more expensive than borrowing U.S. dollars?
Answer: Using interest rate parity: Future rate = 140 × (1.05 / 1.10) = ¥133.64. This is the
breakeven rate where the cost of borrowing yen equals the cost of borrowing dollars.