Exam I
Name
INTERNATIONAL FINANCE
Fall 2003
Multiple Choice -- Circle the letter of the BEST answer (3 points each)
1. A country’s international transactions can be grouped into the following three main types:
a.
b.
c.
d.
e.
current account, medium term account, and long term account
current account, long term account, and capital account
current account, capital account, and official reserve account
current account, trade account, and official reserve account
none of the above
2. Which of the following would NOT be an appropriate strategy for reducing a subsidiary's
exposure to political risk?
a.
b.
c.
d.
e.
engaging in a joint venture with a local firm
borrowing funds locally
hiring local labor
buying insurance from the Overseas Private Investment Corporation (OPIC)
all of the above would reduce political risk exposure
3. If the USD/£ bid and ask prices are USD1.50 and USD1.51, respectively, the corresponding
bid and ask prices in London are
a.
b.
c.
d.
£0.6667 and £0.6623
£1.50 and £1.51
£0.6623 and £0.6667
none of the above
4. The Swiss Franc (SF) and U.S. dollar spot exchange rate is 1.25 SF/USD and the 180-day
forward exchange rate is 1.30 SF/USD. The forward premium (discount) is
a.
b.
c.
d.
e.
The dollar is trading at an 8% premium to the Swiss franc for delivery in 180 days
The dollar is trading at a 4% premium to the Swiss franc for delivery in 180 days
The dollar is trading at an 8% discount to the Swiss franc for delivery in 180 days
The dollar is trading at a 4% discount to the Swiss franc for delivery in 180 days
None of the above
5. Which of the following is NOT a difference between a forward contract and a futures contract
on foreign currencies?
a.
b.
c.
d.
e.
a forward contract is between a bank and a firm while a futures contract is between two
unrelated parties
a margin requirement is imposed on the buyer or seller of a futures contract but generally
not on a forward contract
a futures contract commits the owner to a future transaction whereas the owner of
a forward contract can let the contract expire
a futures contract is for a standardized amount of currency whereas forward contracts
vary in amounts
all of the above are differences between a futures contract and a forward contract
6. The foreign exchange risk exposure of the multinational firm
a.
b.
c.
d.
e.
should be managed at the subsidiary level so that managers can be fairly evaluated.
should be managed at the top corporate level to avoid unnecessary duplication of
hedging.
can be ignored if markets are efficient.
does not need to be considered since the multinational is diversified in different
currencies.
None of the above
7. A large increase in the income level in Europe along with no growth in the U.S. income level is
normally expected to cause a(n)
a.
b.
c.
d.
e.
increase in European demand for U.S. goods, and the European euro should appreciate
increase in European demand for U.S. goods, and the European euro should
depreciate
decrease in European demand for U.S. goods, and the European euro should appreciate
decrease in European demand for U.S. goods, and the European euro should depreciate
no change at all
8. The spot rate of exchange between the Mexican peso (Mex$) and U.S. Dollar (USD) in New
York is Mex$7.95/USD and the 6-month futures rate is Mex$8.4328/USD. If U.S. interest
rates are 5% per annum then the annual interest rate in Mexico must be
a.
b.
c.
d.
e.
6.1%
8.7%
17.4%
22.6%
none of the above
9. Which firm is most likely to suffer from a real appreciation of the U.S. dollar?
a.
b.
c.
d.
e.
a McDonald's franchise in Chicago
a department store in Philadelphia
a local advertising agency in San Antonio
a wheat farmer in Nebraska
cannot tell with information given
10. Which of the following statements is NOT true?
a.
b.
c.
d.
e.
Hedging reduces the total variation of a firm's cash flows.
Since foreign exchange risk is unsystematic, an individual investor can diversify this risk
away.
Hedging may increase the ability of the firm to borrow funds.
Forward and futures hedging are the means by which arbitrageurs lock-in the profits that
can be made from deviations in interest rate parity.
All of the above statements are true.
11. A large portion of the U.S. population has become dissatisfied with the fact that NAFTA has
failed to create the number of U.S. jobs promised and that the U.S. now has a large trade
deficit with Mexico. Suppose the 2004 elections resulted in a majority in Congress who decide
to terminate NAFTA and reintroduce trade barriers to Mexican products.
A.
What would be the immediate effect of such trade barriers on the peso-dollar foreign
exchange rate? (5 points)
B.
What would be the longer-term effect on i) the U.S. economy in general, and ii) the pesodollar foreign exchange rate? (10 points)
12.
While translation exposure has no real economic impact on the firm and transaction
exposure can generally be hedged, the operating exposure that the multinational corporation
faces is much more difficult to minimize. Discuss the means and considerations by which a
firm can manage its exposure to operating foreign currency risk with regard to the following
areas: (15 points)
i) marketing
ii) production
iii) financing
13. The current T-bill rate in the U.S. is 4% per annum, while Swiss T-bill rates are 3% per
annum. The spot exchange rate is $0.7598/SF (SF is the symbol for Swiss Francs) and the
six-month forward rate is $0.7763/SF. You can borrow funds in either country for 2
percentage points above the T-bill rates. That is, you can borrow in Switzerland at 5% and
you can borrow in the U.S. at 6%. Is the forward rate consistent with interest rates, and if not,
how can a profit be made? Assume you can borrow 10,000 units of either currency.
(15 points)
$70.42 profit
14. Your firm has just made a sale to a British firm of £1 million (£ is the symbol for pounds
sterling) payable in six months.
A.
How much would the firm receive if it uses a forward hedge? The six-month forward rate
offered by your bank is $1.5179 per pound. (5 points)
$1,517,900
B.
How much would the firm receive if it uses a futures hedge? The six-month futures rate
is $1.5204 per pound and your broker charges a 0.2% commission. (5 points)
$1,517,359
C. How much would the firm receive (in six months) if it uses a money market hedge
(assuming it must invests the funds)? T-bill rates in the U.S. are 5% per annum and in
Great Britain are 8%. Your borrowing rate is 8% in the U.S. and 11% in Great Britain.
The spot sell rate is $1.5385 per pound. (5 points)
$1,494,751
D. A six-month put option on pounds can be purchased for 1½ cents per pound with a strike
price of $1.53 per pound. How much would an option hedge net you (in total) if the
pound closes at $1.5243 per pound on settlement date? Your broker charges a 0.2%
commission. (5 points)
$1,511,940
E.
Why might you be willing to pay for a put option with a strike price of $1.53/£ even if it
nets you less than a futures hedge? (5 points)