PARIS GRADUATE SCHOOL OF MANAGEMENT
BACHELOR OF BUSINESS ADMINISTRATION
MID-TERM EXAMINATION
SUBJECT: FI 403 INTERNATIONAL FINANCE II
DATE: 28 MARCH 07 (WEDNESDAY)
TIME : 6:30 PM – 9:30 PM
DURATION: 3 HOURS
INSTRUCTIONS:1. There are 6 printed pages in this paper including the cover page.
2. Clearly indicate the answer to all questions on your Answer Booklet.
3. There are 2 parts to this examination. Answer ALL questions:
a. Section A [40 marks]
b. Section B [60 marks]
4. This is a closed book exam. Students are allowed to bring in a one-page
approved formula sheet for the examination.
DO NOT OPEN THIS BOOKLET UNTIL YOU
ARE INSTRUCTED TO DO SO.
FI403
CL Pua
DO NOT OPEN THIS BOOKLET UNTIL YOU
Section A [40 marks]
Answer ALL questions.
1. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1
= $2. One year later, the stock rises to £60. You are happy with your 20 percent
return on the stock, but when you sell the stock and exchange your £60 for
dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of
value is an example of
A) Exchange Rate Risk
B) Political Risk
C) Market imperfections
D) Weakness in the dollar
2. If a country unexpectedly imposes restrictions on imports, this trade barrier is an
example of:
A) Exchange Rate Risk
B) Political Risk
C) Market Imperfections
D) Expanded Opportunity Set
3. A domestic firm that produces and sells its products in one country
A) Is protected from foreign exchange risk.
B) Could face foreign exchange risk.
C) Can face no political risk.
D) Is an example of a market imperfection
4. The fundamental goal of sound business management is
A) Shareholder wealth maximization
B) Market share maximization
C) Globalization
D) Increasing the size of the firm
5. The theory of comparative advantage states that
A) Economic well-being in enhanced if countries produce those goods for which
they have comparative advantage and then trade those goods for goods that
they do not enjoy a comparative advantage in producing.
B) Economic well-being in enhanced if countries consume those goods for which
they have a comparative advantage and then trade for those goods.
C) Tariffs and other protectionist measures can enhance the mercantile success
of countries that adopt them.
D) Countries should first produce the goods and services that they need, and
then produce goods for export.
6. The key arguments in favor of flexible exchange rates rests on
A) Easier external adjustments.
B) National Policy autonomy
C) a) and b) are correct.
D) None of the above.
FI403
CL Pua
7. Suppose that the pound is pegged to gold at £20 per ounce and the dollar is
pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per
pound. If the current market exchange rate is $1.80 per pound, how would you
take advantage of this situation?
A) Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert
the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the
current rate of $1.80 per pound to get $360.
B) Start with £350. Buy 17.5 ounces of gold at £20 per ounce. Convert the gold
to dollars at $35 per ounce. Exchange the dollars for pounds at the current
market exchange rate is $1.80 per pound.
C) Both of the above are correct
D) None of the above are correct
8. One advantage of monetary union
A) Loss of national monetary and exchange-rate political independence.
B) Transition of asymmetric macro-economic shocks.
C) Reduced transactions costs and the elimination of exchange-rate uncertainty.
D) Enhanced control of interest rates in the member countries.
9. A Fixed Exchange rate regime
A) Forces a country to give up free international flows of capital
B) Can eliminate exchange rate uncertainty.
C) Forces a country to abandon independent monetary policy.
D) Is the model provided by the U.S. Federal Reserve.
10. If the United States imports more than it exports, one can expect:
A) The U.S. dollar would be likely to appreciate against other currencies.
B) The supply of dollars is likely to exceed the demand in the foreign exchange
market, ceteris paribus.
C) The U.S. dollar would be under pressure to depreciate against other
currencies.
D) b) and c) are correct.
11. If a country must make a net payment to foreigners because of a balance-ofpayments deficit, the country can:
A) Increase its official reserve assets, such as SDRs.
B) Borrow anew from foreigners.
C) Print more currency.
D) Countries must now buy their currencies back from the World Bank.
12. Many companies have provided managers with executive stock options
A) These are a form of incentive contracts.
B) These can serve as a mechanism of aligning the interests of shareholders
and managers.
C) These options can offer managers an incentive to run the company in such as
way that enhances shareholder wealth as well as their own.
D) All of the above
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CL Pua
13. Free cash flow
A) Represents a firm’s internally generated funds in excess of the amount needed
to undertake all profitable investment projects.
B) Tends to be highest in mature industries with low future growth prospects.
C) Represents a temptation to managers.
D) All of the above
14. Suppose a U.S. company continually performs poorly and all of its internal
governance mechanism fail to correct the problem.
A) Over time this situation may prompt an outsider (corporate raider) to mount a
takeover bid.
B) A hostile takeover bid can serve as a drastic governance mechanism of the last
resort.
C) The market for corporate control may discipline managers.
D) All of the above
15. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00.
What must the euro-pound exchange rate be?
A) €1 = £1.60
B) €1 = £0.625
C) €2.50 = £1
D) €1 = £2.50
16. Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and
€2.00 = £1.00. Starting with $1,000,000, how can you make money?
A) Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade
for $1,062,500 at €1 = $.85.
B) Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at
€2.00 = £1.00; exchange for dollars at £1 = $1.60.
C) Start with euros; exchange for pounds; exchange for dollars; exchange for
euros
17. In the forward market
A) Market participants agree to buy or sell foreign currency in the future at prices
agreed-upon today.
B) Market participants agree to buy (not sell) foreign currencies in the future at
prices agreed-upon today.
C) Market participants pay today for a specific amount of foreign currency to be
received in the future.
D) Market participants agree to buy and sell fixed amounts of foreign currency at
spot prices that will prevail in the future.
18. Consider a trader who takes a long position in a six-month forward contract on
British pounds. The forward rate is $1.75 = £1.00; the contract size is £62,500. At
the maturity of the contract the spot exchange rate is $1.65 = £1.00
A) The trader has lost $625.
B) The trader has lost $6,250.
C) The trader has made $6,250.
D) The trader has lost $66,287.88
FI403
CL Pua
19. An exchange rate quoted in American terms
A) Says how many units of foreign currency you get for one U.S. dollar.
B) Says how many U.S. dollars one unit of foreign currency is worth.
C) Is the same as the indirect quotation.
D) Is the inverse of the direct quotation.
20. The spot and forward foreign exchange market:
A) Is an over-the-counter market.
B) Is open 24 hours a day, 7 days a week, somewhere in the world.
C) Is the largest and most active financial market in the world.
D) All of the above are correct.
E) None of the above are correct.
FI403
CL Pua
Section B [60 marks]
Answer ALL questions.
Question 1 [15 marks]
In a floating exchange rate system, if the current account is running a deficit, what
are the consequences for the nation’s balance on capital account and its overall
balance of payments?
Question 2 [15 marks]
Suppose that a three-month interest rates (annualized) in Malaysia and the United
States are 7% and 9%, respectively. If the spot rate is RM3.50:$1 and the 90-day
forward rate is RM3.39:$1,
a.
b.
c.
d.
Where would you invest? [3 marks]
Where would you borrow? [3 marks]
What arbitrage opportunity do these figures present? [4 marks]
Assuming no transaction costs, what would be your arbitrage profit per dollar
or dollar-equivalent borrowed? [5 marks]
Question 3 [15 marks]
Suppose that Corporation XYZ must pay a French supplier FF 100 million in 90
days.
a. Explain how Corporation XYZ can use currency options to hedge its exchange
risk.
b. Discuss the advantages and disadvantages of using currency futures versus
currency options to hedge the corporation’s exchange risk.
Question 4 [15 marks]
Suppose the short-term interest rate in France was 3.5% while the forecast French
inflation was 2.0% while the short-term German interest rate was 2.6% and the
forecast German inflation was 1.6%.
a. Based on these figures, what were the real interest rates in France and
Germany?
b. How would you explain the differences in real rates between France and
Germany?
FI403
CL Pua