FI 472 Test I _______________________ Spring 2008 Clay Moffett

Name: _____________________________-

NOTE: Write all your answers on the answer sheet attached to the back of this test. You may keep the test, but put your name on the answer sheet and turn it in. Write neatly, anything I cannot read, is wrong. Show your work if you wish partial credit. Each multiple choice question is worth 3 points, each short answer is worth 5. 1 Historically, the primary motive for U.S. multinationals to produce abroad has been to a. lower costs b. respond more quickly to the marketplace c. avoid trade barriers d. gain tax benefits

Which one of the following provides strong evidence that internationalization continues to grow in the world economy? a. import restrictions by the Bush Administration on foreign steel b. efforts suggested by politicians to restrict the sourcing of foreign products by locally headquartered multinationals c. the growing volume of foreign direct investment by U.S. as well as other multinational companies d. pressure on governments to embargo unfriendly nations 3. According to Shapiro, if you were the CEO of a multinational corporation, which of the following would be MOST important to you in hiring a manager? One that a. Avoids risk at any price b. Manages effectively the political environment of the subsidiary country c. Anticipates every future disturbance related to the supply chain d. Makes decisions that anticipates problems and provides solutions that enhances the firms prospects for growth 4. The most likely explanation for the rise of the U.S. dollar during the early 1980s is that a. the U.S. budget deficit raised U.S. interest rates b. the U.S. trade deficit held down U.S. inflation c. the U.S. economy improved dramatically d. all of the above Of the a. b. c. d. following, exchange rates depend the most on relative inflation rates relative interest rates relative trade deficits a and b

5.

6. 2.5 To some U.S. manufacturers and labor unions, a cheap yuan value gives Chinas __________ an unfair advantage in the global economy. a. imports b. subsidies c. bankers d. exporters 7. a. b. On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend the lira devalued against the DM to DM 0.0012. By how much had the lira devalued against the DM? 7.69% 8.33%

c. d. 8.

5.21% 9.27% The price of foreign goods in terms of domestic goods is called a. the real exchange rate b. the balance of trade c. the trade-weighted exchange rate d. purchasing parity Large a. b. c. d. e. government budget deficits will raise the value of a nation's currency by raising domestic interest rates raise the value of a nation's currency by stimulating the domestic economy lower the value of a nation's currency by leading to higher inflation lower the value of a nation's currency by leading to added political risk be irrelevant since historical experience shows no correlation between government budget deficits and the value of the nation's currency

9.

10. a. b. c. d. 11.

The _______ for/of foreign currency in the U.S. is derived from the demand for ___________ by American consumers. Demand, foreign products Demand, tax loopholes Supply, lower tariffs Supply, local products The ________ is an exchange rate system that is relatively free from central bank and other government-type interventions. a. managed float b. clean float c. dirty float d. target-zone arrangement Under a. b. c. d. the classic gold standard, if prices began rising in the U.S. the dollar value of the pound would rise the dollar value of the pound would fall the U.S. would begin running a balance of trade surplus gold would flow out of the U.S. and the U.S. money supply would drop

12.

13.

In order to boost the value of the DM relative to the dollar a. the Fed should sell dollars for DM and the Bundesbank should buy DM with dollars b. the Fed should sell dollars for DM and the Bundesbank should buy dollars with DM c. the Fed should sell DM for dollars and the Bundesbank should sell dollars for DM d. the Fed should sell DM for dollars and the Bundesbank should buy DM with dollars

14. In its absolute version, purchasing power parity states that price levels worldwide should be _______when expressed in a common currency. a. equal b. roughly equal c. different d. opportunities for arbitrage 15. A forward forward is a. a currency futures contract with a forward contingency b. real exchange c. nominal interest based on notional amounts

d.

commitment of a future loan at a fixed price (forward rate)

16.

The spot rate on the euro is $1.33 and the 180-day forward rate is $1.34. The difference between the two rates means a. interest rates are higher in the U.S. than in Germany b. the euro has risen in relation to the dollar c. the inflation rate in Germany is declining d. the euro is expected to fall in value relative to the dollar A balance of trade deficit results in a current account a. deficit surplus IMF intervention d. World Bank loan The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the a. balance of trade b. current account balance c. balance of payments capital account balance The great economic lesson of the ill-fated, post-World War II experiment in Communism is that _________ work and command economies do not. a. state subsidies b. market forces c. five-year plans d. centralized economic controls The states best strategy is to provide basic _________ in order to promote economic growth. a. health care services b. lifelong pensions for its workers c. economic and political stability d. natural resources The world's largest currency trading market is a. New York b. Frankfurt c. Tokyo London Hedgers, mostly _____________, engage in forward contracts on the foreign exchange markets to protect the home currency value of various foreign currency-denominated assets and liabilities on their balance sheets. a. commercial banks b. public utilities c. multinational corporations d. speculators 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

17. b. c. 18

d. 19.

20.

21.

d. 22.

23.

c. d.

currency swap forward contract

24.

An American company that imports leather goods from England is most likely to be a. long pounds b. short pounds c. can't tell

25. Suppose the pound sterling is selling for $1.62 and the buying rate for the Swiss franc is $0.71. Then the /SFr cross rate is a. 1 = SFr 0.4383 b. SFr 1 = 2.2817 c. 1 = SFr 2.2817 d. a or b 26. Suppose the current spot rate for the euro is $1.3427. A call option with an exercise price of $1.3550 is said to be a. in-the-money b. out-of-the-money c. at-the-money d. past breakeven

27. The basic difference(s) between forward and futures contracts is that 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 are marked to market. d. all of the above 28. You can speculate on an appreciation of the Japanese yen by a selling a yen put option and buying a yen call option b selling a yen put option and selling a yen call option c buying a yen put option and selling a yen call option d buying a yen put option and buying a yen call option An __________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount. a. b. c. d. interest rate currency bond currency bond

29.

30. Suppose you buy three PHLX euro futures contracts (contract size 62,500) with a 95 strike price at a price of 2.5 (/). a. What would be your total dollar cost for these calls, ignoring broker fees? b. After holding these calls for 60 days, you sell them for 3.8 (/). What is your net profit on the contracts assuming that brokerage fees on both entry and exit were $5 per contract and that your opportunity cost was 8% per annum on the money tied up in the premium?

31. Suppose Credit Suisse quotes spot and 90-day forward rates of $0.7957-60, 8-13. a. What are the outright 90-day forward rates that Credit Suisse is quoting? b. What is the forward discount or premium associated with buying 90-day Swiss francs? c. Compute the percentage bid-ask spreads on spot and forward Swiss francs. 32. What caused the collapse of the Bretton Woods agreement? 33. Describe the Fischer Effect: 34. List the differences between a futures contract and a forward contract:

BONUS: (Worth 5 points) What is S.I.M.E.X.? (Answer must be exact, no partial credit given):

FI 472 Answer Sheet Name: ________________________________________________________ Test 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29.

30. a.

b.

31. a.

b.

c.

32.

33.

36.

BONUS:

1. b 2. c 3. d 4. c 5. d 6. d 7. a 8. a 9. e 10. a 11. b 12. d 13. a 14. a 15. d 16. a 17. c 18. c 19. b 20. c 21. d 22. c 23. d 24. b 25. c 26. b 27. d 28. a 29. a 30. a. ANSWER. With each call option being for 62,500, the three contracts combined are for 187,500. At a price of 2.5/, the total cost is therefore 187,500 x $0.025 = $4,687.50. b. ANSWER. The net profit would be 1.3/ (3.8 - 2.5) for a total profit before expenses of $2,437.50 (0.013 x 187,500). Brokerage fees totaled $10 per contract or $30 overall. The opportunity cost would be $4,687.50 x 0.08 x 60/365 = $61.65. After deducting these expenses (which total $91.65), the net profit is $2,345.85. 31. a. ANSWER. The outright forwards are: bid rate = $0.7965 (0.7957 + 0.0008) and ask rate = $0.7973 (0.7960 + 0.0013). b. ANSWER. The annualized forward premium = [(0.7973 - 0.7965)/0.7965] x 4 = 0.004390 = 0.439%. c. ANSWER. The bid-ask spread is calculated as follows:

Percent spread =

Ask price - Bid price x 100 Ask price

Substituting in the numbers yields a spot bid-ask spread of (0.7960 - 0.7957)/0.7960 = 0.04%. The corresponding forward bid-ask spread is (0.7973 - 0.7965)/0.7973 = 0.10%. 32. Causes: a. b. U.S. high inflation rate U.S.$ depreciated sharply.

33. states that nominal interest rates (r) are a function of the real interest rate (a) and a premium (i) for inflation expectations. R = a + i Real Rates of Interest 1. Should tend toward equality everywhere through arbitrage. 2. With no government interference nominal rates vary by inflation or rh - rf = ih - if countries with higher inflation rates have higher interest rates. 36.

differential