Question 1: Which of the following could reduce agency problems for an MNC?
- Stock options as managerial compensation.
- Hostile takeover threat.
- Investor monitoring.
- Independent board members
Question 2: Assume that Live Co. has expected cash flows of 200,000 USD from domestic operations, 200,000 CHF from Swiss operations, and 150,000 EUR from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected net USD cash flows of Live Co?
Question 3: A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal.
- Decrease; increase
- Increase; increase
- Increase; decrease
- Decrease; decrease
Question 4: According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.
- Increase; decrease
- Decrease; decrease
- Decrease; increase
- Increase; increase
Question 5: Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.
- Depreciate; buying
- Depreciate; selling
- Appreciate; buying
- Appreciate; selling
Question 6: A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 15 EUR when the Dutch market closed. As the U.S. market opens, the exchange rate on the euro is 1.10 USD/EUR. Assuming no significant news has happened in the interim, the price of the ADR should be about ____ USD.
Question 7: Your Company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward (entering into a short forward contract on the yen). The current spot rate of the yen is 0.0089 USD/JPY, while the forward rate is 0.0095 USD/JPY. You expect the spot rate in 60 days to be 0.0090 USD/JPY. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward?
Question 8: All else equal, an increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.
- Reduce; reduce
- Reduce; increase
- Increase; increase
- Increase; reduce
Question 9: Baylor Bank believes the New Zealand dollar (NZD) will appreciate over the next five days from 0.48 to 0.50 USD/NZD. The following annual interest rates apply:
USD:
Lending rate: 7.10%
Borrowing rate: 7.50%
NZD:
Lending rate: 6.80%
Borrowing rate: 7.25%
Baylor Bank has the capacity to borrow either 10 million NZD or 5 million USD. If Baylor Bank's forecast is correct, and it executes the appropriate speculative trade, what will its USD profit be from speculation over the five-day period? (Assume the bank does not use any of its own funds for the trade, using only borrowed funds.)
Question 10: Assume that a speculator purchases a put option on British pounds, with a strike price of $1.50, for $.05 per unit. A pound option contract is on 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51, and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is:
Question 11: Frank is an option speculator. He anticipates the Danish kroner (DKK) to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. If Frank buys the option, and the future spot rate of the Danish kroner is indeed 0.21 USD/DKK, what is his net profit per unit?
Question 12: The premium on a euro call option is $.02. The exercise price is $1.32. What is the break-even price of the euro for the buyer of this call option?
Question 13: You are offered the opportunity to play the following dice game. A fair die will be rolled, and if it comes up with a 3, you get 500 bucks. Otherwise, you lose 100 bucks. What is the expected value of this game to you?
Question 14: In the previous question, imagine you play the game 3 times. What is the probability that you win the first roll, and lose the second and the third rolls? (Enter answer in percents, accurate to two decimal places.)
Question 15: Now that you know the answer to the previous question, what is the probability of winning one and only one dice roll out of 3, regardless of order? (Enter answer in percents, accurate to two decimal places.)
Question 16: Given the payoffs to the dice roll question, what is the maximum number of rolls out of 20 you can win and still end up with a net loss?
Question 17: Recall that the Solow growth model specifies the economic production function as
Y = A * K^a * L^(1-a)
Consider the following initial conditions:
A = 4
a = 0.8
K = 32
L = 243
What is the output of the economy (Y) in the first period?
Question 18: In the previous question, if the savings rate is 25% and the depreciation rate is 10%, what will be the resulting level of capital (K) at the end of the first period (beginning of the second)?
Question 19: Given these parameters, what is the equilibrium level of capital in this economy?
Question 20: In the previous question, what is the equilibrium level of output in this economy?
Question 21: Assuming that 50% of the populations are in the labor force, what is the GDP per capita at equilibrium in this economy?
Question 22: You are returning back to the USA after a trip to Argentina. Upon arrival you notice you have an extra 2000 Argentine pesos (ARS) in your wallet. You ask for a quote on the peso at the bank in the airport, and they give you a bid/ask quote of 0.2/0.22 USD/ARS. How many USD will you be able to recover if you trade with this bank?
Question 23: You decide to speculate in the wine market, so you buy 100 bottles of Bordeaux wine from France at 120 EUR apiece. A year has passed, and you observe that the price of your wine has risen to 140 EUR per bottle (turns out it was a good year). At the same time, the euro has depreciated against the dollar by 5%. What was the net rate of return on this investment, assuming you are in the US and measure your return in terms of USD? (Enter answer in percent, accurate to two decimal places.)
Question 24: The euro is quoted at 1.3 USD/EUR, and the Argentine peso (ARS) is quoted at 5 ARS/USD. If that is the case, what should be the EUR/ARS exchange rate? (Enter answer accurate to 4 decimal places.
Question 25: You create a portfolio with three assets in it, with 50% of the portfolio in asset X, and 25% each in assets Y and Z. If the expected returns of assets X, Y, and Z are 10%, 20%, and 12%, respectively, what is the expected return on your portfolio? (Enter answer in percent, accurate to two decimal places.)
Question 26: Asset A has an expected return of 10% and a standard deviation of 15%. Asset B has an expected return of 7% and a standard deviation of 12%. The returns on the two assets have a correlation of 0.2. If you construct an equally weighted portfolio of the two assets, what will be the variance of its returns? (Enter answer accurate to 5 decimal places.)
Question 27: In the previous problem, what is the portfolio's standard deviation? (Enter answer in percent, accurate to two decimal places.)
Question 28: Your borrowing capacity is 10 million USD and 50 million ARS.
The lending/borrowing rates in the USD market are 1%/3%, and the lending/borrowing rates in the ARS market are 20%/22%. The current spot exchange rate is 5 ARS/USD, and you expect this rate to not change significantly, moving to 5.05 ARS/USD in 3 months (90 days). You want to profit from your expectations, so you will carry out a speculative trade using borrowed funds. If your expectations are correct, how much profit, measured in USD, can you make?
Question 29: The Chinese Yuan (RMB) is currently trading at 0.16 USD/RMB, and the one year forward rate is 0.15 USD/RMB. What is the forward premium? (Enter answer in percent, accurate to 2 decimal places.)
Question 30: You are taking a stroll on the island of knights and knaves, and notice a group of four inhabitants (A, B, C, and D) relaxing under a tree and discussing their international finance exploits. You approach, and hear A tell the following story:
So this one day, I bought a bunch of 1-month put options on 50,000 British pounds, at a premium of 0.03 USD per unit. The GBP was trading at 2 USD/GBP at the time, and my option strike price was 1.91 USD. It was September, 1992, and as luck would have it, good old George Soros was working on taking the Bank of England for a ride to the tune of a few billion dollars. So by option expiration at the end of September, the GBP was trading at 1.77 USD/GBP. So the option position I described netted me 15,500 USD profit!
At this point, the other members of the group make the following statements:
B: Cool story bro, too bad it's not true!
C: Oh, B is just lying because that's what he does all the time.
D: Nah, B is right.
Which of these four inhabitants is a knight? (Check all that apply.)
A
B
C
D