FIN 420 CORRECT TEST PAPER ANSWERS AND
QUESTIONS SET A+
✔✔developed markets - ✔✔Developed Markets Characteristics
Large equity capitalization
Lower currency conversion restrictions
Liquid markets; robust financial institutions and system
Higher regulation
Higher transparency
✔✔frontier markets - ✔✔haven more risk than emerging markets
✔✔Developed mkts - ✔✔Austira
France
Italy
Spain
Belgium
Denmark
Finland
Germany
Ireland
Israel
Netherlands
Norway
Portugal
Sweden
Switz
UK
Stralia
Japan
Singapore
Hong Kong
✔✔Vehicles - ✔✔Global and international mutual funds (active exposure)
, Global and international ETFs (passive exposure)
Closed-end funds
Direct purchase on foreign stock exchange
American Depository Receipts (ADRs)
✔✔Optimal amount of foreign assets - ✔✔40-50%
✔✔characteristics (exchange rate summary) - ✔✔Turn the ER into a ratio over 1 and
determine the price and base currencies
Determine what currency the funds are denominated in at a certain point in time; you
want that currency to appreciate
Determine if the currency id in the price or base of the ER to determine if you want the
ER to + or -
To determine how much of a home currency, you need to exchange into a foreign
currency, make the foreign currency the base currency (1) and multiple the home
currency by the amount of foreign currency needed
✔✔Identify whether a currency is appreciating or depreciating against another
Differentiate gain or loss from currency or foreign asset appreciation or depreciation -
✔✔You reside in Japan and your money exists in yen currency (JPY). You are
interested in purchasing an asset in the US which costs 1,000,000 USD. While holding
the asset in USD, do you want the exchange rate to appreciate or depreciate? Do you
want the JPY to appreciate or depreciate? - You want the foreign currency (USD) to
appreciate against the JPY. This means that the JPY depreciates against the foreign
currency (USD). You want the USD-JPY (JPY/USD) exchange rate to appreciate.
You reside in the US and your money exists in US currency (USD). You are interested
in purchasing an asset in Japan which costs 1,000,000 Japanese yen (JPY). While
holding the asset in JPY, do you want the exchange rate to appreciate or depreciate?
Do you want the USD to appreciate or depreciate? - You want the foreign currency
(JPY) to appreciate against the USD. This means that the USD depreciates against the
foreign currency (JPY). You want the USD-JPY (JPY/USD) exchange rate to
depreciate.
✔✔Describe derivatives - ✔✔Derivatives create beneficial opportunities and strategies
that do not exist with only the securities of basic asset of the economy
Participants invest a small amount of their capital to enter into a derivative contract
(high leverage). Small movements in the underlying receive higher payoffs (or losses)
Derivatives can be more liquid than the underlying Offer an effective way to transfer
risk
Add to market efficiency
Generate income Preserve and increase return, limit risk
✔✔Differentiate between a hedger and a speculator - ✔✔Hedge - Reduce exposure to
future movements in the price of an underlying security that is owned. (Like insurance.)
(Owns the underlying asset)
QUESTIONS SET A+
✔✔developed markets - ✔✔Developed Markets Characteristics
Large equity capitalization
Lower currency conversion restrictions
Liquid markets; robust financial institutions and system
Higher regulation
Higher transparency
✔✔frontier markets - ✔✔haven more risk than emerging markets
✔✔Developed mkts - ✔✔Austira
France
Italy
Spain
Belgium
Denmark
Finland
Germany
Ireland
Israel
Netherlands
Norway
Portugal
Sweden
Switz
UK
Stralia
Japan
Singapore
Hong Kong
✔✔Vehicles - ✔✔Global and international mutual funds (active exposure)
, Global and international ETFs (passive exposure)
Closed-end funds
Direct purchase on foreign stock exchange
American Depository Receipts (ADRs)
✔✔Optimal amount of foreign assets - ✔✔40-50%
✔✔characteristics (exchange rate summary) - ✔✔Turn the ER into a ratio over 1 and
determine the price and base currencies
Determine what currency the funds are denominated in at a certain point in time; you
want that currency to appreciate
Determine if the currency id in the price or base of the ER to determine if you want the
ER to + or -
To determine how much of a home currency, you need to exchange into a foreign
currency, make the foreign currency the base currency (1) and multiple the home
currency by the amount of foreign currency needed
✔✔Identify whether a currency is appreciating or depreciating against another
Differentiate gain or loss from currency or foreign asset appreciation or depreciation -
✔✔You reside in Japan and your money exists in yen currency (JPY). You are
interested in purchasing an asset in the US which costs 1,000,000 USD. While holding
the asset in USD, do you want the exchange rate to appreciate or depreciate? Do you
want the JPY to appreciate or depreciate? - You want the foreign currency (USD) to
appreciate against the JPY. This means that the JPY depreciates against the foreign
currency (USD). You want the USD-JPY (JPY/USD) exchange rate to appreciate.
You reside in the US and your money exists in US currency (USD). You are interested
in purchasing an asset in Japan which costs 1,000,000 Japanese yen (JPY). While
holding the asset in JPY, do you want the exchange rate to appreciate or depreciate?
Do you want the USD to appreciate or depreciate? - You want the foreign currency
(JPY) to appreciate against the USD. This means that the USD depreciates against the
foreign currency (JPY). You want the USD-JPY (JPY/USD) exchange rate to
depreciate.
✔✔Describe derivatives - ✔✔Derivatives create beneficial opportunities and strategies
that do not exist with only the securities of basic asset of the economy
Participants invest a small amount of their capital to enter into a derivative contract
(high leverage). Small movements in the underlying receive higher payoffs (or losses)
Derivatives can be more liquid than the underlying Offer an effective way to transfer
risk
Add to market efficiency
Generate income Preserve and increase return, limit risk
✔✔Differentiate between a hedger and a speculator - ✔✔Hedge - Reduce exposure to
future movements in the price of an underlying security that is owned. (Like insurance.)
(Owns the underlying asset)
