International Finance Final Exam-Questions and Answers 100%
Pass/Verified
A country experiencing a significant balance-of-payments surplus would be likely to -
✔✔expand imports, offering marketing opportunities for foreign enterprises, and
encourage imposing foreign exchange restrictions.
When individual investors become aware of overseas investment opportunities and are
willing to diversify their portfolios internationally, - ✔✔they benefit from an expanded
opportunity set.
A dealer in pounds who thinks that the exchange rate is about to increase in volatility -
✔✔may want to widen his bid-ask spread.
An example(s) of a political risk is - ✔✔both the expropriation of assets and adverse changes
in tax rules are correct.
Generally speaking, liberalization of financial markets when combined with a weak,
underdeveloped domestic financial system tends to - ✔✔create an environment susceptible
to currency and financial crises.
If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$
bid and ask prices are - ✔✔€0.6623 and €0.6667.
The theory of comparative advantage - ✔✔claims that economic well-being is enhanced if
each country's citizens produce that which they have a comparative advantage in producing
relative to the citizens of other countries, and then trade production.
The forward price - ✔✔all of the options
Most governments at least try to make it difficult for people to cross their borders illegally.
This barrier to the free movement of labor is an example of - ✔✔a market imperfection.
,Privatization refers to the process of - ✔✔a country divesting itself of the ownership and
operation of a business venture by turning it over to the free market system.
If the United States imports more than it exports, then - ✔✔one can infer that the U.S.
dollar would be under pressure to depreciate against other currencies.
the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus.
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:
Swiss franc/dollar = SFr1.6043/$
Australian dollar/U.S. dollar = A$1.8296/$
Australian dollar/Swiss franc = A$1.1494/SFr
Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these
quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage
profit, and how much would he profit if he has $1,000,000 available for this purpose? -
✔✔Sell dollars to get Swiss francs: Sell $1,000,000 to get $1,000,000 × SFr1.6043/$ =
SFr1,604,300.
ii. Sell Swiss francs to buy Australian dollars: Sell SFr1,604,300 to buy SFr1,604,300 ×
A$1.1494/SFr = A$1,843,982.42.
iii. Sell Australian dollars for dollars: Sell A$1,843,982.42 for A$1,843,982.42/A$1.8296/$ =
$1,007,860.96.
Thus, your arbitrage profit is $1,007,860.96 − $1,000,000 = $7,860.96.
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 - ✔✔exchange rate risk.
Country. U.S. $ equiv. Currency per U.S. $
Tuesday Monday Tuesday. Monday
U.K.(Pound)£62,500. 1.6000. 1.6100. 0.6250. 0.6211
, 1 Month Forward. 1.6100. 1.6300. 0.6211. 0.6173
3 Months Forward. 1.6300. 1.6600. 0.6173. 0.6024
6 Months Forward. 1.6600. 1.7200. 0.6024. 0.581412
12 Months Forward. 1.7200. 1.8000. 0.5814. 0.5556
Using the table shown, what is the most current spot exchange rate shown for British
pounds? Use a direct quote from a U.S. perspective. - ✔✔$1.60 = £1.00
The main cost of European monetary union is - ✔✔the loss of national monetary and
exchange rate policy independence.
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€.
Based on your analysis of the exchange rate, you are confident that the spot exchange rate
will be $1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What
actions do you need to take to speculate in the forward market? - ✔✔Take a long position in
a forward contract on €1,000,000 at $1.50/€.
The gold standard still has ardent supporters who believe that it provides - ✔✔an effective
hedge against price inflation.
In countries like France and Germany, - ✔✔managers have often viewed shareholders as
one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks
and so forth.
The spot market - ✔✔involves the almost-immediate purchase or sale of foreign exchange.
If the interest rate rises in the U.S. while other variables remain constant - ✔✔capital
inflows into the U.S. will increase.
Under the Bretton Woods system, - ✔✔the U.S. dollar was the only currency that was fully
convertible to gold; other currencies were not directly convertible to gold.
Pass/Verified
A country experiencing a significant balance-of-payments surplus would be likely to -
✔✔expand imports, offering marketing opportunities for foreign enterprises, and
encourage imposing foreign exchange restrictions.
When individual investors become aware of overseas investment opportunities and are
willing to diversify their portfolios internationally, - ✔✔they benefit from an expanded
opportunity set.
A dealer in pounds who thinks that the exchange rate is about to increase in volatility -
✔✔may want to widen his bid-ask spread.
An example(s) of a political risk is - ✔✔both the expropriation of assets and adverse changes
in tax rules are correct.
Generally speaking, liberalization of financial markets when combined with a weak,
underdeveloped domestic financial system tends to - ✔✔create an environment susceptible
to currency and financial crises.
If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$
bid and ask prices are - ✔✔€0.6623 and €0.6667.
The theory of comparative advantage - ✔✔claims that economic well-being is enhanced if
each country's citizens produce that which they have a comparative advantage in producing
relative to the citizens of other countries, and then trade production.
The forward price - ✔✔all of the options
Most governments at least try to make it difficult for people to cross their borders illegally.
This barrier to the free movement of labor is an example of - ✔✔a market imperfection.
,Privatization refers to the process of - ✔✔a country divesting itself of the ownership and
operation of a business venture by turning it over to the free market system.
If the United States imports more than it exports, then - ✔✔one can infer that the U.S.
dollar would be under pressure to depreciate against other currencies.
the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus.
Doug Bernard specializes in cross-rate arbitrage. He notices the following quotes:
Swiss franc/dollar = SFr1.6043/$
Australian dollar/U.S. dollar = A$1.8296/$
Australian dollar/Swiss franc = A$1.1494/SFr
Ignoring transaction costs, does Doug Bernard have an arbitrage opportunity based on these
quotes? If there is an arbitrage opportunity, what steps would he take to make an arbitrage
profit, and how much would he profit if he has $1,000,000 available for this purpose? -
✔✔Sell dollars to get Swiss francs: Sell $1,000,000 to get $1,000,000 × SFr1.6043/$ =
SFr1,604,300.
ii. Sell Swiss francs to buy Australian dollars: Sell SFr1,604,300 to buy SFr1,604,300 ×
A$1.1494/SFr = A$1,843,982.42.
iii. Sell Australian dollars for dollars: Sell A$1,843,982.42 for A$1,843,982.42/A$1.8296/$ =
$1,007,860.96.
Thus, your arbitrage profit is $1,007,860.96 − $1,000,000 = $7,860.96.
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 - ✔✔exchange rate risk.
Country. U.S. $ equiv. Currency per U.S. $
Tuesday Monday Tuesday. Monday
U.K.(Pound)£62,500. 1.6000. 1.6100. 0.6250. 0.6211
, 1 Month Forward. 1.6100. 1.6300. 0.6211. 0.6173
3 Months Forward. 1.6300. 1.6600. 0.6173. 0.6024
6 Months Forward. 1.6600. 1.7200. 0.6024. 0.581412
12 Months Forward. 1.7200. 1.8000. 0.5814. 0.5556
Using the table shown, what is the most current spot exchange rate shown for British
pounds? Use a direct quote from a U.S. perspective. - ✔✔$1.60 = £1.00
The main cost of European monetary union is - ✔✔the loss of national monetary and
exchange rate policy independence.
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€.
Based on your analysis of the exchange rate, you are confident that the spot exchange rate
will be $1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What
actions do you need to take to speculate in the forward market? - ✔✔Take a long position in
a forward contract on €1,000,000 at $1.50/€.
The gold standard still has ardent supporters who believe that it provides - ✔✔an effective
hedge against price inflation.
In countries like France and Germany, - ✔✔managers have often viewed shareholders as
one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks
and so forth.
The spot market - ✔✔involves the almost-immediate purchase or sale of foreign exchange.
If the interest rate rises in the U.S. while other variables remain constant - ✔✔capital
inflows into the U.S. will increase.
Under the Bretton Woods system, - ✔✔the U.S. dollar was the only currency that was fully
convertible to gold; other currencies were not directly convertible to gold.
