14) Modigliani and Miller argued that a corporation’s fi nancial policies such as hedging foreignexchange risk ________ unless they lowered the firm’s taxes affected its investment decisions orcould be done more cheaply than individual investors’ transactions could be done.A) always change the value of the firm’s assetsB) were relevant to a firm’s dividend policyC) do not change the value of the firm’s assetsD) were difficult to assess15) How can hedging increase the value of a firm?A) by increasing its interest expense B) by reducing its future income taxesC) by increasing its headquarter expense D) by reducing its liabilities16) Suppose that the value of a firm increases when the euro strengthens relative to the dollar anappropriate hedge would be toA) liquidate euro liabilities.B) buy euros for ward.C) find another currency that is highly correlated to sell forward.D) convert some of the firm’s debt into euros.17) Which one of the following is an example of a currency futures exchange?A) The Tok yo Stock Exchange B) The Chicago Board of TradeC) The International Monetary Market D) The New York Stock Exchange18) Unlike forward contracts the size of currency futures contracts are ________.A) subject to the forces of supply and demand in the currency spot marketB) based on the months in which they expireC) a standardized amount that differs for each currency tradedD) a function of the initial mar gin required at the open of the trade19) When the value of the futures contract margin account falls below the maintenance margin ________.A) there is a margin call at which point the account must be brought back up to themaintenance margin amountB) there is a margin callC) no money changes hands again until the expiration dateD) no action is neces sary by the investor20) Marking to market is the process by which the clearing house of an exchange ________.A) forces the inves tor to go long the currencyB) debits and credits losses and profits; closes and opens a new contract at the new price C) allows the market forces to affect daily prices until the expiration dateD) closes the old contract and sets the price of a new contract a zero21) What is the name of the total number of contracts outstanding for a particular derivativecontract?A) open interest B) A long position C) opensettlementD) settle22) The hedging contract that gives the buyer the right but not the obligation to sell a specificamount of foreign currency with domestic currency is known as the ________.A) European option B) American optionC) call option D) put option23) The exchange rate in an option contract is called the option’s ________.A) discount B) delivery price C) premium D) strike price24) The original or first seller of the option is known as the ________.A) option broker B) option commission merchantC) writer D) clearing member25) Which one of the following practices in the futures markets adds greater stability to the market?A) the right but not the requirement to perform the contractB) the initial marginC) credit checksD) marking to market26) Which of the following conditions wo uld be “in the money” for an American call option forforeign currency?A) when the strike price is greater than the spot priceB) when the strike price is lower than the spot priceC) when the strike price is equal to the spot priceD) when the market price limits are reached and trading is halted27) A ________ allows a multinational corporation to change the currency of denomination of itsdebts.A) interest rate swap B) currency future contractC) currency option contract D) currency swap28) The theoretical principal underlying the swap is termed theA) arbitrage principal. B) basis amount.C) swap differential. D) notional principal.29) A currency swap is equivalent to aA) currency option with the exercise price equal to the current spot rate.B) short -term currency futures contract.C) long dated forward foreign exchange contract where the forward rate is the current spotrate.D) interest rate swap where the basis is the differential between the fixed and floating interestrates.30) When managers respond to changes in the real exchange rate with their relative price it is known as:A) ex change rate pass-through B) a real depreciation C) economic exposure D) real exchange risk31) The phenomenon where the profitability of the firm is at risk due to real exchange rate change isknown as ________ exposure.A) accounting B) translation C) operating D) sovereign risk32) Another name for operating exposure is ________ exposure.A) translation B) accounting C) sovereign risk D) economic33) During a change in the real exchange rates a major factor determining the response of the firm isthe ________.A) price elasticity of competing product’s demand curveB) supply elasticity of the industryC) price elastici ty of the product’s demand curveD) supply elasticity of the firm34) In what production process are materials and intermediate parts sensitive to the real exchangedue to the fluctuations currency values?A) plant location decisions B) pricing policiesC) input sourcing D) production scheduling35) What production process allows a multinational firm to shift or increase production to a plant ina country where the currency has depreciated in real terms in order to minimize costs?A) production scheduling B) input sourcingC) pricing policies D) plant location deci sions36) From the perspective of the writer of a put option written on €62 500. If the strike price is$1.25/€ and the option premium is $1 875 at what exchange rate do you start to losemoney?A) $ 1.22/€ B) $ 1.25/€ C) $1.28/€ C) none of the above.37) With currency futures options the underlying asset is A) foreign currency B) a call or put option written on foreign currency C) a futures contract on the foreign currency D) none of the above.38) If the UIRP does not hold then A) One should use the international I-CAPM to calculate the cost of capital B) The world CAPM holds C) The forward exchange rate is unbiased estimator of the future spot FOREXD) A and C39) World Bank’s narrow definition for financial contagion A) includes any non-fundamental transmission mechanism B) excludes herding behavior D) A and B42) In a currency swap A) the two potential counterparties seek symmetric positions in the FOREX markets B) the firms have a comparative advantage in borrowing in their domestic money markets C) A and BD) none of the above.43) When cross-hedging XA) find any financial instrument that has some positive correlation with X B) find any financial instrument that strongly covaries with X in a predictable way C) find any financial instrument that has some negative correlation with X D) none of the above.44) The sovereign spread is higher if A) the probability of default is higher (other things equal) B) the recovery rate RR is smaller (other things equal) C) A and BD) none of the above45) What is the optimal hedge ratio according to Fischer Black if you want to hedge the FOREX risk inyour world portfolio?A) less than 100% because of Siegel’s paradox B) 100% C) over 100% D) none of the above46) Two sources of political risk are A) expropriation and corruption B) shifts in monetary and fiscal policies C) natural disaster and epidemic disease D) none of the above.47) Open interest A) is the number of contracts outstanding for some delivery month B) is a good proxy of future demand/supply of some contract C) can be seen as the depth of the market D) all of the above.48) If the average exchange rate volatility is 2 times the average world market portfolio volatility whatis the value of Black’s universal optimal hedging ratio?49) The Gaussian distributionA) has skewness equal to zeroB) has kurtosis equal to 3C) can be explained using the mean and standard deviation only D) all of the above.50) The breadth of the futures market can be proxied byA) the open interestB) number of different contracts (delivery month) offered in the marketsC) size of the contractD) none of the above.51) The economic principle behind a currency swap between two firms A) The law of one priceB) That both firms have an absolute advantage in the money marketsC) That both firms have a comparative advantage in the money marketsD) arbitrage52) Un unexpected change in the real foreign exchange rate is A) a transitory shockB) a permanent shockC) A and B53) The MNC operating exposure is determined by A) The market structure where it operatesB) Its foreign exchange pass-throughC) A and BD) None of the above54) An example of a moonsonal effect in the international financial markets isA) A shock in the price of oil B) New capital controls in BrazilC) A shift in the bias of monetary policy by the FedD) A and C55) Adjusting the discount rate to assess projects in the rest of the world (ROW) implies that A) political risk is idiosyncraticB) political risk is a dimension of systematic riskC) the existence of financial contagion in the international marketsD) B and C56) The sovereign spread can be obtained using A) Market prices of equivalent US Treasury and Brady bondsB) Money market interest rates denominated in different currenciesC) Relative PPPD) None of the above57) The sovereign spread is affected by A) Exogenous factors outside of the control of governmentsB) Idiosyncratic factors to some extent under the control of governmentsC) A and BD) None of the above58) Moral hazard refers toA) The use of hidden actions of managers against stockholdersB) The use of hidden information against stockholdersC) The impact of a moonsonal effectD) None of the above59) Adjusting the free cash flow in operations of a project by the probability of expropiation oralternatively adjusting the discount factor by the probability of expropriation will giveA) Different results because of financial contagionB) The same results as they are equivalent methods to adjust for country or political riskC) A negative present valueD) None of the above60) The CAPM specification that contemplates a time-varying process of segmentation andintegration in the global economy is know asA) The World CAPMB) The Time-varying or Regime-Switching CAPMC) The International CAPM
