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Modigliani and Miller argued that a corporation’s fi nancial policies, such as hedging foreign

Modigliani and Miller argued that a corporation’s fi nancial policies, such as hedging foreign

14) Modigliani and Miller argued that a corporation’s fi nancial policies, such as hedging foreign

exchange risk, ________ unless they lowered the firm’s taxes, affected its investment decisions, or

could be done more cheaply than individual investors’ transactions could be done.

A) always change the value of the firm’s assets

B) were relevant to a firm’s dividend policy

C) do not change the value of the firm’s assets

D) were difficult to assess

15) How can hedging increase the value of a firm?

A) by increasing its interest expense B) by reducing its future income taxes

C) by increasing its headquarter expense D) by reducing its liabilities

16) Suppose that the value of a firm increases when the euro strengthens relative to the dollar, an

appropriate hedge would be to

A) 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 Trade

C) The International Monetary Market D) The New York Stock Exchange

18) Unlike forward contracts, the size of currency futures contracts are ________.

A) subject to the forces of supply and demand in the currency spot market

B) based on the months in which they expire

C) a standardized amount that differs for each currency traded

D) a function of the initial mar gin required at the open of the trade

19) 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 the

maintenance margin amount

B) there is a margin call

C) no money changes hands again until the expiration date

D) no action is neces sary by the investor

20) Marking to market is the process by which the clearing house of an exchange ________.

A) forces the inves tor to go long the currency

B) 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 date

D) closes the old contract and sets the price of a new contract a zero

21) What is the name of the total number of contracts outstanding for a particular derivative


A) open interest B) A long position C) open


D) settle

22) The hedging contract that gives the buyer the right, but not the obligation, to sell a specific

amount of foreign currency with domestic currency is known as the ________.

A) European option B) American option

C) call option D) put option

23) The exchange rate in an option contract is called the option’s ________.

A) discount B) delivery price C) premium D) strike price

24) The original or first seller of the option is known as the ________.

A) option broker B) option commission merchant

C) writer D) clearing member

25) 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 contract

B) the initial margin

C) credit checks

D) marking to market

26) Which of the following conditions wo uld be “in the money” for an American call option for

foreign currency?

A) when the strike price is greater than the spot price

B) when the strike price is lower than the spot price

C) when the strike price is equal to the spot price

D) when the market price limits are reached and trading is halted

27) A ________ allows a multinational corporation to change the currency of denomination of its


A) interest rate swap B) currency future contract

C) currency option contract D) currency swap

28) The theoretical principal underlying the swap is termed the

A) arbitrage principal. B) basis amount.

C) swap differential. D) notional principal.

29) A currency swap is equivalent to a

A) 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 spot


D) interest rate swap, where the basis is the differential between the fixed and floating interest


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 risk

31) The phenomenon where the profitability of the firm is at risk due to real exchange rate change is

known as ________ exposure.

A) accounting B) translation C) operating D) sovereign risk

32) Another name for operating exposure is ________ exposure.

A) translation B) accounting C) sovereign risk D) economic

33) During a change in the real exchange rates, a major factor determining the response of the firm is

the ________.

A) price elasticity of competing product’s demand curve

B) supply elasticity of the industry

C) price elastici ty of the product’s demand curve

D) supply elasticity of the firm

34) In what production process are materials and intermediate parts sensitive to the real exchange

due to the fluctuations currency values?

A) plant location decisions B) pricing policies

C) input sourcing D) production scheduling

35) What production process allows a multinational firm to shift or increase production to a plant in

a country where the currency has depreciated in real terms in order to minimize costs?

A) production scheduling B) input sourcing

C) pricing policies D) plant location deci sions

36) 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 lose


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 FOREX

D) A and C

39) World Bank’s narrow definition for financial contagion,

A) includes any non-fundamental transmission mechanism,

B) excludes herding behavior, D) A and B

42) 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 B

D) none of the above.

43) When cross-hedging X

A) 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 B

D) none of the above

45) What is the optimal hedge ratio according to Fischer Black if you want to hedge the FOREX risk in

your world portfolio?

A) less than 100% because of Siegel’s paradox,

B) 100%,

C) over 100%,

D) none of the above

46) 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 what

is the value of Black’s universal optimal hedging ratio?

49) The Gaussian distribution

A) has skewness equal to zero

B) has kurtosis equal to 3

C) 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 by

A) the open interest

B) number of different contracts (delivery month) offered in the markets

C) size of the contract

D) none of the above.

51) The economic principle behind a currency swap between two firms,

A) The law of one price

B) That both firms have an absolute advantage in the money markets

C) That both firms have a comparative advantage in the money markets

D) arbitrage

52) Un unexpected change in the real foreign exchange rate is,

A) a transitory shock

B) a permanent shock

C) A and B

53) The MNC operating exposure is determined by,

A) The market structure where it operates

B) Its foreign exchange pass-through

C) A and B

D) None of the above

54) An example of a moonsonal effect in the international financial markets is

A) A shock in the price of oil B) New capital controls in Brazil

C) A shift in the bias of monetary policy by the Fed

D) A and C

55) Adjusting the discount rate to assess projects in the rest of the world (ROW) implies that,

A) political risk is idiosyncratic

B) political risk is a dimension of systematic risk

C) the existence of financial contagion in the international markets

D) B and C

56) The sovereign spread can be obtained using,

A) Market prices of equivalent US Treasury and Brady bonds

B) Money market interest rates denominated in different currencies

C) Relative PPP

D) None of the above

57) The sovereign spread is affected by,

A) Exogenous factors outside of the control of governments

B) Idiosyncratic factors to some extent under the control of governments

C) A and B

D) None of the above

58) Moral hazard refers to

A) The use of hidden actions of managers against stockholders

B) The use of hidden information against stockholders

C) The impact of a moonsonal effect

D) None of the above

59) Adjusting the free cash flow in operations of a project by the probability of expropiation or

alternatively adjusting the discount factor by the probability of expropriation will give

A) Different results because of financial contagion

B) The same results as they are equivalent methods to adjust for country or political risk

C) A negative present value

D) None of the above

60) The CAPM specification that contemplates a time-varying process of segmentation and

integration in the global economy is know as

A) The World CAPM

B) The Time-varying or Regime-Switching CAPM

C) The International CAPM 

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