Financial Markets and Institutions
Exam Preparation Guide
Course Introduction
This course provides a comprehensive introduction to the structure, functions, and roles of financial markets and institutions within the global economy. Students will explore the mechanisms of money, credit, and capital markets, analyzing how financial intermediaries such as banks, insurance companies, and investment firms operate and influence economic activity. Key topics include the determination of interest rates, risk management, regulation, innovations in financial instruments, and the impact of monetary policy. Through real-world case studies and current events, learners will gain insight into the interactions between financial institutions and markets and their collective importance in promoting economic growth and stability.
Recommended Textbook
International Finance Global 6th Edition by von Cheol Eun
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Chapter 1: Globalization and the Multinational Firm
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Q1) Underlying the theory of comparative advantage are assumptions regarding A)free trade between nations.
B)that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile.
C)that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively mobile.
D)a and b
Answer: D
Q2) A corporation that can source its products in one country,sell them in another country,and raise the funds in a third country
A)is a multinational corporation.
B)is a domestic firm if all of the shareholders are from the same country.
C)enjoys a built-in hedge against exchange rate risk.
D)enjoys a built-in hedge against political risk.
Answer: A
Q3) Is Northern Ireland better off when it trades with Southern Ireland?
A)True
B)False
Answer: True
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Chapter 2: International Monetary System
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Sample Questions
Q1) Prior to the Argentine Peso Crisis
A)Argentina had a "dirty float" where the government allowed the exchange rate to float within wide bands.
B)Argentina had a currency board arrangement with the peso pegged to the U.S.dollar at parity.
C)the Argentine government defaulted on its international debts.
D)weakening of the U.S.dollar led the Argentine government to abandon dollarization.
Answer: D
Q2) Suppose that country A and country B are both on a bimetallic standard.In country A the ratio is 15 to one (i.e.an ounce of gold is worth 15 times as much as an ounce of silver in that currency),while in country B the ratio is ten to one.If the free flow of capital is allowed between countries A and B is this a sustainable framework?
A)Yes
B)No
C)There is not enough information to make an informed determination.
Answer: B
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Chapter 3: Balance of Payments
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Q1) The most important international reserve asset,comprising 94 percent of the total reserve assets held by IMF member countries is
A)gold.
B)foreign exchanges.
C)special Drawing Rights (SDRs).
D)reserve positions in the International Monetary Fund (IMF).
Answer: B
Q2) The balance of payments records
A)only international trade, (exports and imports).
B)only cross-border investments (FDI and portfolio investment).
C)not only international trade, (exports and imports) but also cross-border investments.
D)none of the above
Answer: C
Q3) The world's largest debtor nation and creditor nation,respectively,are A)Japan and the U.S.
B)The U.S.and Japan.
C)The U.S.and Canada.
D)Great Britain and Mexico.
Answer: B
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Page 5
Chapter 4: Corporate Governance Around the World
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Q1) Several studies document the empirical link between A)weak investor protection and GDP growth.
B)financial development and economic growth.
C)growth in GDP and concentrated ownership.
D)none of the above
Q2) In the United States,it is well documented that
A)boards dominated by their chief executives are prone to trouble.
B)public scrutiny can help improve corporate governance.
C)as public firms improve their corporate governance, the stock price goes up.
D)all of the above
Q3) Outside the United States and the United Kingdom,
A)concentrated ownership of the company is more the exception than the rule.
B)diffused ownership of the company is more the exception than the rule.
C)partnerships are more important than corporations.
D)none of the above
Q4) In the United States,managers are legally bound by the "duty of loyalty" to A)the board of directors.
B)to the shareholders.
C)to the bondholders.
D)to the government.
Page 6
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Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) Which of the following are correct?
A) \(F _ { N } ( j / k ) = \frac { F _ { N } ( \$ / j ) } { F _ { N } ( \$ / k ) }\)
B) \(F _ { N } ( j / k ) = \frac { F _ { N } (
/ \$ ) } { F _ { N } ( j / \$ ) }\)
C) \(F _ { N } ( j / k ) = \frac { F _ { N } ( \$ / j ) } { F _ { N } ( \$ / k ) }\).
D)All of the above are correct
Q2) Most foreign exchange transactions are for
A)intervention by central banks.
B)interbank trades between international banks or nonbank dealers.
C)retail trade.
D)purchase of hard currencies.
Q3) Using the table,what is the 6-month forward pound-yen cross-exchange rate?
Q4) Using the table,what is the Canadian dollar-euro spot cross-exchange rate?
Q5) Using the table,what is 3-month forward premium or discount (expressed as an annual percentage rate)for the British pound in terms of U.S.dollars?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Sample Questions
Q1) Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate by the way)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.The interest rate in Japan (on an investment of comparable risk)is 13 percent.What is your strategy?
A)Take $1m, invest in U.S.T-bills.
B)Take $1m, translate into yen at the spot, invest in Japan, and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.
C)Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in the forward contract.
D)Take $1m, translate into yen at the forward rate, invest in Japan, hedge with a short position in the spot contract.
Q2) USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward BID exchange rate in $ per that satisfies IRP from the perspective of a customer.
Q3) If you borrowed $1,000,000 for one year,how much money would you owe at maturity?
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Comparing "forward" and "futures" exchange contracts,we can say that
A)they are both "marked-to-market" daily.
B)their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity.
C)a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while forward contract is tailor-made by an international bank for its clients and is traded OTC.
D)both b and c
Q2) The current spot exchange rate is $1.55 = 1.00; the three-month U.S.dollar interest rate is 2%.Consider a three-month American call option on 62,500 with a strike price of $1.50 = 1.00.What is the least that this option should sell for?
A)$0.05 * 62,500 = $3,125
B)$3,125/1.02 = $3,063.73
C)$0.00
D)none of the above
Q3) Verify that the dollar value of your put option equals the dollar value of your call. Your answer is worth zero points if it does not include currency symbols ($, )!
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Chapter 8: Management of Transaction Exposure
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Q1) Generally speaking,a firm with recurrent exposure can best hedge using which product?
A)Options
B)Swaps
C)Futures
D)All of the above
Q2) The current exchange rate is 1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or 12,500.
A)The seller has given the buyer an at-the-money put option on euro with a strike in pounds.
B)The seller has given the buyer an at-the-money put option on pounds with a strike in euro.
C)The seller has given the buyer an at-the-money call option on euro with a strike in pounds.
D)None of the above
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Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) With regard to operational hedging versus financial hedging,
A)operational hedging provides a more stable long-term approach than does financial hedging.
B)financial hedging, when instituted on a rollover basis, is a superior long-term approach to operational hedging.
C)since they both have the same goal, stabilizing the firm's cash flows in domestic currency, they are fungible in use.
D)none of the above
Q2) Which of the following is true?
A)The competitive effect is that a currency depreciation may affect operating cash flow in the foreign currency by altering the firm's competitive position in the marketplace.
B)The conversion effect is defined as a given accounting cash value in a foreign currency will be converted into a lower dollar amount after currency depreciation.
C)The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a lower dollar amount after a currency depreciation.
D)None of the above
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Chapter 10: Management of Translation Exposure
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Q1) Salient economic factors for determining the functional currency include
A)cash flow indicators.
B)sales price indicators.
C)sales market indicators.
D)all of the above
Q2) The "reporting currency" is defined in FASB 52 as
A)the currency of the primary economic environment in which the entity operates.
B)the currency in which the MNC prepares its consolidated financial statements.
C)a currency that is not the parent firm's home country currency.
D)both a and c
Q3) The recognized methods for consolidating the financial reports of an MNC are
A)short/long term method, current/future method, flexible/inflexible method, and economic/noneconomic method.
B)current/noncurrent method, monetary/nonmonetary method, short/long term method, and current/future method.
C)current/noncurrent method, monetary/nonmonetary method, temporal method, and current rate method.
D)temporal method, current rate method, flexible/inflexible method, and economic/noneconomic method.
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Page 12
Chapter 11: International Banking and Money Market
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Sample Questions
Q1) A bank may establish a multinational operation for the reason of home country information services.The underlying rationale being that
A)by maintaining foreign branches and foreign currency balances, banks may reduce transaction costs and foreign exchange risk on currency conversion if government controls can be circumvented.
B)local firms may be able to obtain from a foreign subsidiary bank operating in their country more complete trade and financial market information about the subsidiary's home country than they can obtain from their own domestic banks.
C)the foreign bank subsidiary can draw on the parent bank's knowledge of personal contacts and credit investigations for use in that foreign market.
D)greater stability of earnings is possible with international diversification.Offsetting business and monetary policy cycles across nations reduces the country-specific risk of any one nation.
Q2) Edge Act banks are not prohibited from owning equity in business corporations,unlike domestic commercial banks.
A)True
B)False
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Chapter 12: International Bond Market
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Sample Questions
Q1) "Samurai" bonds are
A)dollar-denominated foreign bonds originally sold to U.S.investors.
B)yen-denominated foreign bonds originally sold in Japan.
C)pound sterling-denominated foreign bonds originally sold in the U.K.
D)none of the above
Q2) A "global bond" issue
A)is a very large international bond offering by several borrowers pooled together.
B)is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets.
C)has higher yields for the purchasers.
D)has a lower liquidity.
Q3) A five-year,4 percent Euroyen bond sells at par.A comparable risk five-year,5.5 percent yen/dollar dual-currency bond pays $833.33 at maturity per ¥100,000 of face value.It sells for ¥110,000.What is the implied ¥/$ exchange rate at maturity?
A)¥131/$1.00
B)¥120/$1.00
C)¥110/$1.00
D)¥103/$1.00
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Chapter 13: International Equity Markets
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Sample Questions
Q1) The smaller the concentration percentage,
A)the more concentrated a market is in a few stock issues.
B)the less concentrated a market is.
C)the more liquid the secondary stock market is.
D)none of the above
Q2) Unlike day orders,a good-til-cancelled (GTC)order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or cancelled.Which of the following are true?
A)A GTC order will not be executed until the limit price has been reached, regardless of how many days or weeks it might take.
B)Investors often use GTC orders to set a limit price that is far away from the current market price.
C)Some brokerage firms may limit the time a GTC order can remain in effect and may charge more for executing this type of order.
D)All of the above are true
Q3) Public traders do not trade directly with one another in a dealer market.
A)True
B)False
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Chapter 14: Interest Rate and Currency Swaps
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Sample Questions
Q1) Explain how firm B could use two of the swaps offered above to hedge its exchange rate risk.
Q2) A major risk faced by a swap dealer is sovereign risk.This is
A)the probability that a sovereign counterparty will default.
B)the probability that a country will impose exchange restrictions on a currency involved in an existing swap.
C)the probability governments will intervene to support an exchange rate.
D)none of the above
Q3) Company X and company Y have mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time.Company X has a AAA credit rating,but company Y's credit standing is considerably lower.
A)Company X should demand most of the QSD in any swap with Y as compensation for default risk.
B)Since Y has a poor credit rating, it would not be a participant in the swap market.
C)Company X should more readily agree to a swap involving Y if there is also a swap bank providing credit risk intermediation.
D)both a and c
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Chapter 15: International Portfolio Investment
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Sample Questions
Q1) Consider a simple exchange risk hedging strategy in which the U.S.dollar based investor sells the expected foreign currency proceeds of a risky investment forward.Although the expected foreign investment proceeds will be converted into U.S.dollars at the known forward exchange rate under this strategy,the unexpected foreign investment proceeds
A)will have to be converted into U.S.dollars at the uncertain forward spot exchange rate. B)will have to be converted into U.S.dollars at the uncertain future spot exchange rate. C)will have to be converted into U.S.dollars at the uncertain swap exchange rate. D)none of the above
Q2) Assume that you have invested $100,000 in Japanese equities.When purchased the stock's price and the exchange rate were ¥100 and ¥100/$1.00 respectively.At selling time,one year after purchase,they were ¥110 and ¥110/$1.00.The dollar rate of return would be:
A)0%
B)4.32%
C)28.00%
D)-9.09%
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) FDI stocks
A)are the common shares of multinational companies that invest abroad.
B)are mutual funds that invest in FDI.
C)represent the accumulation of previous years' FDI flows.
D)at the sum total of current year FDI flows.
Q2) Severe imperfections in the labor market arise from immobility of workers due to immigration barriers.As a response,firms should consider A)moving to the workers.
B)moving to countries where labor services are the lowest in absolute terms.
C)moving to countries where labor services are underpriced relative to productivity.
D)hiring illegal immigrants.
Q3) The United States is the largest initiator,of FDI.The largest recipient of FDI is A)also the United States.
B)France.
C)Germany.
D)China.
E)none of the above
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Page 18
Chapter 17: International Capital Structure and the Cost of Capital
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Q1) Solve for the weighted average cost of capital: \[\begin{aligned}
12.40 \% & = K _ { l } \\
2 / 3 & = \lambda \\
8.0 \% & = i \\
40.0 \% & = \tau
\end{aligned}\]
A)8.67%
B)8.00%
C)7.60%
D)7.33%
E)7.14%
Q2) In the notation of the book,K = (1 - \(\lambda\))K<sub>l</sub> + \(\lambda\) (1\(\lambda\))i Which of the following are correct?
A)The debt-to-equity ratio is \(\lambda\)
B)The cost of equity capital for a levered firm is K<sub>l</sub>
C)The after-tax cost of debt capital is i
D)All of the above
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Chapter 18: International Capital Budgeting
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Q1) What is the levered after-tax incremental cash flow for year 1?
A)$4,300
B)-$202,610
C)-$95,700
D)$57,000
E)None of the above
Q2) What is the levered after-tax incremental cash flow for year 2?
A)$185,796,000
B)$215,152,000
C)$267,952,000
D)$284,848,000
E)None of the above The firm will partially finance the project with an 8% interest-only 4-year loan.
Q3) What is CF1 in dollars?
Q4) What is the unlevered after-tax incremental cash flow for year 30?
A)$12,432,300
B)$12,225,390
C)$12,332,300
D)$12,485,000
E)None of the above
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Chapter 19: Multinational Cash Management
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Q1) Multinational cash management
A)is really no different for a MNC than for a purely domestic firm in a closed economy.
B)concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC's affiliates.
C)concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC's affiliates, since intra-affiliate default risk is not an issue.
D)none of the above
Q2) MNCs can reduce their exchange rate expense
A)by using bilateral netting.
B)by using a centralized cash management system.
C)by using multilateral netting.
D)all of the above
Q3) Fill out the following figure with the initial situation shown in the table.
Q4) Fill out the following figure with the initial situation shown in the table.
Q5) Using your results to the last question,use bilateral netting to simplify.
Q6) Using your results to the last question,use multilateral netting to simplify.
Q7) Using your results to the last question,use bilateral netting to simplify.
Page 21
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Chapter 20: International Trade Finance
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Q1) If the importing bank's acceptance commission is 1.25 percent,determine the amount the exporter will receive if he holds the B/A until maturity.
A)$2,945,625
B)$2,990,625
C)$2,906,250
D)$3,009,375
Q2) If the market rate for 90-day B/As is 6.0 percent,calculate the amount the exporter will receive if he discounts the B/A with the importer's bank.
A)$2,945,625
B)$2,990,625
C)$3,000,000
D)$3,009,375
Q3) Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.
Q4) In a consignment sale
A)the importer only pays the exporter once he sells the merchandise.
B)the exporter retains title to the merchandise that is shipped.
C)if the goods do not sell, the importer can return them to the exporter.
D)all of the above
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Affiliate A sells a million units to Affiliate B per year.The marginal income tax rate for Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent.The transfer price can be set at any level between $100 and $200.Which transfer price between A and B should the parent select?
A)$200
B)$100
C)$150
D)It does not matter.
Q2) An income tax is defined by your textbook as
A)is a direct tax.
B)is an indirect tax.
C)is collected with a withholding tax.
D)none of the above
Q3) Tax neutrality is determined
A)by one criterion.
B)by two criteria.
C)by three criteria.
D)by four criteria.
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