Financial Markets and Institutions
Exam Answer Key
Course Introduction
This course offers a comprehensive exploration of the structure, function, and role of financial markets and institutions within the global economy. Students will examine the mechanisms through which funds are transferred from savers to borrowers, the variety of financial instruments available, and how financial intermediaries like banks, insurance companies, and investment firms operate. The curriculum emphasizes the regulatory environment, risk management practices, and the impact of central banks and monetary policy. Through case studies and real-world examples, students will gain an understanding of the ways in which financial markets and institutions drive economic growth, facilitate investment, and respond to both domestic and international financial challenges.
Recommended Textbook
International Financial Management Canadian Perspectives 2nd Edition by
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Cheol Eun
Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) If people in both countries eat the same dish that requires 0.1kg or tomatoes and 1.4kg of potatoes to prepare,how much tomatoes are CONSUMED in Byelorussia?
A)Less than 100 tons
B)At least 100 tons but less than 200 tons
C)At least 200 tons but less than 400 tons
D)More than 400 tons
Answer: A
Q2) A multinational firm can be defined as:
A)A firm that invests short-term cash inflows in more than one currency
B)A firm that has sales affiliates in several countries
C)A firm that is incorporated in more than one country
D)A firm that incorporated in one country that has production and sales operations in several other countries
Answer: D
Q3) What are some of major recent trends in globalization?
Answer: The major trends are (1)the emergence of globalized financial markets,(2)the advent of the euro,(3)trade liberalization and economic integration,and (4)privatization.
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Page 3
Chapter 2: International Monetary System
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Q1) A "good" (or ideal)international monetary system should provide:
A)liquidity, elasticity, and flexibility
B)elasticity, sensitivity, and reliability
C)liquidity, adjustments, and confidence
D)none of these
Answer: C
Q2) The euro currently in use is the common currency of
A)11 EU member countries
B)12 EU member countries
C)all EU member countries
D)all European countries
Answer: B
Q3) Bretton-Woods system:
A)is an example of a fixed exchange rate regime
B)is an example of a flexible exchange rate regime
C)gave birth to the introduction of the Euro
D)was used to smooth transition from bimetallism to the classical gold standard
Answer: A
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Chapter 3: Balance of Payments
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Q1) Explain balance on current account.
Answer: The current account records flows of goods,services,investment income and international financial transfers.Transactions involving the purchase of Canadian dollars,e.g.exports of goods and services,investment income from abroad,are entered as credits.Transactions involving the sale of Canadian dollars (or purchase of foreign currencies),e.g.imports of goods and services,investment income paid to foreign parent firms,are entered as debits.The balance on current account tells us whether there was an excess demand for Canadian dollars (the balance on current account is positive)or an excess supply of Canadian dollars (the balance on current account is negative)resulting from the flow of goods,services,investment income and international financial transfers.
Q2) Nokia Inc,a Finnish company,hires a French consulting firm.This transaction will be recorded in Finland's balance of payments as
A)a credit in the current account
B)a debit in the current account
C)a credit in the capital account
D)a debit in the capital account
Answer: B
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Chapter 4: Corporate Governance Around the World
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Sample Questions
Q1) If CIBC posts 1.10CAD/USD - 1.14 CAD/USD bid-ask exchange rates,Scotiabank posts 1.12CAD/USD - 1.15 CAD/USD,and Bank of America posts 0.88USD/CAD - 0.9 USD/CAD exchange rates,what is the maximum amount of CAD can you get for 1 USD?
A)1.100
B)1.111
C)1.120
D)1.136
Q2) The following quotes are given for the Euro against the US dollar: 0.9075 - 85,15-10,22-11,30-15 for the spot,one month,three months and six months forward contracts.
a)Calculate the outright quotations and the spread for each maturity.
b)Is the dollar at a forward premium or discount?
c)Where are the interest rates higher?
Q3) The foreign exchange market closes:
A)Never
B)4:00 p.m.EST (New York time)
C)4:00 p.m.GMT (London time)
D)4:00 p.m.(Tokyo time)
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Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) The net cash flow in one year is
A)$10,690
B)$15,000
C)$46,207
D)$22,000
Q2) PPP does not hold well because of the following except
A)barriers to international commodity arbitrage
B)the existence of non-tradables
C)commodity prices are different in different countries
D)the CPI index is calculated using the same basket of goods
Q3) The 9-months inflation rate in Great Britain is expected to be 4% p.a.,and the 9-months inflation rate in Switzerland is predicted to be 6% p.a.Assume that the parity conditions hold.
a)By what percentage rate do you expect the Swiss franc to appreciate (depreciate)with respect to the British pound over the next nine months,based on purchasing power parity?
b)If the spot rate is pound 0.5/SF,what is the expected spot exchange rate between the Swiss franc and the British pound in nine months?
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Chapter 6: International Parity Relationships and Forecasting Foreign
Exchange Rates
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Q1) Find the VAR for a portfolio of $100M with daily standard deviation of 0.5% over 30-day period.Note: z<sub>1%</sub> = 2.326
A)Below $5M
B)Between $5M and $10M
C)Between $10M and $20M
D)Above $20M
Q2) A locally incorporated bank that is either wholly owned or owned in major part by a foreign parent is called
A)Correspondent bank
B)Representative office
C)Foreign branch
D)Subsidiary bank
Q3) The London Interbank Offered Rate (LIBOR)is all of the following except:
A)the rate charged by banks on loans to other Eurobanks
B)the rate paid by banks on deposits from other Eurobanks
C)reference rate in London for Eurocurrency deposits
D)reference rate in London for Eurocurrency loans
Q4) How are Canadian dollar interest rates in the Euromarkets and in the Canadian domestic financial markets related?
Page 8
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) Bonds with fixed coupon payments in regular intervals and a designated maturity date are called
A)straight-fixed rate bonds
B)euro-medium term bonds
C)floating-rate bonds
D)equity-related bonds
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- Canada Inc.has issued a dual-currency bond that pays $555.10 at maturity per SF1,000 of par value.The company's cash flows are exclusively in Canadian dollars.
a)What is the implicit $/SF exchange rate at maturity?
b)Will the company be better or worse off if the actual exchange rate at maturity is $0.6123/SF?
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Chapter 8: Management of Transaction Exposure
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Q1) Assume Nestle is trading for SF200 in Zurich and Nestle ADRs (4 ADRs per share)are trading for $40 on the New York Stock exchange.There is no arbitrage possible.What is the current SF/US$ exchange rate?
A)SF 0.8/$
B)SF 1/$
C)SF 1.25/$
D)SF 4/$
Q2) If the Rolls Royce ADRs were trading at $5.75 when the underlying shares were trading in London at £0.875,ignoring transaction costs,the arbitrage trading profit would be:
A)$0.00
B)$1.12
C)$2.12
D)$3.12
Q3) What/who is Euronext N.V.
A)President of the Eurobank
B)Vice-president of the Eurobank
C)Stock Exchange
D)Stock Index
Q4) What factors go into the decision to cross-list on a foreign exchange?
Page 10
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Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) Suppose the Canadian Wheat Pool wants to hedge a US dollar payable using futures contracts that trade on the Chicago Mercantile exchange.
A)The Wheat Pool should buy Canadian dollar futures
B)The Wheat Pool should sell Canadian dollar futures
C)The Wheat Pool cannot hedge this position
D)The Wheat Pool should not use the Chicago Mercantile exchange
Q2) In reference to the derivatives market,a "speculator"
A)attempts to profit from a change in the futures price
B)wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position
C)plays a zero-sum game
D)b and c
Q3) Which of the following statements is true?
A)The buyer of a forward contract holds a short position.
B)The buyer of a futures contract holds a losing position.
C)The buyer of a forward contract holds a wining position.
D)The buyer of a futures contract holds a long position.
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Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) The following information is given:
Q2) Company A swaps fixed-rate US dollar debt with Company B for floating-rate Canadian dollar debt.This is a
A)single-currency interest rate swap
B)currency swap
C)cross-currency interest rate swap
D)none of these
Q3) Find QSD
A)1%
B)1.2%
C)2.2%
D)3.2%
Q4) Which firms will benefit from a currency swap?
A)neither firm
B)the Canadian firm only
C)both firms
D)need more information
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Chapter 11: International Banking and Money Market
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Q1) In May 2003 when the exchange rate was Yen 110/$,Nissan Motor Company invested
¥1,100,000,000 in pure-discount U.S.bonds and liquidated the investment one year later when the exchange rate was Yen 105/$.The Yen rate of return earned on this investment was 10%.
a)Calculate the dollar amount that the bonds were sold at.
b)Calculate the dollar rate of return of this investment.
Q2) Investors can use of the following to diversify their portfolios internationally except:
A)International mutual funds
B)ADRS
C)WEBS
D)STAS
Q3) A Canadian investor buys shares in DaimlerChrysler on the New York Stock Exchange when the stock's price and the exchange rate were US$ 40 and US$0.70/C$ respectively.One year later the investor sells the shares for US$ 41 and the exchange rate is US$0.80/$.
a)Calculate the investor's annual percentage rate of return in terms of the U.S.dollars.
b)Calculate the investor's annual percentage rate of return in Canadian dollars.
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Page 13
Chapter 12: International Bond Market
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Q1) Operating exposure can be managed by:
A)flexible sourcing policy
B)diversification of the market
C)financial hedging
D)all of these
Q2) Operating exposure can be defined as:
A)the future home currency values of the firm's assets and liabilities
B)the extent to which the firm's operating cash flows would be affected by random changes in exchange rates
C)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes
D)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates
Q3) How can operating exposure be managed?
Q4) The "exposure" (i.e.the regression coefficient beta)is:
A)67.97
B)679.78
C)6797.80
D)none of these
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Chapter 13: International Equity Markets
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Sample Questions
Q1) Assume that the forward rate is the best predictor of the future spot rate.The future dollar cost of meeting this obligation using the option hedge is:
A)$6,450,000
B)$6,545,400
C)$6,653,833
D)$6,880,734
Q2) The steps involved in a money market hedge for a foreign currency payable of a Canadian firm are in order:
A)Borrow Canadian dollars, buy foreign currency spot, invest in foreign currency T-bills, pay foreign currency payable
B)Borrow Canadian dollars, buy foreign currency spot, invest in Canadian T-bills, pay foreign currency payable
C)Borrow foreign currency, buy dollar spot, invest in foreign currency T-bills, collect foreign currency proceeds
D)Borrow foreign currency, buy dollar spot, invest in Canadian T-bills, collect foreign currency proceeds
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Chapter 14: Interest Rate and Currency Swaps
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Q1) Which of the above statements pertains to integrated foreign operations?
A)(i)
B)(i) and (ii)
C)(iii) and (iv)
D)(i), (ii), and (iii)
Q2) The "reporting currency" is:
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)a and c
Q3) The "functional currency" is:
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)b and c
Q4) Which of the above statements pertain to self-sustaining foreign operations?
A)(i)
B)(i) and (ii)
C)(iii) and (iv)
D)(i), (ii), and (iii)
Page 16
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Chapter 15: International Portfolio Investment
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Q1) Country risk refers to:
A)political risk
B)credit risk and other economic performances
C)a and b
D)every risk except political risk
Q2) Explain political risk and its three main classifications.How can political risk be incorporated in the decision making process when firms decide on whether to invest in foreign project or not?
Q3) Explain the role of market imperfections in FDI.
Q4) An increase in political risk can be managed by:
A)adjusting a foreign investment project's NPV by either reducing its expected cash flows, or by increasing the cost of capital
B)forming joint venture with a local company
C)purchasing insurance against the hazard of political risk
D)all of these
Q5) How can firms establish a wholly owned subsidiary in a foreign country? What are the advantages and disadvantages of each method?
Q6) ABC Inc.,located in Vancouver,BC wants to buy XYZ Inc.,located in Seattle,WA.What does the ABC Inc.have to consider so that the acquisition will be successful?
Page 17
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Capital structure refers to all of the following except:
A)Right-hand side the corporate balance sheet
B)A description of how the company is financed
C)The debt-equity ratio
D)What assets the firm has
Q2) "When in Rome do as the Romans do" best describes which approach to a subsidiary's financial structure?
A)conform to the parent company's norm
B)conform to the local norm of the country where the subsidiary operates
C)vary judiciously
D)vary randomly
Q3) Assume that the risk-free rate of return is 4%,and the expected return on the market portfolio is 10%.If the expected return of ABC is 12% the firm's beta calculate using the Capital Asset Pricing Model (CAPM).
A)1
B)1.25
C)1.33
D)1.5
Q4) What are the potential benefits of cross-listing shares on a foreign stock exchange?
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) When making a capital budgeting decision the ultimate decision depends on
A)the APV from the parent's perspective
B)the APV from the subsidiary's perspective
C)both of the above
D)none of these
Q2) Which of the following statements is false about "borrowing capacity"?
A)it is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans
B)it creates tax shields for APV analysis regardless of how the project is actually financed
C)is synonymous to the "project debt"
D)is based on the firm's optimal capital structure
Q3) The option to quit a foreign project early is called:
A)Timing option
B)Abandonment option
C)Growth option
D)Exercise option
Q4) Which cash flows are relevant for the international capital budgeting analysis?
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Chapter 18: International Capital Budgeting
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Q1) When a country enforces exchange controls the profits of a subsidiary in that country are referred to as:
A)Stuck funds
B)Locked profits
C)Blocked funds
D)Lost funds
Q2) Assume that the US and Canadian governments impose no restrictions on transfer pricing.What transfer price should Company ABC charge?
A)5,000
B)6,000
C)7,000
D)10,000
Q3) If the transfer price is $8,000,what is the income tax paid in the United States?
A)300
B)400
C)700
D)1,000
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Chapter 19: Multinational Cash Management
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Q1) Which forms of countertrade involve the use of money?
A)Barter, switch trading, buyback
B)Barter, clearing arrangement, switch trading
C)Buy-back, switch trading, counterpurchase
D)Buy-back, counterpurchase, offset
Q2) The ________ sends a purchase order to the ________. The________ applies to his bank for a letter of credit.
A)importer, exporter, exporter
B)exporter, importer, importer
C)importer, exporter, importer
D)exporter, importer, exporter
Q3) 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)$3,000,000
D)$3,009,375
Q4) Name and explain the three most important documents in a typical international trade transaction.
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Chapter 20: International Trade Finance
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Q1) A tax levied on passive income earned by an individual or a corporation of one country within the tax jurisdiction of another is called
A)foreign income tax
B)value-added tax
C)investment tax
D)withholding tax
Q2) Calculate the American foreign tax credit for a subsidiary in Germany.Assume that the German income tax rate is 50%,the American income tax rate is 35%,and the withholding tax rate is 10%.The taxable income in Germany is 500.Assume that all income is remitted to the parent immediately.
Q3) A "tax haven" country is one that has a low,or zero percent,national tax rates.Some of the countries that fall into this category are:
A)Bahamas, Bahrain, Bermuda, and the Cayman Islands
B)Denmark, Norway, Switzerland, and Sweden
C)Bulgaria, Canada, Saudi Arabia, and South Africa
D)Congo, Egypt, Kuwait, and Zaire
Q4) What are the major ways in which countries levy taxes?
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Chapter 21: International Tax Environment and Transfer Pricing
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Q1) Discuss the major advantage and key weakness of a public corporation.
Q2) Weak investor protection is associated with all of the following except:
A)valuable stock markets
B)sharp market declines during a financial crisis
C)lower stock market capitalization
D)fewer publicly traded companies
Q3) How can listing overseas benefit the corporate governance of a public company?
Q4) find that
A)the entrenchment effect dominates the alignment effect
B)the alignment effect dominates the entrenchment effect
C)the entrenchment effect dominates the alignment effect over the range of managerial ownership between 5 percent and 25 percent
D)the alignment effect dominates the entrenchment effect over the range of managerial ownership between 5 percent and 25 percent
Q5) Private benefits of corporate control will tend to be higher in
A)in French civil law countries than in English common law countries.
B)in English common law countries than in French civil law countries.
C)in French civil law countries than in Scandinavian civil law countries.
D)In English common law countries than in German civil law countries.
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