Financial Markets and Institutions
Exam Materials
Course Introduction
Financial Markets and Institutions explores the structure, function, and role of financial systems in the economy. The course examines various types of financial markets including money, bond, equity, and derivatives markets and the institutions that facilitate their operation, such as banks, investment firms, insurance companies, and regulatory bodies. Students will analyze how these entities and markets interact to allocate resources, manage risks, and influence economic growth. Emphasis is placed on the mechanisms of interest rate determination, asset pricing, financial intermediation, and the impact of regulation and monetary policy on financial stability. The course aims to provide a comprehensive understanding of the dynamics and challenges within contemporary financial systems, preparing students for informed participation in or analysis of financial sectors.
Recommended Textbook Fundamentals of Multinational Finance 4th Edition by Michael H. Moffett
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Page 2
Chapter 1: Current Multinational Challenges and the Global Economy
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Sample Questions
Q1) The phase of the globalization process characterized by imports from foreign suppliers and exports to foreign buyers is called the
A)domestic phase.
B)multinational phase.
C)international trade phase.
D)import-export banking phase.
Answer: C
Q2) The Eurocurrency loan market is characterized by narrow interest rate spreads between deposit and loan rates.This is due in part to which of the following factors?
A)The Eurocurrency market is a "wholesale" market..
B)Loan amounts are very large, often in excess of $500,000.
C)Eurocurrency borrowers are typically large, low-risk corporations or government entities.
D)All of the above are legitimate reasons for the narrow spread in the Eurocurrency market.
Answer: D
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Chapter 2: Financial Goals and Corporate Governance
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Sample Questions
Q1) Anglo-American is defined to mean
A)North, Central, and South America.
B)the United States, Canada, and Western Europe.
C)the United States, United Kingdom, Canada, Australia and New Zealand.
D)the United States, France, Britain, and Germany.
Answer: C
Q2) If share price falls from $15 to $12 per share,and pays a dividend of $1 per share,what was the rate of return to shareholders?
A)13.33%
B)-13.33%
C)16.67%
D)-16.67%
Answer: B
Q3) Which of the following is a reason why managers act to maximize shareholder wealth in Anglo-American markets?
A)the use of stock options to align the goals of shareholders and managers
B)the market for corporate control that allows for outside takeover of the firm
C)performance based compensation for executive management
D)all of the above
Answer: D
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Chapter 3: The International Monetary System
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Sample Questions
Q1) The Euro currency is fixed against other currencies on the international currency exchange markets,but allows member country currencies to float against each other.
A)True
B)False
Answer: False
Q2) The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability,full financial integration,and monetary independence.If a country chooses to have a pure float exchange rate regime,which two of the three goals is a country most able to achieve?
A)monetary independence and exchange rate stability
B)exchange rate stability and full financial integration
C)full financial integration and monetary independence
D)A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.
Answer: C
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Chapter 4: The Balance of Payments
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Sample Questions
Q1) A country experiencing a serious BOP ________ is more likely to ________ exports than otherwise.
A)surplus; contract
B)deficit; contract
C)deficit; expand
D)none of the above
Q2) Because current and financial/capital account balances use double-entry book keeping it is unusual to find serious discrepancies in the debits and credits.
A)True
B)False
Q3) Which of the following is the best definition of money laundering?
A)legal transfer of funds through the usual international payments mechanisms
B)the transfer of cash into collectibles that are then transferred across borders
C)the cross-border purchase of assets that are then managed in a way that hide the movement of money and its ownership
D)false invoicing of international trade transactions
Q4) Identify and explain the three stages of the J-curve adjustment path of the trade balance adjustment process.
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Chapter 5: Current Multinational Financial Challenges: the
Credit Crisis of 2007 - 2009
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Q1) Subprime mortgages may have never exceeded 7% to 8% of all outstanding mortgage obligations by 2007,but by the end of 2008,they were the source of more than 65% of bankruptcy filings by homeowners in the United States.
A)True
B)False
Q2) Which of the following large U.S.firms was allowed to fail in 2008 and forced to file for bankruptcy?
A)Fannie Mae
B)Lehman Brothers
C)Freddie Mac
D)AIG
Q3) A (an)________ is a financial intermediation device designed to allow banks to create off-balance sheet investment entities that "borrow short" and "lend long".
A)asset-backed security (ABS)
B)structured investment vehicle (SIV)
C)mortgage-backed security (MBS)
D)plain vanilla swap
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Page 7
Chapter 6: The Foreign Exchange Market
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Sample Questions
Q1) The following is an example of an American term foreign exchange quote:
A)$20/£.
B)0.85 euro/$.
C)100¥/euro.
D)None of the above.
Q2) Foreign exchange quotes are often confusing.Define these terms and then identify the types of quotes that follow.Direct quote,indirect quote,American terms,European terms
EUR0.686 = USD1,this quote found in Frankfurt,Germany
USD1.4577 = EUR1.0,this quote found in San Francisco,California
Q3) NDFs are traded and settled outside the country of the subject currency,and therefore are beyond the control of the country's government.
A)True
B)False
Q4) Although the "big three" (dollar,euro,and yen)continue to dominate global trades,it will probably not be long before a fourth,not yet on the map-the Chinese renminbi-will move into greater prominence.
A)True
B)False
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Chapter 7: International Parity Conditions
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Sample Questions
Q1) The current U.S.dollar-yen spot rate is 85¥/$.If the 90-day forward exchange rate is 88 ¥/$ then the yen is selling at a per annum ________ of ________.
A)premium; 1.57%
B)premium; 6.30%
C)discount; 3.41%
D)discount; 13.64%
Q2) If exchange markets were not efficient,it would pay for a firm to spend resources on forecasting exchange rates.
A)True
B)False
Q3) ________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.
A)The Fisher Effect
B)The International Fisher Effect
C)Absolute Purchasing Power Parity
D)Relative Purchasing Power Parity
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Chapter 8: Foreign Currency Derivatives and Swaps
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Sample Questions
Q1) Refer to Instruction 8.1.The risk of strategy #1 is that interest rates might go down or that your credit rating might improve.The risk of strategy #3 is (Assume your firm is borrowing money.)
A)that interest rates might go down or that your credit rating might improve.
B)that interest rates might go up or that your credit rating might improve.
C)that interest rates might go up or that your credit rating might get worse.
D)none of the above.
Q2) Financial derivatives are powerful tools that can be used by management for purposes of
A)speculation.
B)hedging.
C)human resource management.
D)A and B above.
Q3) Refer to Table 8.1.The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________.
A)1460; 0.68 cents; $425.00
B)1440; 1.06 cents; $662.50
C)1450; 1.02 cents; $637.50
D)1440; 1.42 cents; $887.50
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Page 10
Chapter 9: Foreign Exchange Rate Determination and Forecasting
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Sample Questions
Q1) Assume your country has a balance of payments surplus.How would the government and markets react to "correct" this imbalance under a fixed exchange rate regime? Under a floating exchange rate regime?
Q2) The Central Bank practice of the active buying and selling of the domestic currency against foreign currencies is the process of ________.
A)direct intervention
B)indirect intervention
C)coordinated intervention
D)capital controls
Q3) The Asian Currency crisis appeared to begin in ________.
A)South Korea
B)Taiwan
C)Thailand
D)Japan
Q4) The ________ is the Argentine currency unit.
A)peso
B)dollar
C)real
D)peseta
Page 11
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Chapter 10: Transaction and Translation Exposure
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Sample Questions
Q1) If a firm's balance sheet has an equal amount of exposed foreign currency assets and liabilities and the firm translates by the temporal method,then
A)the net exposed position is called monetary balance.
B)the change of value of liabilities and assets due to a change in exchange rates will be of equal but opposite direction.
C)both A and B are true.
D)none of the above.
Q2) The basic advantage of the ________ method of foreign currency translation is that foreign nonmonetary assets are carried at their original cost in the parent's consolidated statement while the most important advantage of the ________ method is that the gain or loss from translation does not pass through the income statement.
A)monetary; current rate
B)temporal; current rate
C)temporal; monetary
D)current rate; temporal
Q3) Does foreign currency exchange hedging both reduce risk and increase expected value? Explain,and list several arguments in favor of currency risk management and several against.
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Chapter 11: Operating Exposure
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Sample Questions
Q1) ________ exposure is far more important for the long-run health of a business than changes caused by ________ or ________ exposure.
A)Operating; translation; transaction
B)Transaction; operating; translation
C)Accounting; translation; transaction
D)Translation; operating; transaction
Q2) Which one of the following management techniques is likely to best offset the risk of long-run exposure to payables denominated in a particular foreign currency?
A)borrow money in the foreign currency in question
B)lend money in the foreign currency in question
C)rely on the Federal Reserve Board to enact monetary policy favorable to your exposure risk
D)none of the above
Q3) Most swap dealers arrange swaps so that each firm that is a party to the transaction knows who the counterparty is.
A)True
B)False
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Chapter 12: The Global Cost and Availability of Capital
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Sample Questions
Q1) LipTea Incorporated purchases raw materials and has processing plants around the world. The firm finances 30% of its assets with debt and 70% with equity,has a 30% average tax rate,and can issue bonds at a pre-tax rate of 7%.Their standard deviation of returns is roughly 1.50 times as great as the market's returns,and has a correlation with the market of 0.45. If the risk-free rate of return is 5% and the expected return on the international market portfolio is 14%,what is the firm's WACC?
A)7.75%
B)8.38%
C)12.24%
D)There is not enough information to answer this question.
Q2) LipTea Incorporated purchases raw materials and has processing plants around the world. The standard deviation of the firm's equity returns is 1.2 times as great as the market's standard deviation of returns. If the correlation of LipTea's returns with the market's is 0.80,what is the systematic risk of the firm?
A)1.50
B)1.20
C)0.96
D)There is not enough information to answer this question.
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14
Chapter 13: Sourcing Equity and Debt Globally
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Sample Questions
Q1) Which of the following is NOT true regarding Euro-Medium-Term notes (EMTNs)when compared to typical long-term bonds?
A)The EMTN is a facility allowing continuous issuance over a short period of time.
B)EMTN coupon payments are on set calendar dates regardless of the date of issue.
C)EMTNs are relatively small, often with totals of $5 million or less.
D)All of the above are true.
Q2) For most firms,the cost of capital decreases to a low point as the firm ________ debt financing.Beyond some optimal level,the cost of capital increases as the amount of debt ________.
A)decreases; increases
B)decreases; decreases
C)increases; increases
D)increases; decreases
Q3) The term "euro" as used in the euro equity market implies
A)the issuers are located in Europe.
B)the investors are located in Europe.
C)both A and B.
D)none of the above.
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Chapter 14: Multinational Tax Management
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Sample Questions
Q1) A country CANNOT have both a territorial and a worldwide approach as a national tax policy.
A)True
B)False
Q2) The territorial approach to taxation policy is also termed the ________ approach.
A)source
B)ethical
C)greedy
D)location
Q3) The two basic approaches to national tax systems are
A)domestic and foreign.
B)worldwide and territorial.
C)high and low rates.
D)continental and global.
Q4) Transfer pricing is a strategy that may be used by MNEs to
A)reduce consolidated corporate income taxes.
B)partially finance a subsidiary in another country.
C)transfer funds from a subsidiary to the parent corporation.
D)all of the above.
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Chapter 15: Foreign Direct Investment and Political Risk
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Sample Questions
Q1) A ________ loan,also known as ________ is a parent-to-affiliate loan channeled through a financial intermediary such as a large commercial bank.
A)fronting; link financing
B)parallel; a back-to-back loan
C)fronting; a back-to-back loan
D)link financing; parallel loan
Q2) A ________ is a shared ownership in a foreign business.
A)licensing agreement
B)greenfield investment
C)joint venture
D)wholly-owned affiliate
Q3) Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally?
A)MNEs initially invest in countries with a similar "national psychic."
B)Firms eventually take greater risks in terms of the national psychic of countries in which they invest.
C)Initial investments tend to be much larger than subsequent ones.
D)All of the above have been observed.
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Chapter 16: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) Which of the following is NOT a factor critical to the success of project financing?
A)separability of the project from its investors
B)long-lived and capital intensive singular projects
C)cash flow predictability from third part commitments
D)All of the above are critical factors for project financing.
Q2) The process of acquiring an enterprise anywhere in the world has the following common elements EXCEPT ________.
A)identification and valuation of the target
B)the tender offer
C)management of the post-acquisition transition
D)All of the above are common elements in the process.
Q3) When dealing with international capital budgeting projects,the value of the project is NOT sensitive to the firm's cost of capital.
A)True
B)False
Q4) Compared to a greenfield investment,list advantages and disadvantages of a cross-border merger or acquisition.
Q5) What is project financing and what are the factors critical to its success?
Page 18
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Chapter 17: International Portfolio Theory and Diversification
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Sample Questions
Q1) Refer to Instruction 17.2.What is the expected return of the proposed portfolio?
A)9.2%
B)9.0%
C)19.2%
D)19%
Q2) The ________ connects the risk-free security with the optimal domestic portfolio.
A)security market line
B)capital asset pricing model
C)capital market line
D)none of the above
Q3) ________ risk is measured with beta.
A)Systematic
B)Unsystematic
C)International
D)Domestic
Q4) Capital markets around the world are on average less integrated today than they were 20 years ago.
A)True
B)False
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Even though dividends are cash payments,firms typically must consider both cash flow and net income when making dividend distribution decisions.
A)True
B)False
Q2) Days working capital is equal to
A)days payables + days receivables - days inventory.
B)days inventory + days receivables - days payables.
C)days payables + days inventory + days receivables.
D)none of the above.
Q3) For disbursement purposes,it is to the benefit of the firm to minimize float.
A)True
B)False
Q4) Which of the following statements is true?
A)A/R provide part of the funding for inventory.
B)A/P provide part of the funding for A/R and inventory.
C)Inventory pays for A/R and A/P.
D)None of the above is true.
Q5) Identify and explain the five parts of a operating cycle as suggested by the authors.
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Chapter 19: International Trade Finance
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Sample Questions
Q1) The Export-Import Bank is an independent agency of the U.S.government established in 1934 to
A)ship money abroad.
B)import agricultural products during the recession.
C)facilitate and stimulate foreign trade of the United States.
D)none of the above.
Q2) Refer to Instruction 19.1.What is the size of the discount (not including the commission fee)Jackson must take for receiving the proceeds of the sale today rather than waiting for six months?
A)$7,000
B)$5,000
C)$12,000
D)$14.000
Q3) Because most international transactions are between affiliated parties,international transaction contracts are less complex,but the management of the total value of the MNE is more complex.
A)True
B)False
Q4) What is the trade dilemma and how is the dilemma generally solved?
Q5) What is the Import-Export Bank and how can it aid in export financing?
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