Financial Markets and Institutions
Midterm Exam
Course Introduction
Financial Markets and Institutions explores the essential structure, function, and operations of financial systems within the global economy. The course examines various types of financial markets, such as money, capital, bond, and equity markets, alongside financial institutions like commercial banks, investment firms, insurance companies, and central banks. Students will learn how these institutions facilitate the flow of funds, manage risk, influence monetary policy, and promote economic stability and growth. The course also covers regulatory frameworks, international financial systems, and recent trends affecting the industry, preparing students to understand and analyze the modern financial environment.
Recommended Textbook
International Financial Management 13th Edition by Jeff Madura
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21 Chapters
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Chapter 1: Multinational Financial Management: An Overview
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Sample Questions
Q1) Under the product cycle theory, foreign demand can be initially satisfied by exporting.
A)True
B)False
Answer: True
Q2) A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.
A)True
B)False
Answer: False
Q3) The valuation of an MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries.
A)True
B)False
Answer: False
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Chapter 2: International Flow of Funds
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Sample Questions
Q1) The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time.
A)increased; increased
B)increased; decreased
C)decreased; decreased
D)decreased; increased
Answer: B
Q2) The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations.
A)True
B)False
Answer: False
Q3) The North American Free Trade Agreement (NAFTA) increased restrictions on:
A)trade between Canada and Mexico.
B)trade between Canada and the United States
C)direct foreign investment in Mexico by U.S. firms.
D)none of the above.
Answer: D
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4
Chapter 3: International Financial Markets
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Sample Questions
Q1) Which of the following is not true regarding ADRs?
A)ADRs are denominated in the currency of the stock's home country.
B)ADRs enable U.S. investors to avoid cross-border transactions.
C)ADRs allow non-U.S. firms to tap into the U.S. market for funds.
D)ADRs sometimes allow for arbitrage opportunities.
Answer: A
Q2) Futures contracts are typically ____; forward contracts are typically ____.
A)sold on an exchange; sold on an exchange
B)sold in an over-the-counter market; sold on an exchange
C)sold on an exchange; sold in an over-the-counter market
D)offered by commercial banks; offered by commercial banks
Answer: C
Q3) The Greece credit crisis in the 2012-2015 period refers to Greece being unable to obtain loans from any banks or governments.
A)True
B)False
Answer: False
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Chapter 4: Exchange Rate Determination
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Sample Questions
Q1) When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.
A)True
B)False
Q2) Assume that the United States places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.
A)increase; increase
B)increase; decline
C)decline; decline
D)decline; increase
Q3) Increases in relative income in one country versus another result in an increase in the first country's currency value.
A)True
B)False
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6
Chapter 5: Currency Derivatives
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Sample Questions
Q1) A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.
A)True
B)False
Q2) Due to put-call parity, we can use the same formula to price calls and puts.
A)True
B)False
Q3) A contingency graph for the purchaser of a call option compares the price paid for the option to the payoffs received under various exchange rate scenarios.
A)True
B)False
Q4) A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:
A)buying an identical futures contract.
B)selling an identical futures contract.
C)buying a futures contract with a different settlement date.
D)selling a futures contract for a different amount of currency.
E)purchasing a put option contract in the same currency.
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Chapter 6: Government Influence on Exchange Rates
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Sample Questions
Q1) Under the ____________ from 1979-1992 (before the euro existed), the currencies of many European countries were currencies of most of these member countries were allowed to fluctuate by no more than 2.25 percent (6 percent for some currencies) from the initially established values.
A)European Monetary System (EMS).
B)snake agreement.
C)Maastricht Treaty.
D)Bretton Woods agreement.
Q2) Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.
A)True
B)False
Q3) The euro is pegged to other currencies of European countries that have not adopted the euro.
A)True
B)False
Q4) A country with fixed exchange rates oFten faces constraints on growth.
A)True
B)False
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Chapter 7: International Arbitrage and Interest Rate Parity
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Sample Questions
Q1) Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity?
A)upward pressure on the Swiss franc's spot rate
B)upward pressure on the U.S. interest rate
C)downward pressure on the Swiss interest rate
D)upward pressure on the Swiss franc's forward rate
Q2) Due to ____, market forces should realign the spot rate of a currency among banks.
A)forward realignment arbitrage
B)triangular arbitrage
C)covered interest arbitrage
D)locational arbitrage
Q3) Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a ____ of ____ percent.
A)discount; 2.73
B)premium; 2.73
C)discount; 3.65
D)premium; 3.65
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Page 9
Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates
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Sample Questions
Q1) Interest rate parity can only hold if purchasing power parity holds.
A)True
B)False
Q2) The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency.
A)True
B)False
Q3) If nominal British interest rates are 3 percent and nominal U.S. interest rates are 6 percent, then the British pound (£) is expected to ____ by about ____percent, according to the international Fisher effect (IFE).
A)depreciate; 2.9
B)appreciate; 2.9
C)depreciate; 1.0
D)appreciate; 1.0
E)none of the above
Q4) If interest rate parity holds, then the international Fisher effect must hold.
A)True
B)False
10
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Chapter 9: Forecasting Exchange Rates
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Sample Questions
Q1) Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the major currencies, but not for currencies of smaller countries.
A)True
B)False
Q2) The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.
A)1.02
B)1.03
C)1.04
D)none of the above
Q3) Different departments in an MNC should establish their own exchange rate forecasts because each department can best determine the type of forecasts that it needs. A)True
B)False
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Chapter 10: Measuring Exposure to Exchange Rate
Fluctuations
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Sample Questions
Q1) U.S. exporters may not necessarily benefit from weak-dollar periods if foreign competitors are willing to reduce their profit margins.
A)True
B)False
Q2) Vada, Inc. exports computers to Australia invoiced in U.S. dollars. Its main competitor is located in Japan. Vada is subject to:
A)economic exposure.
B)transaction exposure.
C)translation exposure.
D)economic and transaction exposure.
Q3) The transaction exposure of two inflow currencies is offset when the correlation between the currencies is high.
A)True
B)False
Q4) In general, translation exposure is larger with MNCs that have a larger proportion of earnings generated by foreign subsidiaries.
A)True
B)False
Page 12
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Chapter 11: Managing Transaction Exposure
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Sample Questions
Q1) A put option essentially represents two swaps of currencies: one swap at the inception of the loan contract and another swap at a specified date in the future.
A)True
B)False
Q2) A futures hedge involves taking a money market position to cover a future payables or receivables position.
A)True
B)False
Q3) A ____ involves an exchange of currencies between two parties, with a promise to re-exchange currencies at a specified exchange rate and future date.
A)long-term forward contract
B)currency option contract
C)parallel loan
D)money market hedge
Q4) A money market hedge involves taking a money market position to cover a future payables or receivables position.
A)True
B)False
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Chapter 12: Managing Economic Exposure and Translation Exposure
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Sample Questions
Q1) A foreign subsidiary with more revenue than expenses denominated in a foreign currency will be favorably affected by appreciation of the foreign currency.
A)True
B)False
Q2) A limitation of hedging translation exposure is that translation losses are not tax deductible, whereas gains on forward contracts used to hedge translation exposure are taxed.
A)True B)False
Q3) To reduce economic exposure when a foreign currency has a greater impact on cash inflows than on cash outflows, an MNC could reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency.
A)True B)False
Q4) All MNCs are subject to translation exposure. A)True B)False
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Chapter 13: Direct Foreign Investment
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Sample Questions
Q1) MNCs oFten attempt to set up production in locations where land and labor are expensive, because expensive factors of production indicate high demand.
A)True
B)False
Q2) If countries' economies are highly integrated, the correlations of their economic growth levels would likely be ____. A firm would benefit ____ by diversifying sales among these countries relative to another set of countries whose economies are less integrated.
A)high and positive; more
B)close to zero; more
C)high and positive; less
D)close to zero; less
Q3) Direct foreign investment would typically be welcomed if:
A)the products to be produced are substitutes for other locally produced products.
B)people from the country of the company's headquarter are transferred to the foreign country to work at the subsidiary.
C)the products to be produced are going to be exported.
D)all of the above
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15
Chapter 14: Multinational Capital Budgeting
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Sample Questions
Q1) Everything else being equal, the ____ the depreciation expense is in a given year, the ____ a foreign project's NPV will be.
A)higher; lower
B)higher; higher
C)lower; higher
D)none of the above
Q2) ____ can cause the parent's aFter-tax cash flows to differ from the subsidiary's aFter-tax cash flows.
A)The number of units sold by the subsidiary
B)The subsidiary's earnings before income and taxes (EBIT)
C)The tax rate the subsidiary is subject to in the host country
D)Withholding taxes imposed by the host government
Q3) The break-even salvage value of a particular project is the salvage value necessary to:
A)offset any losses incurred by the subsidiary in a given year.
B)offset any losses incurred by the MNC overall in a given year.
C)make the project have zero profits.
D)achieve a zero net present value for the project.
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Page 16
Chapter 15: International Corporate Governance and Control
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Q1) Which of the following would not enhance the value of a target from the acquirer's perspective?
A)Expected sales of the target have increased.
B)The subsidiary's currency is expected to strengthen aFter the acquisition.
C)The required rate of return from investing in the target has increased.
D)All of the above would enhance the value of the target.
Q2) The government of a country may prevent a foreign firm from acquiring local targets and downsizing the targets.
A)True
B)False
Q3) Which of the following types of international corporate control transaction is probably the most difficult to value by an MNC?
A)an international acquisition of an existing business
B)an international acquisition of a newly privatized business
C)an international partial acquisition
D)an international divestiture
Q4) At present, U.S. firms acquire more targets in China than in any other country.
A)True
B)False
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Chapter 16: Country Risk Analysis
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Sample Questions
Q1) Which of the following is not an example of political risk?
A)The Japanese government requires an MNC's subsidiary to install exercise rooms for its employees.
B)The Swiss government requires an MNC's subsidiary to install filters in its manufacturing plants to reduce pollution.
C)Country X, considered for expansion, frequently goes to war with its neighbors.
D)Country Y's government has recently taken over the subsidiary of one of your competitors, another U.S.-based MNC.
E)All of the above are examples of political risk.
Q2) When a country's currency is inconvertible, the earnings generated by a subsidiary in that country cannot be remitted to the parent through currency conversion.
A)True
B)False
Q3) When a government engages in an expansionary fiscal policy, it cuts government spending and raises taxes in order to reduce its budget deficit.
A)True
B)False
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18
Chapter 17: Multinational Cost of Capital and Capital Structure
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Sample Questions
Q1) To the extent that individual economies are ____ each other, net cash flows from a portfolio of subsidiaries should exhibit ____ variability, which may reduce the probability of bankruptcy.
A)dependent on; less
B)dependent on; more
C)independent of; less D)independent of; more
Q2) MNCs headquartered in Japan and Germany tend to use a higher degree of financial leverage than MNCs headquartered in the United States.
A)True
B)False
Q3) The capital asset pricing theory is based on the premise that:
A)only unsystematic variability in cash flows is relevant.
B)only systematic variability in cash flows is relevant.
C)both systematic and unsystematic variability in cash flows are relevant.
D)neither systematic nor unsystematic variability in cash flows is relevant.
Q4) An MNC's cost of equity is unrelated to the local risk-free rate.
A)True
B)False
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Chapter 18: Long-Term Debt Financing
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Q1) In general, the ____ rate payer in a plain vanilla swap believes interest rates are going to ____.
A)fixed; decline
B)floating; decline
C)floating; increase
D)none of the above
Q2) A U.S. firm has a Canadian subsidiary that remits a large amount of its earnings to the parent on an annual basis. It also imports supplies from China, invoiced in Chinese yuan. The firm has no other foreign business and needs a small loan. The firm could best reduce its exposure to exchange rate risk by borrowing:
A)U.S. dollars.
B)Canadian dollars.
C)Chinese yuan.
D)a combination of Canadian dollars and Chinese yuan.
Q3) Foreign subsidiaries of U.S. MNCs can avoid exchange rate risk by financing projects with dollars.
A)True
B)False
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20
Chapter 19: Financing International Trade
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Sample Questions
Q1) The time period of most time drafts ranges from
A)30 days to 180 days.
B)2 weeks to 52 weeks.
C)1 year to 5 years.
D)10 days to 60 days.
Q2) ____ refers to the purchase of financial obligations, such as bills of exchange or promissory notes, from the original holder, usually the exporter; the obligations are sold "without recourse," meaning that if the importer does not pay, the exporter has no responsibility for their payment.
A)Factoring
B)Accounts receivable financing
C)Forfaiting
D)None of the above
Q3) The risk to the exporter is highest with the ____ payment method.
A)prepayment
B)letter of credit
C)sight draft
D)open account
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21
Chapter 20: Short-Term Financing
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Sample Questions
Q1) Refer to Exhibit 20-2 above. What is the expected effective financing rate of the portfolio Luzar is contemplating (assume the two currencies move independently from one another)?
A)9.03 percent
B)7.00 percent
C)10.00 percent
D)7.59 percent
E)none of the above
Q2) Assume that the U.S. interest rate is 11 percent while the interest rate on the euro is 7 percent. If a U.S. firm borrows euros, the euro would have to ____ against the dollar by ____ in order to have the same effective financing rate as borrowing dollars.
A)depreciate; about 3.74 percent
B)appreciate; about 3.74 percent
C)appreciate; about 4.53 percent
D)depreciate; about 4.53 percent
Q3) To avoid exchange rate risk when borrowing a foreign currency, an MNC could hedge its position by using interest rate swaps.
A)True
B)False
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Page 22
Chapter 21: International Cash Management
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Sample Questions
Q1) Since exchange rate forecasts are not always accurate, a probability distribution of possible exchange rates may be preferable to a single point estimate.
A)True
B)False
Q2) Which of the following is not a technique to optimize cash flows?
A)Accelerate cash inflows
B)Minimize currency conversion costs
C)Manage blocked funds
D)All of the above are techniques to optimize cash flows
Q3) The Swiss one-year interest rate is 7 percent, while the U.S. one-year interest rate is 2 percent. Assume that interest rate parity exists. If a U.S. firm invests in a Swiss one-year deposit and sells Swiss francs forward with a forward contract to hedge its exchange rate exposure, the effective yield from investing in a one-year deposit in Switzerland will be about:
A)9 percent.
B)7 percent.
C)4 percent.
D)2 percent.
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