Financial Markets and Institutions
Practice Exam
Course Introduction
Financial Markets and Institutions offers a comprehensive exploration of the structures, functions, and roles of financial systems within the global economy. This course examines the operation and regulation of markets such as money, bond, equity, and derivatives markets, as well as the activities of key institutions including commercial banks, investment banks, insurance companies, and mutual funds. Emphasis is placed on the mechanisms of financial intermediation, the impact of monetary policy, risk management, and the evolving regulatory landscape. Through analysis of current events, case studies, and theoretical frameworks, students develop a solid understanding of how financial markets facilitate investment, allocate resources, and influence economic stability and growth.
Recommended Textbook
International Financial Management Canadian Perspectives 2nd Edition by Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Sample Questions
Q1) 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.
Q2) Country A can produce 10 yards of textiles and 6 pounds of food per unit of input.Country B can produce 8 yards of textiles and 5 pounds of food per unit of input.
A)Country A is relatively more efficient than Country B in the production of food
B)Country B is relatively more efficient than Country A in the production of textiles
C)Country A has an absolute advantage over Country B in the production of food and textiles
D)Country B has an absolute advantage over Country A in the production of food and textiles
Answer: C
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3
Chapter 2: International Monetary System
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Q1) Comparing the Euro-12 and the United States,which of the following statements is true?
A)The United States has a larger population than the Euro-12.
B)The United States has a larger GDP than the Euro-12.
C)Euro -12 has a larger share of World Trade than the United States.
D)Euro -12 has less international bonds outstanding than the United States.
Answer: B
Q2) Which is the following is true for countries with fixed exchange rate regimes?
A)Central banks of these courtiers are required to maintain exchange reserves to cover 100% of the existing domestic currency
B)Centrals banks cannot use monetary policy to affect the economics fundamentals (such as inflation)
C)These countries must use currency board
D)None of these
Answer: B
Q3) Before World War I,GBP 2.2474 was needed to buy one ounce of gold.FF 310.00 would also buy one ounce of gold.What was the exchange rate between the French franc and the British Pound?
Answer: FF310/GBP2.2474 = FF137.9372/GBP
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Page 4
Chapter 3: Balance of Payments
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Sample Questions
Q1) BMW,a German car manufacturer,opens a new subsidiary in China.This transaction will be recorded in China'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: C
Q2) A country's international transactions can be grouped into the following three main types:
A)current account, medium term account, and long term account
B)current account, long term account, and capital account
C)current account, capital account, and reserve account
D)capital account, reserve account, trade account
Answer: C
Q3) Portfolio investment refers to:
A)changes in Canadian holdings of noncontrolling equity in foreign companies
B)changes in Canadian holdings of controlling equity in foreign companies
C)changes in foreign holdings of controlling equity in Canadian companies
D)changes in foreign holdings of controlling stock in Canadian companies
Answer: A
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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 US dollar is quoted directly against the Canadian dollar (US$/C$)and indirectly against the yen (¥/US$).In order to get the Canadian dollar - yen cross rate you need to:
A)divide the first exchange rate by the second exchange rate
B)divide the second exchange rate by the first exchange rate
C)multiply the first exchange rate by the second exchange rate
D)multiply the first exchange rate by the inverse of the second exchange rate
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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6
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) Uncovered interest rate parity
A)is an arbitrage condition
B)holds most of the time
C)is based on expectations
D)will provide guaranteed but small profits
Q3) The forward expectations parity states that
A)any forward premium or discount is equal to the expected change in the exchange rate
B)any forward rate is equal to the expected change in the exchange rate
C)the forward premium or discount is equal to the expected change in the real exchange rates
D)the forward premium or discount is equal to the expected change in purchasing power parity
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7
Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) A small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents is called
A)Correspondent bank
B)Representative office
C)Foreign branch
D)Subsidiary bank
Q2) How are Canadian dollar interest rates in the Euromarkets and in the Canadian domestic financial markets related?
Q3) The payment amount under this FRA is:
A)$9,985
B)$10,111
C)$60,667
D)$120,000
Q4) 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
Q5) Explain Eurocommerical papers.
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Chapter 7: Futures and Options on Foreign Exchange
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Q1) A "bearer bond" is one that
A)shows the owner's name on the bond
B)the owner's name is recorded by the issuer
C)possession is evidence of ownership
D)a and b
Q2) 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
Q3) ZZZ Corp.wants to issue zero-coupon bonds with a 10-year maturity.The implied yield to maturity on these bonds is 5% and ZZZ Corp.wants to raise $10,000,000.(Assume no transaction costs).How much money will ZZZ Corp.have to pay at maturity of the bond?
Q4) Which statement is NOT true about market makers?
A)Market makers stand ready to buy or sell on their own account
B)Market makers quote two-way bid and ask prices
C)Market makers trade with one another only
D)Market makers only make the bid-ask spread and charge no other commission
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Chapter 8: Management of Transaction Exposure
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Q1) A measure of "liquidity" for a stock market is
A)the turnover ratio
B)the ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market
C)the LIBOR rate
D)a and b
Q2) Which ADRs are listed on a US exchange:
A)Level I only
B)Level I and II only
C)Level II and III only
D)Level III only
Q3) Canadian stocks are cross-listed in the United States as:
A)American depository receipts
B)Global depository receipts
C)Ordinary shares
D)Global registered shares
Q4) What factors go into the decision to cross-list on a foreign exchange?
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Chapter 9: Management of Economic Exposure
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Q1) Today's settlement price on a Chicago Mercantile Exchange (CME)Euro futures contract is $1.2010/EUR.Your margin account currently has a balance of $2,500.The next two days' settlement prices are $1.2210/EUR and $1.2010/EUR.(The contractual size of one CME EURO contract is EUR 125,000).Calculate your margin account balance at the end of the first and second day if you have a long position on Euro futures.
Q2) In reference to the derivatives market,a "hedger"
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) What is the lowest possible 1-year forward $/£ exchange rate FROM THE LIST BELOW?
A)1.93
B)1.97
C)2.01
D)2.05
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Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) Which of the following is NOT true about swap banks?
A)A swap bank can be an international commercial bank.
B)A swap bank can be an investment bank.
C)A swap bank can be a central bank.
D)A swap bank can be an independent operator.
Q2) Which combination of the following statements is true about the risks that a swap dealer confronts:
(i)- interest rate risk
(ii)- basis risk
(iii)- exchange rate risk
(iv)- political risk
(v)- sovereign risk
A)(i), (ii), (iii), and (v)
B)(i), (iii), and (iv)
C)(iii), (iv), and (iv)
D)(i), (ii), (iii), (iv), and (v)
Q3) The following information is given:
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Chapter 11: International Banking and Money Market
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Sample Questions
Q1) Investors can use of the following to diversify their portfolios internationally except:
A)International mutual funds
B)ADRS
C)WEBS
D)STAS
Q2) In May 2003 when the exchange rate was Yen 110/$,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.
Q3) Which of the following is NOT true about WEBS
A)They are, in essence, mutual funds
B)They are traded on the exchange
C)They track indices of individual countries
D)Legally they are private investment partnerships
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13
Chapter 12: International Bond Market
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Q1) ABC Inc.,a Canadian paper manufacturer,has a subsidiary in the United States which sources its wood from Canada.The US dollar depreciates rapidly.Discuss the likely competitive and conversion effects of the depreciation of the US dollar.
Q2) The expected value of the investment in Canadian dollars is:
A)$3,000
B)$4,950
C)$5,155
D)$5,550
Q3) How can operating exposure be managed?
Q4) Economic exposure refers to:
A)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes
B)the extent to which the value of the firm would be affected by unanticipated changes in exchange rate
C)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates
D)ex post and ex ante currency exposures
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14
Chapter 13: International Equity Markets
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Sample Questions
Q1) The future dollar cost of meeting this obligation using the forward hedge is:
A)$6,450,000
B)$6,545,400
C)$6,653,833
D)$6,880,734
Q2) Fashion Shoes Inc.manufactures its shoes in Milano,Italy.The company just received an order from the United States for USD 1 million to be received in one year.The current spot rate is EUR 1 /USD and the 1 year forward rate is EUR 1.01/USD.The current interest rates are 4% in the United States and 5% in Italy.A call option on the US dollar is available with a strike price of EUR 1.01/USD and a premium of EUR 0.03 and a put option is available with a strike price of EUR 1/USD and a premium of EUR 0.025/USD.Determine the net proceeds from a forward hedge and an options hedge.Which option should Fashion Shoes use?
Q3) Which of the following is a financial hedge?
A)Invoice currency selection
B)Lead/lag strategy
C)Exposure netting
D)Money market hedge
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Chapter 14: Interest Rate and Currency Swaps
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Q1) The Canadian methods for consolidating the financial reports of an MNC are:
A)short/long term method and current/future method
B)current/non-current method and short/long term method
C)temporal method and current rate method
D)temporal method and economic/non-economic method
Q2) Explain the major differences between translating financial statements for self-sustaining foreign operations and for integrated foreign operations.
Q3) 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
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)
Q5) Explain the differences between an integrated foreign operation and a self-sustaining foreign operation.
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Chapter 15: International Portfolio Investment
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Q1) Foreign direct investment is undertaken via
A)Buying bonds in a foreign company
B)Buying 1% of the equity capital of a foreign company
C)Buying 100% of the equity capital of a foreign company
D)Can only be done when a foreign subsidiary is built up from scratch
Q2) Transfer risk refers to the risk which arises from the uncertainty about:
A)the host's country's policies affecting the local operations of an MNC
B)the host's country's policy regarding ownership and control of local operations
C)cross-border flows of capital, payment, know-how, and the like
D)none of these
Q3) How can Export Development Canada (EDC)help firms to deal with political risk?
Q4) Corruption is all of the following except
A)A type of political risk
B)Illegal for Canadians abroad
C)Illegal in Canada
D)Not a serious problem
Q5) Explain the role of market imperfections in FDI.
Q6) How can firms establish a wholly owned subsidiary in a foreign country?
What are the advantages and disadvantages of each method?
Page 17
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Which one of the following is not an approach to determine 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
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) 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
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) In the context of the capital budgeting analysis of an MNC that has strong foreign competitors,"lost sales" refers to:
A)the cannibalization of existing projects by new projects
B)the entire sales revenue of a new foreign manufacturing facility representing the incremental sales revenue of the new project
C)a and b
D)none of these
Q2) The discount rates to use for the APV calculations are:
A)Cost of levered equity for (I) and cost of debt for (II),(III),(IV) and (V)
B)Cost of levered equity for (I) and cost of unlevered equity for (II),(III),(IV) and (V)
C)Cost of unlevered equity for (I) and cost of levered equity for (II),(III),(IV) and (V)
D)Cost of unlevered equity for (I) and cost of debt for (II),(III),(IV) and (V)
Q3) The option to quit a foreign project early is called:
A)Timing option
B)Abandonment option
C)Growth option
D)Exercise option
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Page 19
Chapter 18: International Capital Budgeting
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Q1) If Canada changes its corporate income tax to 35%,does the optimum transfer price change?
A)Yes, it increases
B)Yes, it decreases
C)No, it doesn't change
D)Need more information
Q2) In reference to establishing "transfer prices" between the affiliates of an MNC,which of the following relates to the "resale" price approach?
A)comparable uncontrolled price between unrelated firms
B)the price at which the good is resold by the distribution affiliate is reduced by an amount to cover overhead costs and a reasonable profit
C)assumes that the manufacturing cost is readily available
D)is based on financial and economic models and econometric techniques
Q3) 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
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Page 20
Chapter 19: Multinational Cash Management
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Q1) A bill of lading is
A)A guarantee from the importer's bank that is will act on behalf of the importer and pay the exporter for the merchandise if all relevant documents are presented
B)Is a written order instructing the importer or his agent to pay the amount specified on its face on a certain date
C)Is a document issued by the common carrier specifying that it has received the goods for shipment
D)Is a negotiable money market instrument for which a secondary market exists
Q2) The term "forfaiting"
A)means relinquishing, waiving, yielding, and penalty
B)is a type of medium-term trade financing used to finance the sale of capital goods
C)involves the sale of promissory notes signed by the importer in favor of the exporter, who might sell the notes at a discount from face value
D)b and c
Q3) Explain the major differences between international and domestic trade.
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) When excess tax credits go unused,the foreign tax liability for a branch is greater than the corresponding U.S.tax liability when the foreign income tax rate is greater than the U.S.rate.Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be used in a country given:
U.S.tax rate = 35%
Foreign tax rate = 39%
Withholding tax rate = 5%
A)30.00%
B)35.00%
C)39.00%
D)42.05%
Q2) The foreign tax credit method followed by the United States is:
A)to grant the parent firm credit against its U.S.tax liability for taxes paid to foreign tax authorities on foreign-source income
B)for the purpose of avoiding double taxation
C)a and b
D)none of these
Q3) How can double taxation result out of the two major ways to determine who has to pay taxes?
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Page 22
Chapter 21: International Tax Environment and Transfer Pricing
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Q1) The main weakness of the 'public corporation' is
A)too many shareholders, which makes it difficult to make corporate decision.
B)relatively high corporate income tax rates.
C)conflicts of interest between managers and shareholders.
D)conflicts of interests between shareholders and bondholders.
Q2) How can listing overseas benefit the corporate governance of a public company?
Q3) Explain the agency problem and how it can be remedied.
Q4) 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.
Q5) Corporate governance reform requires all except:
A)increasing the decision making power of managers
B)strengthening the independence of boards of directors with more outsiders
C)enhancing the transparency and disclosure standard of financial statements
D)energizing the regulatory and monitoring functions of securities commissions
Q6) How are investors protected under English common law? What are the implications?
Q7) Discuss the concept of "private benefits of corporate control". Page 23
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Page 24