CHAPTER 2: THE DOMESTIC AND INTERNATIONAL FINANCIAL MARKETPLACE A multinational firm . hasdirectinvestmentsinmanufacturingfacilitiesinmorethanonecountry exportsfinishedgoodsforsaleinanothercountry importsrawmaterialsfromanothercountry hasamanufacturingrepresentativeinanothercountry ANSWER: a Thedifferencebetweenmerchandiseexportsandimportsisknownasthe . transactionexposure differenceinpurchasingpower goodsandservicestradebalance import/exportreserve ANSWER: c TheinterestrateatwhichbanksintheEurocurrencymarketlendtoeachotherisknownasthe . Eurocurrencycurrencyrate(ECR) Londoninterbankofferrate exchangerate interestrateparity ANSWER: b Anexchangeratequotedas$1.47perBritishpoundisknownasa quote. direct futures indirect ANSWER: b IfJapaneseyenaredepositedinabankinParis,thedepositswouldbecalled Eurofrancs EuropeanCurrencyUnit Eurobond Euroyen ANSWER: d strengthenrelativetothedollar weakenrelativetotheECU
losevaluerelativetothedollaroverthenext6months gainvaluerelativetothedollaroverthenext6months ANSWER: c Whichofthefollowingisnotacorrectstatementaboutforeigncurrencyfutures? futurescontractshaveastandardizedmaturitydate futurescontractsareanexchange-tradedagreement futurescontractsarenotliquid futurescontractsare"markedtomarket"daily ANSWER: c ThemostimportantforeigncurrencyfuturesmarketintheUnitedStatesisthe . ChicagoBoardofTrade NewYorkMercantileExchange CommodityExchange ChicagoMercantileExchange ANSWER: d Thebuyerofaforeigncurrencycalloptionhasthe afixedamountofaforeigncurrency. righttosell rightbutnottheobligationtobuy obligationtobuy,onlyatexpiration, obligation to buy ANSWER: b EurodollarsareU.S.dollarsthathavebeendepositedin foreignbanks foreignbranchesofU.S.banks foreignsubsidiaries foreignbanksandforeignbranchesofU.S.banks ANSWER: d 0.80Canadian$/USdollar $1.25Canadian$/USdollar $1.20Canadian$/USdollar $8.00Canadian$/USdollar ANSWER: b IftheexchangeratefromU.S.dollarstoSwissfrancsis$0.20/franc,thentheexchangeratefromfrancstodollarsis
0.20francs/dollar 0.80francs/dollar 5.0francs/dollar 2.0francs/dollar ANSWER: c . expectedgain premium reciprocal discount ANSWER: b Iftheforward(directquote)exchangerateislowerthanthespotrate,thenthecurrencyissaidtobetradingata _____. forwardpremium forwardgain forwarddiscount forwardloss ANSWER: c Financialmiddlemeninclude securitiesbrokers securitiesdealers investmentbankers allofthese ANSWER: d ThefollowingarelistedsecurityexchangesintheUnitedSates: NewYorkStockExchange PacificExchange CincinnatiExchange Allof thesearelistedexchanges ANSWER: d TheStandardandPoor's500StockPriceIndexisa index. priceweighted marketvalueweighted priceaverage noneoftheseanswersiscorrect ANSWER: b
premiumof1.90% premiumof0.97% discountof(-)1.90% discountof(-)0.97% ANSWER: c RATIONALE:Solution:[($1.4934-$1.5077)/($1.5077)](12/6)(100%)=-1.897% premiumof1.00% premiumof0.50% discountof-0.99% premiumof0.25% ANSWER: a RATIONALE:Solution:[(.009227-.009204)/(.009204)](12/3)(100%)=0.9996% a.2.08% b.8.30% c.-6.30% d.14.60% ANSWER: a RATIONALE:Solution:($45-$48+$4)/$48=0.0208or2.08% a.10% b.27.1% c.17.1% d.13.3% ANSWER: d RATIONALE:Solution:HPR=($33-$30+$1)/$30=13.3% a.5.56% b.8.33% c.11.11%
Inanefficientcapitalmarket,stockpricesreflectthepresentvalueofthefirm’sexpectedcashflows. OnlystatementIiscorrect OnlystatementIIiscorrect BothstatementsIandIIarecorrect NeitherstatementInorIIiscorrect ANSWER: c Whichofthefollowingstatementsis/arecorrectaboutfinancialintermediaries? Financialintermediariesprimarilyoperatewithinthesecondarymarket. OnlystatementIiscorrect. OnlystatementIIiscorrect. BothstatementsIandIIarecorrect. NeitherstatementInorIIiscorrect. ANSWER: d Therearethreeformsofmarketefficiency.AllofthefollowingstatementsarecorrectEXCEPT: Theweakformefficiencystatesthatnoinvestorcanearnexcessreturnsbasedonhistoricalpriceinformation. Marketefficiencyisahardandfastrulethathasbeenverifiedinreal-worldsituations. ANSWER: d There are highly publicized hedge fund problems, for example Julian Robertson’s Tiger fund or Long Term CapitalManagement. The impact that this has had on hedge funds is: minimal.Theyhavecontinuedtogrowinsizeandnumber. huge.Hedgefundsarebeingdiscontinued. beingfeltintheoverallreallocationofhedgefundsintobonds. inconsequentialandirrelevant.Investorsmayrelyontheduediligenceofthefundmanagersforsafeinvesting. ANSWER: a Anexampleofafinancialmiddlemanisa: commercialbank stockbroker insurancecompany thriftinstitution ANSWER: b
Anexampleofalistedsecurityexchangewithinthesecondarymarketis: OTC NYSE NASDAQ Automatedquotations ANSWER: b Asagroup,netsaversare: businesses households government partnerships ANSWER: b Trading on the NYSE is conducted by members of the exchange. The members that execute orders and act asagents on behalf of their clients are: FloorBrokers ExchangeRunners DesignatedMarketMakers SECAgents ANSWER: a Thedifferencebetweenthebidpriceandtheaskpriceonasecurityisthe: spread value assetfactor commission ANSWER: a thestockmarketcrash therealestatebubble governmentoverspending theuseoffinancialhedging ANSWER: b SouthKorea Australia
India China ANSWER: b Tightcontroloverfixedandvariablecosts Lowbusinessrisk Abusinessmodelwhichencouragedrisktakingbymanagementthatpaidoff Lowproductpricing ANSWER: c Whatarethedifferencesbetweentheprimaryandsecondarymarkets? ANSWER: Whatisthepurposeandimportanceofthestockmarketindexes? ANSWER: Explainthedegreesofmarketefficiencyandtheirapplicabilitytothestockmarket. ANSWER:
ANSWER: ListthetypesofdisclosureformsrequiredbytheSECandexplainwhatinformationiscontainedineachform. ANSWER: ThevariousSECformslistedinthetextare: securities. 10-Q.Thisformcontainsquarterlyinformationwhichupdatesthe10-K. ANSWER: Thesignificantchangesthathaveoccurredare: Theactstrengthenstheindependenceandaccountabilityoftheauditcommitteeofthefirm’s internalcontrolsystem. 4.Theactrequiresthatauditorsnowcertifyafirm’sfinancialcontrolsystemandreportany materialweaknesses. Theactinstitutesnewrulestoensureindependenceoffinancialanalysts. Howdidthemortgagemarketprovidetheimpetusforthefinancialcrisisof2007-2010? ANSWER: MortgagemarketsintheUSevolvedtotakeadvantageofeasymoneyflowinginfromaroundtheworld.
Thedifferencebetweenputsandcallsis: acallisanoptiontobuy aputallowsthepurchaseofextrastock acallcannotberesold aputrequiresthattheowneroftheputmustsellonaspecificdate ANSWER: a Foreigncurrencyforwardandfutureoptionsarecontractsthatreflect : an obligation achoice adeliverydateoftheproduct aspecificrequirement ANSWER: b Foreigncurrencyforwardandfutureoptionsprovideameansforfirmstocontrol foreigngovernmentintervention foreignpoliticalproblems foreignexchangerisk theforeigntransportofthegoods ANSWER: c privatetrading insidertrading optionstrading informationtrading ANSWER: b Systematic Weak-form AssetEvaluation Behavioral ANSWER: d
AllofthefollowingareanomaliesthathaveimpactedthefinancialmarketinthepastEXCEPT: therealestatemarket thepurchaseandsubsequentsaleofinternetstock therunupofgoldprices investinginbluechipstock ANSWER: d Allofthefollowingcontributedtothefinancialcrisisof2007-2010EXCEPT: theGulfWar thesecuritizationofmortgageloans verylowinterestrates foreign investment in the bond market ANSWER: a All of the following have tax implications as it concerns financial management decisions EXCEPT: Capitalstructure Dividendpolicy Inventorycontrol Leasing ANSWER: c Financialintermediariesarecompensatedfortheirservicesby theinterestratespread. salary. stockoptions preferredstockcertificates ANSWER: a FinancialassetsareallofthefollowingEXCEPT: money debtsecurities equitysecurities inventory ANSWER: d