Q&A Hero

Q: Explain how a drop in the value of the dollar could affect the U.S. import and export sectors.

Q: A U.S. bank has made 50 million in Britain and has 40 in deposits. The bank's currency trading desk has also contracted to buy 20 million and has short positions of 15 million. What is the bank's net exposure? How could they use forward contracts to hedge the exposure? If the bank has exposures in euros and yen, would you recommend they use the forward hedge? Why or why not?

Q: Why does the size of the U.S. current account deficit put pressure on the value of the dollar to decline? How does the size of the capital account affect that pressure? Explain.

Q: What are the major differences between the interbank foreign exchange market and the foreign currency exchanges?

Q: Is it reasonable to expect real rates of interest to be identical across countries? Explain. What does this imply about parity?

Q: An FI's position in FX markets generally reflects four trading activities. What are they, and which cause the FI to bear FX risk?

Q: A bank has committed to deliver yen in 6 months to a corporate customer. The spot rate is 110 yen to the dollar and the 6-month forward rate is 105 yen per dollar. Are there costs to hedging this exposure with the forward market? Explain.

Q: A British bank has borrowed dollars in the United States, but is now concerned about its currency risk. What alternatives does it have to limit its risk? Be specific.

Q: A U.S. FI has U.S. $200 million worth of one-year loans earning an average rate of return of 6%. The FI also has one-year single payment Canadian dollar loans of C$110 million earning 8%. The FI's funding source is $300 million in U.S.$ one-year CDs, on which they are paying 4%. Initially the exchange rate is C$1.10 per $1 U.S. The one-year forward rate is C$1.14 per $1 U.S. What is the bank's dollar % spread if they hedge fully using forwards?

Q: What are the major purposes of the foreign exchange markets?

Q: The concept underlying purchasing power parity is the A. Fisher effect B. Bretton Woods Agreement C. Law of one price D. Big Mac Index E. Balance of payments concept

Q: The ________________ measures the net flows of imports and exports of goods, services, income payments, and unilateral transfers. A. current account B. capital account C. change in official reserves D. statistical discrepancy E. basic balance account

Q: A U.S. bank has 120 million in loans to corporate customers and has 70 million in deposits it owes to customers with the same maturity. The bank has also sold 20 million pounds forward. The bank's net exposure is A. 210 million B. 30 million C. 70 million D. 170 million E. 190 million

Q: You can buy or sell the yen spot at 102 to the dollar. You can buy or sell the yen one-year forward at 104 to the dollar. If U.S. annual interest rates are 4%, what must be the approximate one-year Japanese interest rate if interest rate parity holds? A. 5.92% B. 3.20% C. 2.75% D. 4.73% E. 6.80%

Q: You can buy or sell the spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01 to the pound. If U.S. annual interest rates are 5%, what must be the approximate one-year British interest rate if interest rate parity holds? A. 4.00% B. 5.25% C. 2.75% D. 3.48% E. 5.65%

Q: Which of the following are likely to lead to an appreciation of the U.S. dollar (ceteris paribus)? I. Higher real U.S. interest rates II. Lower U.S. inflation III. Higher nominal U.S. interest rates A. II and III only B. I and III only C. I and II only D. II only E. I, II, and III

Q: A current account deficit implies that A. more goods and services are exported than are imported. B. the country borrowed from abroad more than it loaned, and/or sold off some of its assets. C. there is excessive consumption of foreign financial assets. D. the value of the dollar will rise. E. the country is going bankrupt.

Q: The large U.S. current account deficit implies that A. U.S. interest rates are too high. B. the value of the dollar is too weak. C. dollar foreign currency reserves at Asian central banks are too low. D. the presidential administration desires to improve growth of overseas economies. E. the United States must rely on foreigners to be willing to invest in the United States.

Q: Which of the following conditions may lead to a decline in the value of a country's currency? I. Low interest rates II. High inflation III. Large current account deficit A. I only B. I and II only C. II and III only D. II only E. III only

Q: A negotiated OTC agreement to exchange currencies at a fixed date in the future but at an exchange rate specified today is a A. currency swap agreement B. forward foreign exchange transaction C. currency futures contract D. currency options contract E. spot foreign exchange transaction

Q: The largest center for trading in foreign exchange is A. New York B. London C. Tokyo D. Hong Kong E. Geneva

Q: The spot rate for the Argentine peso is $0.3600 per peso. Over the year inflation in Argentina is 10% and U.S. inflation is 4%. If purchasing power parity holds, at year-end the exchange rate should be approximately ______________ dollars per Real. A. 0.2987 B. 0.3614 C. 0.2875 D. 0.3384 E. 0.3015

Q: At the beginning of the year the exchange rate between the Brazilian Real and the U.S. dollar was 2.2 Reals per dollar. Over the year Brazilian inflation was 12% and U.S. inflation was 4%. If purchasing power parity holds, at year-end the exchange rate should be approximately ________________ dollars per Real. A. 2.3913 B. 0.4895 C. 2.8498 D. 0.4182 E. 0.3440

Q: If interest rate parity holds and the annual German nominal interest rate is 3% and the U.S. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Germany is about _______________ than in the United States. A. 1% higher B. 2% higher C. 1% lower D. 4% lower E. 2% lower

Q: The agreement that ended the era of fixed exchange rates for the major economies was called the A. Louvre Accord B. Bretton Woods Agreement C. Smithsonian Agreement I D. Smithsonian Agreement II E. Plaza Accord

Q: The levels of foreign currency assets and liabilities at banks have ___________ in recent years and the level of foreign currency trading has ____________. A. increased; increased B. decreased; decreased C. increased; decreased D. decreased; increased E. decreased; stayed the same

Q: If a firm has more foreign currency assets than liabilities, and no other foreign currency transactions, it has A. positive net exposure B. negative net exposure C. a fully balanced position D. zero net exposure

Q: Bank's net foreign exposure is equal to A. net foreign assets B. net FX bought C. net foreign assets + net FX bought D. assets - liabilities E. none of the above

Q: An investor starts with 1 million and converts it to 694,500, which is then invested for one year. In a year the investor has 736,170, which she then converts back to euros at an exchange rate of 0.68 pounds per euro. The annual euro rate of return earned was _____. A. 7.55% B. 6.00% C. 7.45% D. 8.13% E. 8.26%

Q: An investor starts with $1 million and converts it to 0.75 million pounds, which is then invested for one year. In a year the investor has 0.7795 million pounds, which she then converts to dollars at an exchange rate of 0.72 pounds per dollar. The U.S. dollar annual rate of return earned was _____. A. 4.97% B. 5.27% C. 6.45% D. 7.69% E. 8.26%

Q: A European investor can earn a 4.75% annual interest rate in Europe or 2.75% per year in the United States. If the spot exchange rate is $1.58 per euro, at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments? A. $1.5484 B. $1.6108 C. $1.5335 D. $1.5498 E. $1.5977

Q: A Japanese investor can earn a 1% annual interest rate in Japan or about 3.5% per year in the United States. If the spot exchange rate is 101 yen to the dollar, at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments? A. 100.58 B. 98.56 C. 101.68 D. 97.42 E. 103.50

Q: A Swiss bank converted 1 million Swiss francs to euros to make a euro loan to a customer when the exchange rate was 1.85 francs per euro. The borrower agreed to repay the principle plus 3.75% interest in 1 year. The borrower repaid euros at loan maturity and when the loan was repaid the exchange rate was 1.98 francs per dollar. What was the bank's franc rate of return? A. 7.75% B. 11.04% C. 9.94% D. -2.82% E. 5.71%

Q: A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.2 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.3 francs per dollar. What was the bank's dollar rate of return? A. 26.00% B. -2.69% C. 7.14% D. -3.08% E. 5.00%

Q: A U.S. firm has borrowed 50 million from a British firm. The borrower will need to convert dollars to pounds to repay the loan when it is due. The U.S. firm could hedge the exchange rate risk by A. buying pounds forward. B. selling pounds forward. C. borrowing pounds. D. both B and C would hedge the risk E. both A and C would hedge the risk

Q: A U.S. firm has 50 million in assets in Britain that they need to repatriate in 6 months. They could hedge the exchange rate risk by A. buying pounds forward. B. selling pounds forward. C. borrowing pounds. D. both B and C would hedge the risk E. both A and C would hedge the risk

Q: A U.S. bank borrowed dollars, converted them to euros, and invested in euro-denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should A. sell dollars forward. B. sell euros forward. C. buy euros forward. D. sell euros spot. E. none of the above

Q: A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States to take advantage of interest rate differentials. To cover the currency risk, the investor should A. sell pounds forward. B. buy dollars forward. C. buy pounds forward. D. sell pounds spot. E. none of the above

Q: In 2009, the U.S. imported goods and services worth about _____________ and exported about _________ leading to a current account ____________. A. $2.4 trillion; $2.2 trillion; deficit B. $2.2 trillion; $2.4 trillion; surplus C. $2.4 trillion; $2.2 trillion; surplus D. $2.2 trillion; $2.4 trillion; deficit E. $2.0 trillion; $2.0 trillion; balance

Q: Foreign exchange trading in 2010 averaged about _____________ per day. A. $101 million B. $4.0 trillion C. $101 billion D. $1.88 trillion E. $101 trillion

Q: The ongoing accumulation of foreign currency reserves by foreign monetary authorities contributed to the dollar's drop in 2006.

Q: The dollar's value increased when the Fed cut interest rates in late 2007.

Q: A drop in value of the dollar hurts U.S. importers and helps U.S. exporters, ceteris paribus.

Q: New York is the global center of foreign exchange trading with the largest daily volume of currency trading.

Q: During much of the 1800s, developed nations employed what came to be known as the Bretton Woods international monetary system to manage exchange rates.

Q: A country with lower interest rates than another country is likely to see its currency appreciate if parity holds.

Q: A U.S. bank has made 12 million worth of loans and 10 million worth of deposits in Britain. The bank would benefit from a drop in the value of the pound against the dollar.

Q: If the United States has inflation of 3% and Europe has inflation of 5%, the value of the euro should increase, ceteris paribus.

Q: If the euro per yen ratio falls, the value of the yen has risen.

Q: If the dollar is initially worth 120 yen and then the exchange rate changes so that the dollar is now worth 115 yen, the value of the yen has depreciated.

Q: If you can convert 150 Swiss francs to $90, the exchange rate is 1.67 francs per dollar.

Q: In 1973, the Smithsonian Agreement II eliminated fixed exchange rates for the major economies.

Q: In 1971, the Bretton Woods Agreement established that, for the first time, currency values would be fixed against one another within narrow bands.

Q: A U.S. firm agrees to import textiles from Hong Kong and pay in 90 days. The invoice requires payment in Hong Kong dollars. The U.S. importer could hedge this currency risk by buying the HK dollar forward.

Q: If a foreign currency appreciates, that country's goods and services become relatively more expensive for U.S. buyers.

Q: You own 500 shares of common stock in a firm that has 2 million shares outstanding. The firm announces a plan to sell an additional 500,000 shares through a rights offering. a) How many rights to purchase new shares will you receive? b) Suppose that the market price per share is $30, but each right allows you to purchase a share of stock for $27. What should be the value of one right? c) If you sold your rights, how much money should you make?

Q: Why have international stock prices fallen as a result of the subprime crisis in the United States?

Q: What are the major effects of the Sarbanes-Oxley Act (SO) of 2002 on the stock markets? What else has the NYSE done to improve corporate governance?

Q: A firm desires to sell stock to the public. The underwriter charges $0.45 million in fees and offers to buy 6 million shares from the firm at a price of $35 per share. In addition, registration and audit fees total $130,000, and marketing and miscellaneous fees add up to another $75,000. The underwriter expects to earn gross proceeds per share of $38. What is the issuing firm's out-of-pocket dollar transaction cost to issue the stock? Immediately after the stock was issued, the stock price rose to $40. What is the issuing firm's opportunity cost? What is the total issuance cost, including opportunity costs, as a percentage of the total funds available to the issuing firm?

Q: In what major ways do stocks differ from bonds?

Q: What are ECNs? How are they changing trading in the traditional markets?

Q: When would preferred stock be a better investment choice than common stock or bonds?

Q: As a small (minority) stockholder would you prefer to have cumulative voting or straight voting shares? As a majority shareholder?

Q: What are the advantages and disadvantages of foreign investing? How does an ADR help overcome the disadvantages?

Q: Answer the following questions concerning the given partial stock quote: a) What was the dividend yield?b) What was the most recent four quarters of earnings per share?c) Valued at the closing price, what was the total dollar volume of shares traded?d) What was the stock price at the beginning of the year?

Q: What are weak form, semi-strong form, and strong form efficiency? Does one form of efficiency imply another?

Q: Data shows that only 11 of 27 recessions prior to 1990 were preceded by a decline in stock prices. Although stocks are a leading economic indicator, what are some reasons why a stock price decline might not indicate an upcoming recession?

Q: Ethanol Lawn Mowers issued 500,000 shares to the public. The gross proceeds were $31,250,000 and the net proceeds were $30 million. Merrel Bench was the lead underwriter and deal negotiator, but 10 other investment bankers (one of which was Golden Sax) were also used to put up capital and help sell the issue. Which of the following statements is/are correct? I. The public paid $62.50 a share. II. Golden Sax was the originating house. III. The spread per share was $3.50. IV. Merrel Bench is the sole book running manager. V. This offer was a syndicated deal. A. I, II, and IV only B. III and V only C. I, IV, and V only D. II and III only E. I and V only

Q: Computerized markets that automatically match orders between buyers and sellers and are used primarily by institutions traders are called A. OTC bulletin boards B. SPIDRS C. Index Markets D. ECNs E. Specialists

Q: The electronic-based market for less actively traded U.S. securities is the A. ADR market B. OTC Bulletin Board C. Pink Sheet stocks D. NYSE Low Volume Market E. ECN Market

Q: The age group that holds the most stock is the ____________ group. A. under 35 B. 35-44 C. 45-64 D. 65 and older

Q: The NYSE specialists are charged with I. trading for their own account. II. ensuring public limit orders are executed. III. facilitating processing public market orders. A. I only B. I and II only C. II and III only D. I and III only E. I, II, and III

Q: The stamp on a prospectus accompanying a new issue that indicates the issue has not yet been approved for sale by the SEC is called the A. green hornet B. seal of approval C. red herring D. eagle stamp E. Regd FD

Q: In a ____________ offering the firm preregisters with SEC any securities it wishes to sell over the next two years. A. rights B. full underwritten C. general cash D. shelf E. best efforts

Q: Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not: I. weak form efficient II. semi-strong form efficient III. strong form efficient A. I only B. I and II only C. III only D. II and III only E. I, II, and III

Q: Today Stock A is worth $20 and has 1000 shares outstanding. Stock B costs $30 and has 500 shares outstanding. Stock C is priced at $50 per share and has 1200 shares outstanding. If tomorrow Stock A is priced at $22, Stock B at $35, and Stock C is worth $48, what would the value-weighted index amount equal? (The index has a base period value of 100.) A. 35.00 B. 105.00 C. 108.44 D. 101.45 E. 102.21

Q: A firm is using cumulative voting and four director spots are up for election. There are 3.6 million shares outstanding. How many shares must a minority owner own or control to ensure that he or she can gain control of one seat on the board of directors? A. 900,001 B. 880,001 C. 720,001 D. 1,800,001 E. 1,750,001

Q: The largest single type of holder of common stock ($) is A. pension funds B. households C. mutual funds D. brokers and dealers E. life insurance firms

Q: Which of the following indices are value-weighted? I. NYSE Composite II. S&P500 III. NASDAQ Composite IV. Dow Jones Industrial Average A. I, II, III, and IV B. I only C. II only D. II, III, and IV only E. I, II, and III only

Q: NYSE listing has traditionally benefited a firm by A. improving the stock's price. B. generating increased publicity for the firm. C. providing easier access to primary market capital. D. B and C only E. A, B, and C