财务管理英文版Chapter 6

CHAPTER 1 GLOBALIZATION AND THE MULTINATIONAL FIRMSUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONSQUESTIONS1。

Why is it important to study international financial management?Answer：We are now living in a world where all the major economic functions，i.e。

, consumption，production, and investment，are highly globalized。

It is thus essential for financial managers to fully understand vital international dimensions of financial management. This global shift is in marked contrast to a situation that existed when the authors of this book were learning finance some twenty years ago. At that time，most professors customarily （and safely, to some extent）ignored international aspects of finance. This mode of operation has become untenable since then。

2. How is international financial management different from domestic financial management？Answer：There are three major dimensions that set apart international finance from domestic finance。

CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPSSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1。

Give a full definition of arbitrage。

Answer：Arbitrage can be defined as the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain, guaranteed profits。

2. Discuss the implications of the interest rate parity for the exchange rate determination。

Answer：Assuming that the forward exchange rate is roughly an unbiased predictor of the future spot rate, IRP can be written as:S = ［(1 + I£)/(1 + I$）］E[S t+1|I t］。

The exchange rate is thus determined by the relative interest rates，and the expected future spot rate，conditional on all the available information，I t, as of the present time。

One thus can say that expectation is self-fulfilling. Since the information set will be continuously updated as news hit the market, the exchange rate will exhibit a highly dynamic，random behavior.3. Explain the conditions under which the forward exchange rate will be an unbiased predictor of the future spot exchange rate.Answer: The forward exchange rate will be an unbiased predictor of the future spot rate if （I) the risk premium is insignificant and （ii) foreign exchange markets are informationally efficient。

Chapter 3International Financial Markets Lecture OutlineMotives for Using International Financial Markets Motives for Investing in Foreign MarketsMotives for Providing Credit in Foreign MarketsMotives for Borrowing in Foreign MarketsForeign Exchange MarketHistory of Foreign ExchangeForeign Exchange TransactionsExchange QuotationsForeignInterpretingCurrency Futures and Options MarketsInternational Money MarketOrigins and DevelopmentStandardizing Global Bank RegulationsInternational Credit MarketSyndicated LoansInternational Bond MarketEurobond MarketDevelopment of Other Bond MarketsComparing Interest Rates Among CurrenciesInternational Stock MarketsIssuance of Foreign Stock in the U.S.Issuance of Stock in Foreign MarketsComparison of International Financial MarketsHow Financial Markets Affect an MNC’s ValueChapter ThemeThis chapter identifies and discusses the various international financial markets used by MNCs. These markets facilitate day-to-day operations of MNCs, including foreign exchange transactions, investing in foreign markets, and borrowing in foreign markets.Topics to Stimulate Class Discussion1. Why do international financial markets exist?2. How do banks serve international financial markets?3. Which international financial markets are most important to a firm that consistently needsshort-term funds? What about a firm that needs long-term funds?Critical debateShould firms that go public engage in international offerings?Proposition Yes. When a firm issues shares to the public for the first time in an initial public offering (IPO), it is naturally concerned about whether it can place all of its shares at a reasonable price. It will be able to issue its shares at a higher price by attracting more investors. It will increase its demand by spreading the shares across countries. The higher the price at which it can issue shares, the lower is its cost of using equity capital. It can also establish a global name by spreading shares across countries.Opposing view No. If a firm spreads its shares across different countries at the time of the IPO, there will be less publicly traded shares in the home country. Thus, it will not have as much liquidity in the secondary market. Investors desire shares that they can easily sell in the secondary market, which means that they require that the shares have liquidity. To the extent that a firm reduces its liquidity in the home country by spreading its share across countries, it may not attract sufficient home demand for the shares. Thus, its efforts to create global name recognition may reduce its name recognition in the home country.With whom do you agree? State your reasons. Use InfoTrac or some other search engine to learn more about this issue. Which argument do you support? Offer your own opinion on this issue.ANSWER: The key is that students recognize the tradeoff involved. A firm that engages in a relatively small IPO will have limited liquidity even when all of the stock is issued in the home country. Thus, it should not consider issuing stock internationally. However, firms with larger stock offerings may be in a position to issue a portion of their shares outside the home country. They should not spread the stocks across several countries, but perhaps should target one or two countries where they conduct substantial business. They want to ensure sufficient liquidity in each of the foreign countries where they sell shares.Stock Markets are inefficientPropositionI cannot believe that if the value of the euro in terms of, say, the British pound increases three days in a row, on the fourth day there is still a 50:50 chance that it will go up or down in value. I think that most investors will see a trend and will buy, therefore the price is morelikely to go up. Also, if the forward market predicts a rise in value, on average, surely it is going to rise in value. In other words, currency prices are predictable. And finally, if it were so unpredictable and therefore unprofitable to the speculator, how is it that there is such a vast sum of money being traded every day for speculative purposes – there is no smoke without fire.The simple answer is that if that is what you believe, buy currencies that have viewOpposingincreased three days in a row and on average you should make a profit, buy currencies where the forward market shows an increase in value. The fact is that there are a lot of investors with just your sort of views. The market traders know all about such beliefs and will price the currency so that such easy profit (their loss) cannot be made. Look at past currency rates for yourself, check all fourth day changes after three days of rises, any difference is going to be not enough to cover transaction costs or trading expenses and the slight inaccuracy in your figures which are likely to be closing day mid point of the bid/ask spread. No, all currency movements are related to information and no-one knows if tomorrows news will be better or worse than expected.With whom do you agree? Could there be undiscovered patterns? Could some movements not be related to information? Could some private news be leaking out?ANSWER: Clearly there are no obvious patterns. Discussion on the impossibility of obvious patterns is worth emphasizing. However, does market inefficiency necessarily involve patterns, could market manipulation be occasional. There is worrying evidence from share price movements that there is unusual movement before announcements on many occasions, so the ideathat traders do not occasionally collude and move the price without supporting economic evidence is not an unreasonable view. Proof is however difficult as we have to separate anticipation from prior knowledge, the lucky speculator from the speculator who was in the know.Answers to End of Chapter Questions1. Motives for Investing in Foreign Money Markets. Explain why an MNC may invest fundsin a financial market outside its own country.ANSWER: The MNC may be able to earn a higher interest rate on funds invested in a financial market outside of its own country. In addition, the exchange rate of the currency involved may be expected to appreciate.2. Motives for Providing Credit in Foreign Markets. Explain why some financial institutionsprefer to provide credit in financial markets outside their own country.ANSWER: Financial institutions may believe that they can earn a higher return by providing credit in foreign financial markets if interest rate levels are higher and if the economic conditions are strong so that the risk of default on credit provided is low. The institutions may also want to diversity their credit so that they are not too exposed to the economic conditions in any single country.3. Exchange Rate Effects on Investing. Explain how the appreciation of the Australian dollaragainst the euro would affect the return to a French firm that invested in an Australian money market security.ANSWER: If the Australian dollar appreciates over the investment period, this implies that the French firm purchased the Australian dollars to make its investment at a lower exchange rate than the rate at which it will convert A$ to euros when the investment period is over.Thus, it benefits from the appreciation. Its return will be higher as a result of this appreciation.4. Exchange Rate Effects on Borrowing. Explain how the appreciation of the Japanese yenagainst the UK pound would affect the return to a UK firm that borrowed Japanese yen and used the proceeds for a UK project.ANSWER: If the Japanese yen appreciates over the borrowing period, this implies that the UK firm converted yen to pounds at a lower exchange rate than the rate at which it paid for yen at the time it would repay the loan. Thus, it is adversely affected by the appreciation. Its cost of borrowing will be higher as a result of this appreciation.5. Bank Services. List some of the important characteristics of bank foreign exchange servicesthat MNCs should consider.ANSWER: The important characteristics are (1) competitiveness of the quote, (2) the firm’s relationship with the bank, (3) speed of execution, (4) advice about current market conditions, and (5) forecasting advice.6. Bid/ask Spread. Delay Bank’s bid price for US dollars is £0.53 and its ask price is £0.55.What is the bid/ask percentage spread?ANSWER: (£0.55– £0.53)/£0.55 = .036 or 3.6%7. Bid/ask Spread. Compute the bid/ask percentage spread for Mexican peso in which the askrate is 20.6 New peso to the dollar and the bid rate is 21.5 New peso to the dollar.ANSWER: direct rates are 1/20.6 = $0.485:1 peso as the ask rate and 1/21.5 = $0.465:1 peso as the bid rate so the spread is[($0.485 – $0.465)/$0.485] = .041, or 4.1%. Note that the spread is fro the Mexiccan peso not the dollar.8. Forward Contract. The Wolfpack ltd is a UK exporter that invoices its exports to the UnitedStates in dollars. If it expects that the dollar will appreciate against the pound in the future, should it hedge its exports with a forward contract? Explain..ANSWER: The forward contract can hedge future receivables or payables in foreign currencies to insulate the firm against exchange rate risk. Yet, in this case, the Wolfpack Corporation should not hedge because it would benefit from appreciation of the dollar when it converts the dollars to pounds.9. Euro. Explain the foreign exchange situation for countries that use the euro when theyengage in international trade among themselves.ANSWER: There is no foreign exchange. Euros are used as the medium of exchange.10. Indirect Exchange Rate. If the direct exchange rate of the euro is worth £0.685, what is theindirect rate of the euro? That is, what is the value of a pound in euros?ANSWER: 1/0.685 = 1.46 euros.11. Cross Exchange Rate. Assume Poland’s currency (the zloty) is worth £0.17 and theJapanese yen is worth £0.005. What is the cross (implied) rate of the zloty with respect to yen?ANSWER: £0.17/£0.005 = 34 zloty:1 yen12. Syndicated Loans. Explain how syndicated loans are used in international markets.ANSWER: A large MNC may want to obtain a large loan that no single bank wants to accommodate by itself. Thus, a bank may create a syndicate whereby several other banks also participate in the loan.13. Loan Rates. Explain the process used by banks in the Eurocredit market to determine the rateto charge on loans.ANSWER: Banks set the loan rate based on the prevailing LIBOR, and allow the loan rate to float (change every 6 months) in accordance with changes in LIBOR.14. International Markets. What is the function of the international money market? Brieflydescribe the reasons for the development and growth of the European money market. Explain how the international money, credit, and bond markets differ from one another.ANSWER: The function of the international money market is to efficiently facilitate the flow of international funds from firms or governments with excess funds to those in need of funds.Growth of the European money market was largely due to (1) regulations in the U.S. that limited foreign lending by U.S. banks; and (2) regulated ceilings placed on interest rates of dollar deposits in the U.S. that encouraged deposits to be placed in the Eurocurrency market where ceilings were nonexistent.The international money market focuses on short-term deposits and loans, while the international credit market is used to tap medium-term loans, and the international bond market is used to obtain long-term funds (by issuing long-term bonds).15. Evolution of Floating Rates. Briefly describe the historical developments that led to floatingexchange rates as of 1973.ANSWER: Country governments had difficulty in maintaining fixed exchange rates. In 1971, the bands were widened. Yet, the difficulty of controlling exchange rates even within these wider bands continued. As of 1973, the bands were eliminated so that rates could respond to market forces without limits (although governments still did intervene periodically).16. International Diversification. Explain how the Asian crisis would have affected the returnsto a UK. firm investing in the Asian stock markets as a means of international diversification.[See the chapter appendix.]ANSWER: The returns to the UK firm would have been reduced substantially as a result of the Asian crisis because of both declines in the Asian stock markets and because of currency depreciation. For example, the Indonesian stock market declined by about 27% from June 1997 to June 1998. Furthermore, the Indonesian rupiah declined against the U.S. dollar by 84%.17.Eurocredit Loans.a.With regard to Eurocredit loans, who are the borrowers?b. Why would a bank desire to participate in syndicated Eurocredit loans?c. What is LIBOR and how is it used in the Eurocredit market?ANSWER:a. Large corporations and some government agencies commonly request Eurocredit loans.b. With a Eurocredit loan, no single bank would be totally exposed to the risk that theborrower may fail to repay the loan. The risk is spread among all lending banks within the syndicate.c. LIBOR (London interbank offer rate) is the rate of interest at which banks in Europe lendto each other. It is used as a base from which loan rates on other loans are determined in the Eurocredit market.18. Foreign Exchange. You just came back from Canada, where the Canadian dollar was worth£0.43. You still have C$200 from your trip and could exchange them for pounds at the airport, but the airport foreign exchange desk will only buy them for £0.40. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for £0.055 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 1500 New Pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.ANSWER: Exchange with the tourist. If you exchange the C$ for pesos at the foreign exchange desk, the C$200 is multiplied by £0.40 and then divided by £0.055 ie a ratio of £0.40/0.055 = 7.27 pesos to the C$. The total pesos would be 200 x 7.27 = 1454 pesos, a little less than is being offered by the tourist.19. Foreign Stock Markets. Explain why firms may issue stock in foreign markets. Why mightMNCs issue more stock in Europe since the conversion to a single currency in 1999?ANSWER: Firms may issue stock in foreign markets when they are concerned that their home market may be unable to absorb the entire issue. In addition, these firms may have foreign currency inflows in the foreign country that can be used to pay dividends on foreign-issued stock. They may also desire to enhance their global image. Since the euro can be used in several countries, firms may need a large amount of euros if they are expanding across Europe.20. Stock Market Integration. Bullet plc a UK firm, is planning to issue new shares on theLondon Stock Exchange this month. The only decision still to be made is the specific day on which the shares will be issued. Why do you think Bullet monitors results of the Tokyo stock market every morning?ANSWER: The UK stock market prices sometimes follow Japanese market prices. Thus, the firm would possibly be able to issue its stock at a higher price in the UK if it can use the Japanese market as an indicator of what will happen in the UK market. However, this indicator will not always be accurate.Advanced Questions21. Effects of September 11. Why do you think the terrorist attack on the U.S. was expected tocause a decline in U.S. interest rates? Given the expectations for a potential decline in U.S.interest rates and stock prices, how were capital flows between the U.S. and other countries likely affected?ANSWER: The attack was expected to cause a weaker economy, which would result in lower U.S. interest rates. Given the lower interest rates, and the weak stock prices, the amount of funds invested by foreign investors in U.S. securities would be reduced.22. International Financial Markets. Carrefour the French Supermarket chain has established retail outlets worldwide. These outlets are massive and contain products purchased locally as well as imports. As Carrefour generates earnings beyond what it needs abroad, it may remit those earnings back to France. Carrefour is likely to build additional outlets especially in China.a. Explain how the Carrefour outlets in China would use the spot market in foreign exchange.ANSWER:The Carrefour stores in China need other currencies to buy products from other countries, and must convert the Chinese currency (yuan) into the other currencies in the spot market to purchase these products. They also could use the spot market to convert excess earnings denominated in yuan into euros, which would be remitted to the French parent.b. Explain how Carrefour might utilize the international money markets when it isestablishing other Carrefour stores in Asia.ANSWER: Carrefour may need to maintain some deposits in the Eurocurrency market that can be used (when needed) to support the growth of Carrefour stores in various foreign markets. When some Carrefour stores in foreign markets need funds, they borrow from banks in the Eurocurrency market. Thus, the Eurocurrency market serves as a deposit or lending source for Carrefour and other MNCs on a short-term basis. (Eurocurrency refers to international currencies, most likely the dollar, not just the euro!)c. Explain how Carrefour could use the international bond market to finance theestablishment of new outlets in foreign markets.ANSWER: Carrefour could issue bonds in the Eurobond market to generate funds needed to establish new outlets. The bonds may be denominated in the currency that is needed; then, once the stores are established, some of the cash flows generated by those stores could be used to pay interest on the bonds.23.Interest Rates. Why do interest rates vary among countries? Why are interest rates normallysimilar for those European countries that use the euro as their currency? Offer a reason why the government interest rate of one country could be slightly higher than that of the government interest rate of another country, even though the euro is the currency used in both countries.ANSWER: Interest rates in each country are based on the supply of funds and demand for funds for a given currency. However, the supply and demand conditions for the euro are dictated by all participating countries in aggregate, and do not vary among participating countries. Yet, the government interest rate in one country that uses the euro could be slightly higher than others that use the euro if it is subject to default risk. The higher interest rate would reflect a risk premium.Blades plc Case Study。

CHAPTER 6 INTERNATIONAL PARITY RELATIONSHIPSSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Give a full definition of arbitrage.Answer:Arbitrage can be defined as the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain, guaranteed profits.2. Discuss the implications of the interest rate parity for the exchange rate determination.Answer: Assuming that the forward exchange rate is roughly an unbiased predictor of the future spot rate, IRP can be written as:S = [(1 + I£)/(1 + I$)]E[S t+1 I t].The exchange rate is thus determined by the relative interest rates, and the expected future spot rate, conditional on all the available information, I t, as of the present time. One thus can say that expectation is self-fulfilling. Since the information set will be continuously updated as news hit the market, the exchange rate will exhibit a highly dynamic, random behavior.3. Explain the conditions under which the forward exchange rate will be an unbiased predictor of the future spot exchange rate.Answer: The forward exchange rate will be an unbiased predictor of the future spot rate if (I) the risk premium is insignificant and (ii) foreign exchange markets are informationally efficient.4. Explain the purchasing power parity, both the absolute and relative versions. What causes the deviations from the purchasing power parity?Answer: The absolute version of purchasing power parity (PPP):S = P$/P£.The relative version is:e = π$ - π£.PPP can be violated if there are barriers to international trade or if people in different countries have different consumption taste. PPP is the law of one price applied to a standard consumption basket.5. Discuss the implications of the deviations from the purchasing power parity for countries’ competitive positions in the world market.Answer: If exchange rate changes satisfy PPP, competitive positions of countries will remain unaffected following exchange rate changes. Otherwise, exchange rate changes will affect relative competitiveness of countries. If a country’s currency appreciates (depreciates) by more than is warranted by PPP, that will hurt (strengthen) the country’s competitive position in the world market.6. Explain and derive the international Fisher effect.Answer: The international Fisher effect can be obtained by combining the Fisher effect and the relative version of PPP in its expectational form. Specifically, the Fisher effect holds thatE(π$) = I$ - ρ$,E(π£) = I£ - ρ£.Assuming that the real interest rate is the same between the two countries, i.e., ρ$ = ρ£, and substituting the above results into the PPP, i.e., E(e) = E(π$)- E(π£), we obtain the international Fisher effect: E(e) = I$ - I£.7. Researchers found that it is very difficult to forecast the future exchange rates more accurately than the forward exchange rate or the current spot exchange rate. How would you interpret this finding?Answer: This implies that exchange markets are informationally efficient. Thus, unless one has private information that is not yet reflected in the current market rates, it would be difficult to beat the market.8. Explain the random walk model for exchange rate forecasting. Can it be consistent with the technical analysis?Answer: The random walk model predicts that the current exchange rate will be the best predictor of the future exchange rate. An implication of the model is that past history of the exchange rate is of no value in predicting future exchange rate. The model thus is inconsistent with the technical analysis which tries to utilize past history in predicting the future exchange rate.*9. Derive and explain the monetary approach to exchange rate determination.Answer: The monetary approach is associated with the Chicago School of Economics. It is based on two tenets: purchasing power parity and the quantity theory of money. Combing these two theories allows for stating, say, the $/£ spot exchange rate as:S($/£) = (M$/M£)(V$/V£)(y£/y$),where M denotes the money supply, V the velocity of money, and y the national aggregate output. The theory holds that what matters in exchange rate determination are:1. The relative money supply,2. The relative velocities of monies, and3. The relative national outputs.10. CFA question: 1997, Level 3.A.Explain the following three concepts of purchasing power parity (PPP):a. The law of one price.b. Absolute PPP.c. Relative PPP.B.Evaluate the usefulness of relative PPP in predicting movements in foreign exchange rates on:a.Short-term basis (for example, three months)b.Long-term basis (for example, six years)Answer:A. a. The law of one price (LOP) refers to the international arbitrage condition for the standardconsumption basket. LOP requires that the consumption basket should be selling for the same price ina given currency across countries.A. b. Absolute PPP holds that the price level in a country is equal to the price level in another country times the exchange rate between the two countries.A. c. Relative PPP holds that the rate of exchange rate change between a pair of countries is about equal to the difference in inflation rates of the two countries.B. a. PPP is not useful for predicting exchange rates on the short-term basis mainly becauseinternational commodity arbitrage is a time-consuming process.B. b. PPP is useful for predicting exchange rates on the long-term basis.PROBLEMS1. Suppose that the treasurer of IBM has an extra cash reserve of $100,000,000 to invest for six months. The six-month interest rate is 8 percent per annum in the United States and 6 percent per annum in Germany. Currently, the spot exchange rate is €1.01 per dollar and the six-month forward exchange rate is €0.99 per dollar. The treasurer of IBM does not wish to bear any exchange risk. Where should he/she invest to maximize the return?The market conditions are summarized as follows:I$ = 4%; i€ = 3.5%; S = €1.01/$; F = €0.99/$.If $100,000,000 is invested in the U.S., the maturity value in six months will be$104,000,000 = $100,000,000 (1 + .04).Alternatively, $100,000,000 can be converted into euros and invested at the German interest rate, with the euro maturity value sold forward. In this case the dollar maturity value will be$105,590,909 = ($100,000,000 x 1.01)(1 + .035)(1/0.99)Clearly, it is better to invest $100,000,000 in Germany with exchange risk hedging.2. While you were visiting London, you purchased a Jaguar for £35,000, payable in three months. You have enough cash at your bank in New York City, which pays 0.35% interest per month, compounding monthly, to pay for the car. Currently, the spot exchange rate is $1.45/£ and the three-month forward exchange rate is $1.40/£. In London, the money market interest rate is 2.0% for a three-month investment. There are two alternative ways of paying for your Jaguar.(a) Keep the funds at your bank in the U.S. and buy £35,000 forward.(b) Buy a certain pound amount spot today and invest the amount in the U.K. for three months so that the maturity value becomes equal to £35,000.Evaluate each payment method. Which method would you prefer? Why?Solution: The problem situation is summarized as follows:A/P = £35,000 payable in three monthsi NY = 0.35%/month, compounding monthlyi LD = 2.0% for three monthsS = $1.45/£; F = $1.40/£.Option a:When you buy £35,000 forward, you will need $49,000 in three months to fulfill the forward contract. The present value of $49,000 is computed as follows:$49,000/(1.0035)3 = $48,489.Thus, the cost of Jaguar as of today is $48,489.Option b:The present value of £35,000 is £34,314 = £35,000/(1.02). To buy £34,314 today, it will cost $49,755 = 34,314x1.45. Thus the cost of Jaguar as of today is $49,755.You should definitely choose to use “option a”, and save $1,266, which is the difference between $49,755 and $48489.3. Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000.a. Determine whether the interest rate parity is currently holding.b. If the IRP is not holding, how would you carry out covered interest arbitrage? Show all the steps and determine the arbitrage profit.c. Explain how the IRP will be restored as a result of covered arbitrage activities.Solution: Let’s summarize the given data first:S = $1.5/£; F = $1.52/£; I$ = 2.0%; I£ = 1.45%Credit = $1,500,000 or £1,000,000.a. (1+I$) = 1.02(1+I£)(F/S) = (1.0145)(1.52/1.50) = 1.0280Thus, IRP is not holding exactly.b. (1) Borrow $1,500,000; repayment will be $1,530,000.(2) Buy £1,000,000 spot using $1,500,000.(3) Invest £1,000,000 at the pound interest rate of 1.45%;maturity value will be £1,014,500.(4) Sell £1,014,500 forward for $1,542,040Arbitrage profit will be $12,040c. Following the arbitrage transactions described above,The dollar interest rate will rise;The pound interest rate will fall;The spot exchange rate will rise;The forward exchange rate will fall.These adjustments will continue until IRP holds.4. Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is5.6 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €800,000.a. Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.b. Assume that you want to realize profit in terms of euros. Show the covered arbitrage process and determine the arbitrage profit in euros.Solution:a.(1+ i $) = 1.014 < (F/S) (1+ i € ) = 1.053. Thus, one has to borrow dollars and invest in euros to makearbitrage profit.1.Borrow $1,000,000 and repay $1,014,000 in three months.2.Sell $1,000,000 spot for €1,060,000.3.Invest €1,060,000 at the euro interest rate of 1.35 % for three months and receive €1,074,310 atmaturity.4.Sell €1,074,310 forward for $1,053,245.Arbitrage profit = $1,053,245 - $1,014,000 = $39,245.b.Follow the first three steps above. But the last step, involving exchange risk hedging, will bedifferent.5. Buy $1,014,000 forward for €1,034,280.Arbitrage profit = €1,074,310 - €1,034,280 = €40,0305. In the issue of October 23, 1999, the Economist reports that the interest rate per annum is 5.93% in the United States and 70.0% in Turkey. Why do you think the interest rate is so high in Turkey? Based on the reported interest rates, how would you predict the change of the exchange rate between the U.S. dollarand the Turkish lira?Solution: A high Turkish interest rate must reflect a high expected inflation in Turkey. According to international Fisher effect (IFE), we haveE(e) = i$ - i Lira= 5.93% - 70.0% = -64.07%The Turkish lira thus is expected to depreciate against the U.S. dollar by about 64%.6. As of November 1, 1999, the exchange rate between the Brazilian real and U.S. dollar is R$1.95/$. The consensus forecast for the U.S. and Brazil inflation rates for the next 1-year period is 2.6% and 20.0%, respectively. How would you forecast the exchange rate to be at around November 1, 2000?Solution: Since the inflation rate is quite high in Brazil, we may use the purchasing power parity to forecast the exchange rate.E(e)= E(π$) - E(πR$)= 2.6% - 20.0%= -17.4%E(S T)= S o(1 + E(e))= (R$1.95/$) (1 + 0.174)= R$2.29/$7. (CFA question) Omni Advisors, an international pension fund manager, uses the concepts of purchasing power parity (PPP) and the International Fisher Effect (IFE) to forecast spot exchange rates. Omni gathers the financial information as follows:Base price level 100Current U.S. price level 105Current South African price level 111Base rand spot exchange rate $0.175Current rand spot exchange rate $0.158Expected annual U.S. inflation 7%Expected annual South African inflation 5%Expected U.S. one-year interest rate 10%Expected South African one-year interest rate 8%Calculate the following exchange rates (ZAR and USD refer to the South African and U.S. dollar, respectively).a. The current ZAR spot rate in USD that would have been forecast by PPP.b. Using the IFE, the expected ZAR spot rate in USD one year from now.c. Using PPP, the expected ZAR spot rate in USD four years from now.Solution:a. ZAR spot rate under PPP = [1.05/1.11](0.175) = $0.1655/rand.b. Expected ZAR spot rate = [1.10/1.08] (0.158) = $0.1609/rand.c. Expected ZAR under PPP = [(1.07)4/(1.05)4] (0.158) = $0.1704/rand.8. Suppose that the current spot exchange rate is €1.50/₤and the one-year forward exchange rate is €1.60/₤.The one-year interest rate is 5.4% in euros and 5.2% in pounds. You can borrow at most €1,000,000 or the equivalent pound amount, i.e., ₤666,667, at the current spot exchange rate.a.Show how you can realize a guaranteed profit from covered interest arbitrage. Assume that you are aeuro-based investor. Also determine the size of the arbitrage profit.b.Discuss how the interest rate parity may be restored as a result of the abovetransactions.c.Suppose you are a pound-based investor. Show the covered arbitrage process anddetermine the pound profit amount.Solution:a. First, note that (1+i €) = 1.054 is less than (F/S)(1+i €) = (1.60/1.50)(1.052) = 1.1221.You should thus borrow in euros and lend in pounds.1)Borrow €1,000,000 and promise to repay €1,054,000 in one year.2)Buy ₤666,667 spot for €1,000,000.3)Invest ₤666,667 at the pound interest rate of 5.2%; the maturity value will be ₤701,334.4)To hedge exchange risk, sell the maturity value ₤701,334forward in exchange for €1,122,134.The arbitrage profit will be the difference between €1,122,134 and €1,054,000, i.e., €68,134.b. As a result of the above arbitrage transactions, the euro interest rate will rise, the poundinterest rate will fall. In addition, the spot exchange rate (euros per pound) will rise and the forward rate will fall. These adjustments will continue until the interest rate parity is restored.c. The pound-based investor will carry out the same transactions 1), 2), and 3) in a. But to hedge, he/she will buy €1,054,000 forward in exchange for ₤658,750.The arbitrage profit will then be ₤42,584= ₤701,334 - ₤658,750.9. Due to the integrated nature of their capital markets, investors in both the U.S. and U.K. require the same real interest rate, 2.5%, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 3.5% in the U.S. and 1.5% in the U.K. for the next three years. The spot exchange rate is currently $1.50/£.pute the nominal interest rate per annum in both the U.S. and U.K., assuming that the Fishereffect holds.b.What is your expected future spot dollar-pound exchange rate in three years from now?c.Can you infer the forward dollar-pound exchange rate for one-year maturity?Solution.a. Nominal rate in US = (1+ρ)(1+E(π$)) – 1 = (1.025)(1.035) – 1 = 0.0609 or 6.09%.Nominal rate in UK= (1+ρ)(1+E(π₤)) – 1 = (1.025)(1.015) – 1 = 0.0404 or 4.04%.b. E(S T) = [(1.0609)3/(1.0404)3] (1.50) = $1.5904/₤.c. F = [1.0609/1.0404](1.50) = $1.5296/₤.Mini Case: Turkish Lira and the Purchasing Power ParityVeritas Emerging Market Fund specializes in investing in emerging stock markets of the world. Mr. Henry Mobaus, an experienced hand in international investment and your boss, is currently interested in Turkish stock markets. He thinks that Turkey will eventually be invited to negotiate its membership in the European Union. If this happens, it will boost the stock prices in Turkey. But, at the same time, he is quite concerned with the volatile exchange rates of the Turkish currency. He would like to understand what drives the Turkish exchange rates. Since the inflation rate is much higher in Turkey than in the U.S., he thinks that the purchasing power parity may be holding at least to some extent. As a research assistant for him, you were assigned to check this out. In other words, you have to study and prepare a report on the following question: Does the purchasing power parity hold for the Turkish lira-U.S. dollar exchange rate? Among other things, Mr. Mobaus would like you to do the following:a.Plot the past exchange rate changes against the differential inflation rates betweenTurkey and the U.S. for the last four years.b.Regress the rate of exchange rate changes on the inflation rate differential to estimatethe intercept and the slope coefficient, and interpret the regression results.Data source: You may download the consumer price index data for the U.S. and Turkey from the following website: /home/0,2987,en_2649_201185_1_1_1_1_1,00.html, “hot file” (Excel format) . You may download the exchange rate data from the website: merce.ubc.ca/xr/data.html.Solution:a. In the current solution, we use the monthly data from January 1999 – December 2002.IM-123.095) (t 1.472βˆ0.649)- (t 0.011αˆε Inf_US) -Inf_Turkey (βˆαˆ e t t ===-=++= The estimated intercept is insignificantly different from zero, whereas the slope coefficient is positive and significantly different from zero. In fact, the slope coefficient is insignificantly different from unity. [Note that t-statistics for β = 1 is 0.992 = (1.472 – 1)/0.476 where s.e. is 0.476] In other words, we cannot reject the hypothesis that the intercept is zero and the slope coefficient is one. The results are thussupportive of purchasing power parity.。

Contemporary Financial Management 10th现代财务管理英文版全套习题ContentsChapter 1 The Role and Objective of Financial Management 1 Chapter 2 The Domestic and International Financial Marketplace 13 Appendix 2A Taxes 26Chapter 3 Evaluation of Financial Performance 31Chapter 4 Financial Planning and Forecasting 51Chapter 5 The Time Value of Money 66Appendix 5A Continuous Compounding and Discounting 95 Chapter 6 Analysis of Risk and Return 99Chapter 7 Fixed Income Securities: Characteristics and Valuation 127 Chapter 8 Common Stock: Characteristics, Valuation, and Issuance 153 Chapter 9 Capital Budgeting and Cash Flow Analysis 179 Chapter 10 Capital Budgeting: Decision Criteria and Real Option Considerations 202 Appendix 10A Mutually Exclusive Investments Having Unequal Lives 221 Chapter 11 Capital Budgeting and Risk 228Chapter 12 The Cost of Capital 246Chapter 13 Capital Structure Concepts 270Chapter 14 Capital Structure Management in Practice 285 Chapter 15 Dividend Policy 306Chapter 16 Working Capital Policy and Short-Term Financing 327 Chapter 17 The Management of Cash and Marketable Securities 344 Chapter18 Management of Accounts Receivable and Inventories 360 Chapter 19 Lease and Intermediate-Term Financing 376 Chapter 20 Financing with Derivatives 388Appendix 20B Bond Refunding Analysis 404Chapter 21 Risk Management 408Chapter 22 International Financial Management 415Chapter 23 Corporate Restructuring 425Chapter 1The Role and Objective of Financial ManagementMULTIPLE CHOICE1. The primary objective of the firm is:a. Shareholder wealth maximizationb. Social responsibilityc. Long run survivald. Profit maximizationANS: A OBJ: TYPE: Fact TOP: A Foundation Concept2. The limitations of the profit maximization goal include:a. It lacks a time dimension (i.e., it is static)b. It fails to consider riskc. The definition of profit is ambiguousd. All the above are limitationsANS: D OBJ: TYPE: FactTOP: Maximization of shareholder wealth: Managerial strategies3. The shareholder wealth maximization goal states that management should seek tomaximize the _______ of the expected future returns to the owners of the firm.a. Future valueb. Compound valuec. Percentage valued. Present valueANS: D OBJ: TYPE: Fact TOP: A Foundation Concept4. Shareholder returns can take the form ofa. Periodic dividend paymentsb. Proceeds from the sale of the stockc. Periodic interest paymentsd. Periodic dividend payments and proceeds from the sale of the stockANS: D OBJ: TYPE: Fact TOP: A Foundation Concept5. Shareholder wealth is measured by the ________ of the shareholders' common stockholdings.a. Book valueb. Market valuec. Historic valued. Compound valueANS: B OBJ: TYPE: Fact TOP: A Foundation Concept6. The objective of maximizing shareholder wealth, as measured by the market value of thefirm's stocka. does not consider the timing of the benefits receivedb. provides a way to consider the risk of the returns being offeredc. benefits only certain stockholdersd. neither considers the timing of the benefits received norbenefits only certainstockholdersANS: B OBJ: TYPE: Fact TOP: A Foundation Concept7. The two most important disciplines on which financial management relies area. accounting and productionb. accounting and marketingc. economics and marketingd. accounting and economicsANS: D OBJ: TYPE: Fact TOP: Financial management and other disciplines8. The most widely accepted objective of the firm is toa. minimize riskb. maximize profitsc. maximize shareholder wealthd. maximize earnings per shareANS: C OBJ: TYPE: Fact TOP: A Foundation Concept9. The ______ the risk of receiving future cash flows, the ______ will be the present valueof those cash flows.a. greater, greaterb. greater, lowerc. lower, lowerd. lower, greaterANS: B OBJ: TYPE: Fact TOP: Risk10. A major advantage of using the maximization of shareholder wealth as the primary goalof the firm is that this goal considersa. the timing and the risk of the expected benefits to be receivedb. the investor's consumption utilityc. the value of closely held partnershipsd. all the aboveANS: A OBJ: TYPE: Fact TOP: A Foundation Concept11. The primary reason for the divergence between the shareholder wealth maximization goaland the actual goals pursued by management has been attributed toa. separation of social responsibility and stakeholders' concernsb. separation of ownership and controlc. separation of personal welfare and long-run profit goalsd. the granting of "golden parachute" contractsANS: B OBJ: TYPE: Fact TOP: Divergent objectives12. Giving top management _______ is one method that ensures managers will act in theinterest of shareholders in merger decisions.a. "golden parachute" contractsb. excellent payc. executive perksd. job securityANS: A OBJ: TYPE: Fact TOP: Divergent objectives13. _____ arise from the divergent objectives between owners and managers.a. Shareholder relationshipsb. Stakeholder problemsc. Creditor problemsd. Agency problemsANS: D OBJ: TYPE: Fact TOP: Agency problems14. Agency costs include all of the following except:a. expenditures to monitor management's actionsb. providing stock as part of management's compensationc. flotation costsd. bonding expendituresANS: C OBJ: TYPE: Fact TOP: Stockholders and managers15. A potential agency conflict can arise between stockholders and creditors because ownersmaya. increase the risk of a firm's investmentsb. decrease the amount of debt outstandingc. decrease the risk of a firm's investmentsd. increase the firm's net worthANS: A OBJ: TYPE: Fact TOP: Stockholders and creditors16. When KKR acquired RJR Nabisco, the ______ in the debt ratio, resulted in a(n) ______in the value of the firm's outstanding bonds.a. decrease, increaseb. increase, increasec. decrease, declined. increase, declineANS: D OBJ: TYPE: Fact TOP: Stockholders and creditors17. Agency problems may give rise to costs that ______ the market value of firms.a. increaseb. decreasec. do not affectd. are not important toANS: B OBJ: TYPE: Fact TOP: Stockholders and managers18. All of the following are problems with the microeconomic profit maximization modelexcept:a. the absence of a time dimensionb. offers financial managers insights to a wide range of problemsc. does not consider the risk of alternative decisionsd. the problem of defining profitsANS: B OBJ: TYPE: FactTOP: Maximization of shareholder wealth: Managerial strategies19. ________ are largely outside of the direct control of managers.a. investment strategiesb. economic environment factorsc. major policy decisionsd. dividend policiesANS: B OBJ: TYPE: Fact TOP: Managerial actions to influence value20. The success of a firm is linked to its stakeholders. This group includes:a. community neighborsb. suppliersc. employeesd. all the aboveANS: D OBJ: TYPE: Fact TOP: Social responsibility concerns21. Techniques identified by John Casey that managers could keep in mind when addressingthe ethical dimensions of a business problem include all of the following except:a. collect all the facts bearing on the problemb. clarify the parameters of the problemc. involve all parties with a financial interest in the outcomed. seek equity for those who may be affectedANS: C OBJ: TYPE: FactTOP: Ethical issues: the practice of financial management22. Many small business owners are _________ diversified with respect to their personalwealth.a. poorlyb. highlyc. welld. 90%ANS: A OBJ: TYPE: FactTOP: Entrepreneurial finance issues: Shareholder wealth maximizat23. __________ deals with economic decisions of individuals, households, and firms.a. Economic accountingb. Microeconomicsc. Blue Chip econometricsd. MacroeconomicsANS: B OBJ: TYPE: Fact TOP: Economics24. Financial management draws heavily on the following related disciplines:a. accountingb. macroeconomicsc. microeconomicsd. all of the aboveANS: D OBJ: TYPE: Fact TOP: Financial management and other disciplines25. The chief financial officer (CFO) normally has responsibilityfor all the following except:a. advertising strategyb. managing interest rate riskc. trading foreign currenciesd. accounting functionsANS: A OBJ: TYPE: Fact TOP: Organization of the financial management function26. The controller normally has responsibility for all _______ related activities, while thetreasurer is normally concerned with ________.a. acquisition, data processingb. tax, cost accountingc. tax, financial accountingd. accounting, expenditure of fundsANS: D OBJ: TYPE: Fact TOP: Organization of the financial management function27. According to the shareholder wealth maximization goal, management should seek tomaximize the __________ of the __________ to owners.a. present value; expected pretax cash flowsb. future value; expected pretax cash flowsc. present value; expected future returnsd. future value; expected future returnsANS: C OBJ: TYPE: Fact TOP: A foundation concept28. Shareholder wealth is measured by the __________.a. book value of the shareholders' common stock holdingsb. market value of the shareholders' common stock holdingsc. book value of the company's assetsd. market value of the company's assetsANS: B OBJ: TYPE: Fact TOP: Determinants of value29. Among the most important agency relationships in the context of finance is (are) therelationship(s) between __________.a. stockholders and creditorsb. management and workersc. stockholders and creditors, and management and workersd. management and creditorsANS: A OBJ: TYPE: Fact TOP: Agency problems30. Protective covenants in a company's bond indentures are used in agency relationshipsinvolving __________.a. stockholders and managersb. stockholders and creditorsc. management and workersd. management and creditorsANS: B OBJ: TYPE: Fact TOP: Stockholders and creditors31. The chief financial officer (CFO) of a corporation normally reports to the_______________________ of the company.a. chairman of the board of directorsb. chief operating officerc. controllerd. chief executive officerANS: D OBJ: TYPE: Fact TOP: Organization of the financial management function32. The ___________ has a goal of serving as a bridge between academic study of financeand the application of financial principles by financial managers.a. Financial Executives Instituteb. Financial Management Associationc. American Finance Associationd. Institution of Financial AnalystsANS: B OBJ: TYPE: Fact TOP: Professional finance affiliation33. All of the following economic environment factors affect stock prices except:a. investment strategiesb. competitionc. tax ratesd. currency exchange ratesANS: A OBJ: TYPE: Fact TOP: Managerial actions to influence value34. The major factors that determine the market value of a company's shares of stock includethe __________ .a. risk of its cash flowsb. timing of its cash flowsc. book value of its assetsd. risk of its cash flows and the timing of its cash flowsANS: D OBJ: TYPE: Fact TOP: Determinants of value35. There is often a divergence between the shareholder wealth maximization goal and theactual goals pursued by management. The primary reason for this is __________.a. geographical dispersion of shareholdersb. separation of ownership and controlc. age differences between managers and shareholdersd. that both have their own agendasANS: B OBJ: TYPE: Fact TOP: Divergent objectives36. The existence of divergent objectives between owners and managers is one example of aclass of problems arising from __________.a. social responsibility concernsb. age differences between managers and ownersc. agency relationshipsd. union-management relationsANS: C OBJ: TYPE: Fact TOP: Agency problems37. The activities of the treasurer include all of the following except:a. financial planningb. tax preparationc. credit analysisd. pension fund managementANS: B OBJ: TYPE: Fact TOP: Organization of the financial management function38. The most important managerial objective is to:a. make MC=MRb. maximize profitsc. minimize agency costsd. none of the aboveANS: D OBJ: TYPE: Fact TOP: A foundation concept39. _______ are important because the financial health of a firm depends on the firm beingable to generate sufficient cash to pay its creditors, employees, suppliers, and owners.a. cash salesb. cash flowsc. cash profitsd. net profitsANS: B OBJ: TYPE: Fact TOP: A foundation concept40. One method of decreasing the cash outflows of a firm is toa. decrease depreciationb. increase capital expendituresc. decrease dividendsd. increase debt repaymentANS: C OBJ: TYPE: Fact TOP: Cash flow41. If a firm shows an accounting net income, thena. it will not have a cash flow problemb. it will not have a problem obtaining a bank loanc. it will be able to repay all current liabilities on timed. none of the aboveANS: D OBJ: TYPE: Fact TOP: Cash flow42. Cash flow concepts are _____ but generally accepted accounting principles are ______ inthe determination of a firm's net income.a. unambiguous, ambiguousb. ambiguous, unambiguousc. ambiguous, also ambiguousd. unambiguous, straightforwardANS: A OBJ: TYPE: Fact TOP: Importance of cash flow43. Accounting-based measures of performance include all the following excepta. return on equityb. cash flowc. return on assetsd. market shareANS: B OBJ: TYPE: Fact TOP: Cash flows and shareholder wealth44. Accounting-based measures of performance _____ subject to short-term manipulation bymanagers; cash flows ______ subject to short-term manipulation.a. are, are notb. are not, arec. are, are alsod. are not, also are notANS: A OBJ: TYPE: Fact TOP: Cash flows and shareholder wealth45. The net present value rule provides appropriate guidance for financial decision makerswhen costs are incurred immediately buta. future cash flows are not known with certaintyb. marginal costs are equal to marginal revenuec. result in a stream of benefits over several future time periodsd. marginal costs are greater then marginal revenueANS: C OBJ: TYPE: Fact TOP: Net present value rule46. Corporate officers normally include all the following except:a. Secretaryb. Chief operating officerc. Treasurerd. Financial analystANS: D OBJ: TYPE: Fact TOP: Corporate organization47. The difference between a firm's annual after-tax operating profit and its total annual costof capital is known as:a. earned incomeb. Economic Value Addedc. Managerial Value Addedd. operating incomeANS: B OBJ: TYPE: Fact TOP: Divergent objectives48. ____ equals the number of shares outstanding times the market price per share.a. Book valueb. Stakeholders wealthc. Total shareholder wealthd. Economic valueANS: C OBJ: TYPE: Fact TOP: A Foundation Concept49. Which of the following companies requires that its top officers own common stock in thecompany that is at least equal to their annual salary.a. Ford Motor Companyb. Tucson Electric Power Companyc. Panhandle Easternd. Anheuser-BuschANS: A OBJ: TYPE: Fact TOP: Divergent Objectives50. The net present value of an investment made by a firm represents the contribution of thatinvestment to the ____ of the firm.a. book valueb. profitc. valued. cash flowANS: C OBJ: TYPE: Fact TOP: Net present value rule51. A major advantage of the corporate form of business over both sole proprietorships andpartnerships is thea. limited liabilityb. reduction in taxesc. ease of formationd. ability to maintain ownershipANS: A OBJ: TYPE: Fact TOP: Corporation52. Which of the following is not an advantage that the corporate form of business has overeither the sole proprietorship or partnership?a. ability to raise capitalb. ease of changing ownershipc. limited liabilityd. elimination of double taxesANS: D OBJ: TYPE: Fact TOP: Corporation53. A major disadvantage of a sole proprietorship is the fact thata. it is expensive to establishb. the owner has unlimited personal liabilityc. it is easy to finance growthd. the owner pays taxes on all the incomeANS: B OBJ: TYPE: Fact TOP: Sole proprietorship54. In a limited partnership, the limited partners may limit their:a. tax liabilityb. liabilityc. tax write-offd. ability to attract new productsANS: B OBJ: TYPE: Fact TOP: Partnership55. Corporate securities represent claims against thea. corporate officers of the firmb. agents of the corporationc. liabilities and net worth of the firmd. assets and future earnings of the firmANS: D OBJ: TYPE: Fact TOP: Corporate securities56. _________ is (are) referred to as a residual form of ownershipin a corporation.a. Common stockb. Preferred stockc. Bondsd. DividendsANS: A OBJ: TYPE: Fact TOP: Corporate securities57. The advantages of the corporate form of organization over both sole proprietorships andpartnerships include ________.a. limited liabilityb. permanencyc. limited liability and permanencyd. lower tax ratesANS: C OBJ: TYPE: Fact TOP: Corporation58. Although this type of business generates less than 6% of the total U.S. business revenue,_____ make up approximately 75% of all businesses.a. general partnershipsb. corporationsc. limited partnershipsd. sole-proprietorshipsANS: D OBJ: TYPE: Fact TOP: Sole proprietorship59. Which of the following is not an advantage of the corporate form of businessorganization:a. unlimited lifeb. unlimited liabilityc. flexibility in ownership changed. ability to raise capitalANS: B OBJ: TYPE: Fact TOP: Corporation60. There are problems with using the “profit maximization” criterion. Which of thefollowing is/are correct?I. Profit maximization has an ambiguous definition of “maximizing profits”.II. Profit maximization fails to consider risk.a. I onlyb. II onlyc. Both I and IId. Neither I nor IIANS: C OBJ: TYPE: Fact TOP: Foundation concept61. Which of the following statements is/are correct?I. Shareholders elect the Chairman of the BoardII. The board of directors has no control over whether or not dividends will be paid.a. I onlyb. II onlyc. Both I and IId. Neither I nor IIANS: D OBJ: TYPE: Fact TOP: Corporate organization62. There are three major factors that determine the market value ofa company’s share ofstock. All of the following are factors EXCEPT:a. Cash flowsb. Sales generatedc. Timing of cash flowsd. Risk taken to generate cash flowsANS: B OBJ: TYPE: Fact TOP: Determinants of value63. Which of the following is an economic principle used in finance?a. Full utilization of data processingb. Marginal analysis where marginal costs are set equal to marginal revenues.c. Accrual basis of recognizing revenues and expensesd. Target capital structureANS: B OBJ: TYPE: Fact TOP: Financial management and otherdisciplines64. The definition of the marginal analysis principle is that financial decisions are made andactions are takena. within the global economic viewpoint.b. with regard to governmental laws and cultural effectiveness.c. when the added benefits exceed the added costs.d. based on the impact of public opinion.ANS: C OBJ: TYPE: FactTOP: Maximization of shareholder wealth: Managerial strategies65. There are three forms of business organization. Which of the following has unlimitedliability?I. CorporationII. General partnershipa. I onlyb. II onlyc. Both I and IId. Neither I nor IIANS: B OBJ: TYPE: Fact TOP: PartnershipESSAY1. Explain the chain of command in a corporation.ANS:The stockholders, who own a pro-rata share of the company, elect the board of directors. The board makes broad decisions affecting the direction of the company, leaving the day-to-day decisions to the corporate officers, who are elected by the board. Corporate officers are: the chairman of the board, the chief executive officer, the chief operating officer, chief financial officer, president, vice-president(s), treasurer and secretary.OBJ: TYPE: Fact TOP: Corporate organization2. There are five compe titive forces that influence an industry’s structure.ANS:1. The threat of new entrants.2. The threat of substitute products3. The bargaining power of buyers4. The bargaining power of suppliers5. The rivalry among current competitorsOBJ: TYPE: Fact TOP: Managerial actions to influence value3. What are the shortcomings in the profit maximization objective asa managerial strategy?ANS:1. Profit maximization lacks a time dimension.2. There are many definitions of profit for a firm. There is much latitude permitted inrecognizing and accounting for costs and revenues.3. There is a question as to which profit is to be maximized: total profit, rate of profit orEPS.4. There is no direct way to consider the risk associated with alternative decisions.OBJ: TYPE: Fact TOP: Maximization of shareholder wealth: Managerial strategiesChapter 2The Domestic and International Financial MarketplaceMULTIPLE CHOICE1. The difference between merchandise exports and imports is known as the __________.a. transaction exposureb. difference in purchasing powerc. merchandise trade balanced. import/export reserveANS: C OBJ: TYPE: Fact TOP: The global economy2. A multinational firm __________.a. has direct investments in manufacturing facilities in more than one countryb. exports finished goods for sale in another countryc. imports raw materials from another countryd. has a manufacturing representative in another countryANS: A OBJ: TYPE: Fact TOP: The global economy3. The interest rate at which banks in the Eurocurrency market lend to each other is knownas the __________ .a. Eurocurrency currency rate (ECR)b. London interbank offer ratec. exchange rated. interest rate parityANS: B OBJ: TYPE: Fact TOP: The Eurocurrency market4. If Japanese yen are deposited in a bank in Paris, the deposits would be called __________a. Eurofrancsb. European Currency Unitc. Eurobondd. EuroyenANS: D OBJ: TYPE: Fact TOP: The Eurocurrency market5. An exchange rate quoted as $1.47 per British pound is known as a __________ quote.a. hedgeb. directc. futuresd. indirectANS: B OBJ: TYPE: Fact TOP: Direct and indirect quotes6. If the spot rate for Swiss francs is $0.6658/franc and the 180-day forward rate is $0.6637,the market is indicating that the Swiss franc is expected toa. strengthen relative to the dollarb. weaken relative to the ECUc. lose value relative to the dollar over the next 6 monthsd. gain value relative to the dollar over the next 6 monthsANS: C OBJ: TYPE: Fact TOP: Forward rates7. Which of the following is not a correct statement about foreign currency futures?a. futures contracts have a standardized maturity dateb. futures contracts are an exchange-traded agreementc. futures contracts are not liquidd. futures contracts are "marked to market" dailyANS: C OBJ: TYPE: Fact TOP: Foreign currency futures8. The most important foreign currency futures market in the United States is the__________.a. Chicago Board of Tradeb. New York Mercantile Exchangec. Commodity Exchanged. Chicago Mercantile ExchangeANS: D OBJ: TYPE: Fact TOP: Foreign currency futures9. The buyer of a foreign currency call option has the __________ a fixed amount of aforeign currency.a. right to sellb. right but not the obligation to buyc. obligation to buy, only at expiration,d. obligation to buyANS: B OBJ: TYPE: Fact TOP: Foreign currency options10. Eurodollars are U.S. dollars that have been deposited ina. foreign banksb. foreign branches of U.S. banksc. foreign subsidiariesd. foreign banks and foreign branches of U.S. banksANS: D OBJ: TYPE: Fact TOP: The Eurocurrency market11. If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, thenthe exchange rate from Canadian dollars to U.S. dollars isa. 0.80 Canadian $/US dollarb. $1.25 Canadian $/US dollarc. $1.20 Canadian $/US dollard. $8.00 Canadian $/US dollarANS: B OBJ: TYPE: Fact TOP: Direct and indirect quotes12. If the exchange rate from U.S. dollars to Swiss francs is $0.20/franc, then the exchangerate from francs to dollars isa. 0.20 francs/dollarb. 0.80 francs/dollarc. 5.0 francs/dollard. 2.0 francs/dollarANS: C OBJ: TYPE: Fact TOP: Foreign currencies and exchange rates13. If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rateis 0.00717, then the Yen is trading at a(n) ______.a. expected gainb. premiumc. reciprocald. discountANS: B OBJ: TYPE: Fact TOP: Foreign currencies and exchange rates14. If the forward (direct quote) exchange rate is lower than the spot rate, then the currency issaid to be trading at a ______.a. forward premiumb. forward gainc. forward discountd. forward lossANS: C OBJ: TYPE: Fact TOP: Foreign currencies and exchange rates15. Financial middlemen includea. securities brokersb. securities dealersc. investment bankersd. all of the aboveANS: D OBJ: TYPE: Fact TOP: An overview of the U.S. financialsystem16. The following are listed security exchanges in the United Sates:a. New York Stock Exchangeb. Pacific Exchangec. Cincinnati Exchanged. All the above are listed exchangesANS: D OBJ: TYPE: Fact TOP: Listed security exchanges17. The Standard and Poor's 500 Stock Price Index is a ____ index.a. price weightedb. market value weightedc. price averaged. none of these answers is correctANS: B OBJ: TYPE: Fact TOP: Stock Market Indexes18. Securities not listed on exchanges are said to be tradeda. on the AMEXb. as composite transactionsc. over the counterd. on the regional exchangesANS: C OBJ: TYPE: Fact TOP: Security exchanges and stock market indexes19. Financial intermediaries includea. securities brokersb. commercial banksc. securities dealersd. all of the aboveANS: B OBJ: TYPE: Fact TOP: An overview of the U.S. financial system20. _______ markets deal in long-term securities having maturities greater than one year.a. Creditb. Moneyc. Commodity futuresd. CapitalANS: D OBJ: TYPE: Fact TOP: Money and capital markets21. ______ markets deal in short-term securities having maturitiesof one year or less.a. Creditb. Moneyc. Capitald. Capital and creditANS: B OBJ: TYPE: Fact TOP: Money and capital markets22. Which of the following (if any) are not financial intermediaries?a. commercial bankb. thrift institutionc. securities brokerd. all are financial intermediariesANS: C OBJ: TYPE: Fact TOP: An overview of the U.S. financial system23. In the ________ market, the firm receives the proceeds from the sale of its securities.a. over-the-counterb. secondaryc. fully integratedd. primaryANS: D OBJ: TYPE: Fact TOP: Primary and secondary markets24. A savings and loan association is an example of which type of financial intermediary?。