Question 1 1.   Which of the following could reduce agency problems for an MNC? Answer stock options as managerial compensation. hostile takeover threat. investor monitoring. independent board members 10 points   Question 2 1.   Assume that Live Co. has expected cash flows of 200,000 USD from domestic operations, 200,000 CHF from Swiss operations, and 150,000 EUR from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected net USD cash flows of Live Co? Answer 10 points   Question 3 1.   A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal. Answer a. decrease; increase b. increase; increase c. increase; decrease d. decrease; decrease 10 points   Question 4 1.   According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance. Answer a. increase; decrease b. decrease; decrease c. decrease; increase d. increase; increase 10 points   Question 5 1.   Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward. Answer a. depreciate; buying b. depreciate; selling c. appreciate; buying d. appreciate; selling 10 points   Question 6 1.   A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 15 EUR when the Dutch market closed. As the U.S. market opens, the exchange rate on the euro is 1.10 USD/EUR. Assuming no significant news has happened in the interim, the price of the ADR should be about ____ USD. Answer 10 points   Question 7 1.   Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward (entering into a short forward contract on the yen). The current spot rate of the yen is 0.0089 USD/JPY, while the forward rate is 0.0095 USD/JPY. You expect the spot rate in 60 days to be 0.0090 USD/JPY. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? Answer 10 points   Question 8 1.   All else equal, an increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale. Answer a. reduce; reduce b. reduce; increase c. increase; increase d. increase; reduce 10 points   Question 9 1.   Baylor ...

1. Question 1
1.
Which of the following could reduce agency problems for an
MNC?
Answer
stock options as managerial compensation.
hostile takeover threat.
investor monitoring.
independent board members
10 points
Question 2
1.
Assume that Live Co. has expected cash flows of 200,000 USD
from domestic operations, 200,000 CHF from Swiss operations,
and 150,000 EUR from Italian operations at the end of the year.
The Swiss franc's value and euro's value are expected to be $.83
and $1.29 respectively, at the end this year. What are the
expected net USD cash flows of Live Co?
Answer
10 points
Question 3
1.
A high home inflation rate relative to other countries would
____ the home country's current account balance, other things
equal. A high growth in the home income level relative to other
countries would ____ the home country's current account

2. balance, other things equal.
Answer
a.
decrease; increase
b.
increase; increase
c.
increase; decrease
d.
decrease; decrease
10 points
Question 4
1.
According to the "J curve effect," a weakening of the U.S.
dollar relative to its trading partners' currencies would result in
an initial ____ in the current account balance, followed by a
subsequent ____ in the current account balance.
Answer
a.
increase; decrease
b.
decrease; decrease
c.
decrease; increase
d.
increase; increase
10 points
Question 5

3. 1.
Assume a Japanese firm invoices exports to the U.S. in U.S.
dollars. Assume that the forward rate and spot rate of the
Japanese yen are equal. If the Japanese firm expects the U.S.
dollar to ____ against the yen, it would likely wish to hedge. It
could hedge by ____ dollars forward.
Answer
a.
depreciate; buying
b.
depreciate; selling
c.
appreciate; buying
d.
appreciate; selling
10 points
Question 6
1.
A share of the ADR of a Dutch firm represents one share of that
firm's stock that is traded on a Dutch stock exchange. The share
price of the firm was 15 EUR when the Dutch market closed. As
the U.S. market opens, the exchange rate on the euro is 1.10
USD/EUR. Assuming no significant news has happened in the
interim, the price of the ADR should be about ____ USD.
Answer
10 points
Question 7
1.
Your company expects to receive 5,000,000 Japanese yen 60
days from now. You decide to hedge your position by selling
Japanese yen forward (entering into a short forward contract on
the yen). The current spot rate of the yen is 0.0089 USD/JPY,

4. while the forward rate is 0.0095 USD/JPY. You expect the spot
rate in 60 days to be 0.0090 USD/JPY. How many dollars will
you receive for the 5,000,000 yen 60 days from now if you sell
yen forward?
Answer
10 points
Question 8
1.
All else equal, an increase in U.S. interest rates relative to
German interest rates would likely ____ the U.S. demand for
euros and ____ the supply of euros for sale.
Answer
a.
reduce; reduce
b.
reduce; increase
c.
increase; increase
d.
increase; reduce
10 points
Question 9
1.
Baylor Bank believes the New Zealand dollar (NZD) will
appreciate over the next five days from 0.48 to 0.50 USD/NZD.
The following annual interest rates apply:
USD:
Lending rate: 7.10%
Borrowing rate: 7.50%
NZD:
Lending rate: 6.80%

5. Borrowing rate: 7.25%
Baylor Bank has the capacity to borrow either 10 million NZD
or 5 million USD. If Baylor Bank's forecast is correct, and it
executes the appropriate speculative trade, what will its USD
profit be from speculation over the five-day period? (Assume
the bank does not use any of its own funds for the trade, using
only borrowed funds.)
Answer
10 points
Question 10
1.
Assume that a speculator purchases a put option on British
pounds, with a strike price of $1.50, for $.05 per unit. A pound
option contract is on 31,250 units. Assume that at the time of
the purchase, the spot rate of the pound is $1.51, and
continually rises to $1.62 by the expiration date. The highest
net profit possible for the speculator based on the information
above is:
Answer
10 points
Question 11
1.
Frank is an option speculator. He anticipates the Danish kroner
(DKK) to appreciate from its current level of $.19 to $.21.
Currently, kroner call options are available with an exercise
price of $.18 and a premium of $.02. If Frank buys the option,
and the future spot rate of the Danish kroner is indeed 0.21
USD/DKK, what is his net profit per unit?
Answer
10 points
Question 12
1.
The premium on a euro call option is $.02. The exercise price is
$1.32. What is the break-even price of the euro for the buyer of
this call option?

6. Answer
10 points
Question 13
1.
You are offered the opportunity to play the following dice
game. A fair die will be rolled, and if it comes up with a 3, you
get 500 bucks. Otherwise, you lose 100 bucks. What is the
expected value of this game to you?
Answer
10 points
Question 14
1.
In the previous question, imagine you play the game 3 times.
What is the probability that you win the first roll, and lose the
second and the third rolls? (Enter answer in percents, accurate
to two decimal places.)
Answer
10 points
Question 15
1.
Now that you know the answer to the previous question, what is
the probability of winning one and only one dice roll out of 3,
regardless of order? (Enter answer in percents, accurate to two
decimal places.)
Answer
10 points
Question 16
1.
Given the payoffs to the dice roll question, what is the
maximum number of rolls out of 20 you can win and still end up
with a net loss?
Answer
10 points
Question 17
1.
Recall that the Solow growth model specifies the economic

7. production function as
Y = A * K^a * L^(1-a)
Consider the following initial conditions:
A = 4
a = 0.8
K = 32
L = 243
What is the output of the economy (Y) in the first period?
Answer
10 points
Question 18
1.
In the previous question, if the savings rate is 25% and the
depreciation rate is 10%, what will be the resulting level of
capital (K) at the end of the first period (beginning of the
second)?
Answer
10 points
Question 19
1.
Given these parameters, what is the equilibrium level of capital
in this economy?
Answer
10 points
Question 20
1.
In the previous question, what is the equilibrium level of output
in this economy?
Answer
10 points
Question 21
1.
Assuming that 50% of the populations are in the labor force,
what is the GDP per capita at equilibrium in this economy?

8. Answer
10 points
Question 22
1.
You are returning back to the USA after a trip to Argentina.
Upon arrival you notice you have an extra 2000 Argentine pesos
(ARS) in your wallet. You ask for a quote on the peso at the
bank in the airport, and they give you a bid/ask quote of
0.2/0.22 USD/ARS. How many USD will you be able to recover
if you trade with this bank?
Answer
10 points
Question 23
1.
You decide to speculate in the wine market, so you buy 100
bottles of Bordeaux wine from France at 120 EUR apiece. A
year has passed, and you observe that the price of your wine has
risen to 140 EUR per bottle (turns out it was a good year). At
the same time, the euro has depreciated against the dollar by
5%. What was the net rate of return on this investment,
assuming you are in the US and measure your return in terms of
USD? (Enter answer in percent, accurate to two decimal places.)
Answer
10 points
Question 24
1.
The euro is quoted at 1.3 USD/EUR, and the Argentine peso
(ARS) is quoted at 5 ARS/USD. If that is the case, what should
be the EUR/ARS exchange rate? (Enter answer accurate to 4
decimal places.
Answer
10 points
Question 25
1.
You create a portfolio with three assets in it, with 50% of the
portfolio in asset X, and 25% each in assets Y and Z. If the

9. expected returns of assets X, Y, and Z are 10%, 20%, and 12%,
respectively, what is the expected return on your portfolio?
(Enter answer in percent, accurate to two decimal places.)
Answer
10 points
Question 26
1.
Asset A has an expected return of 10% and a standard deviation
of 15%. Asset B has an expected return of 7% and a standard
deviation of 12%. The returns on the two assets have a
correlation of 0.2. If you construct an equally weighted
portfolio of the two assets, what will be the variance of its
returns? (Enter answer accurate to 5 decimal places.)
Answer
10 points
Question 27
1.
In the previous problem, what is the portfolio's standard
deviation? (Enter answer in percent, accurate to two decimal
places.)
Answer
10 points
Question 28
1.
Your borrowing capacity is 10 million USD and 50 million
ARS.
The lending/borrowing rates in the USD market are 1%/3%, and
the lending/borrowing rates in the ARS market are 20%/22%.
The current spot exchange rate is 5 ARS/USD, and you expect
this rate to not change significantly, moving to 5.05 ARS/USD
in 3 months (90 days). You want to profit from your
expectations, so you will carry out a speculative trade using
borrowed funds. If your expectations are correct, how much
profit, measured in USD, can you make?
Answer

10. 10 points
Question 29
1.
The Chinese Yuan (RMB) is currently trading at 0.16
USD/RMB, and the one year forward rate is 0.15 USD/RMB.
What is the forward premium? (Enter answer in percent,
accurate to 2 decimal places.)
Answer
10 points
Question 30
1.
You are taking a stroll on the island of knights and knaves, and
notice a group of four inhabitants (A, B, C, and D) relaxing
under a tree and discussing their international finance exploits.
You approach, and hear A tell the following story:
So this one day, I bought a bunch of 1-month put options on
50,000 British pounds, at a premium of 0.03 USD per unit. The
GBP was trading at 2 USD/GBP at the time, and my option
strike price was 1.91 USD. It was September, 1992, and as luck
would have it, good old George Soros was working on taking
the Bank of England for a ride to the tune of a few billion
dollars. So by option expiration at the end of September, the
GBP was trading at 1.77 USD/GBP. So the option position I
described netted me 15,500 USD profit!
At this point, the other members of the group make the
following statements:
B: Cool story bro, too bad it's not true!
C: Oh, B is just lying because that's what he does all the time.
D: Nah, B is right.
Which of these four inhabitants is a knight? (Check all that
apply.)
Answer

11. A
B
C
D