Question 1

 Which of the following statements is CORRECT?

Question 2
 Which of the following events is likely to decrease the value of call options on the
common stock of GCC Company?
Response: An increase in the exercise price of the option.
Score: 1 out of 1 Yes

Question 3
 Which of the following is NOT an example of a derivative security?
Response: Preferred stock.
Score: 1 out of 1 Yes

Question 4
 A commercial bank recognizes that its net income suffers whenever interest rates
increase. Which of the following strategies would protect the bank against rising interest
rates?
Response: Enter into a short hedge where the bank agrees to sell interest rate futures.
Score: 1 out of 1 Yes

Question 5
 An investor who "writes" a call option against stock held in his or her portfolio is selling
a(n)
Response: Covered option.
Score: 1 out of 1 Yes

Question 6
 A 6-month call option on Romer Technologies' stock has a strike price
of 45andsellsinthemarketfor8.25. Romer's current stock price is $48. What is the
exercise value of the option?
Response: $3.00
Score: 1 out of 1 Yes

Question 7
 Which of the following statements concerning risk management is NOT CORRECT?
Response: Risk management makes sense for firms directly engaged in activities that
involve commodities whose values can be hedged, but it doesn't make much sense for
most other firms.
Score: 1 out of 1 Yes

Question 8
 An option that gives the holder the right to buy a stock at a specified price at some time
in the future is called a(n)
Response: Call option.
Score: 1 out of 1 Yes

Question 9
 A 6-month put option on Makler Corp.'s stock has a strike price
of 45andsellsinthemarketfor8.90. Makler's current stock price is $41. What is the
exercise value of the option?
Response: $4.00
Score: 1 out of 1 Yes

Question 10
 Warnes Motors' stock is trading
at 20ashare.Three−monthcalloptionswithanexercisepriceof 20 have a price
of 1.50.Whichofthefollowingwilloccurifthestockpriceincreases1022 a share?
Response: The price of the call option will increase by less than $2, but the percentage
increase in price will be more than 10%.
Score: 1 out of 1 Yes

Question 11
 An option that gives the holder the right to sell a stock at a specified price at some time
in the future is called a(n)
Response: Put option.
Score: 1 out of 1 Yes

Question 12
 Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a
swap cannot reduce actual net interest expenses.
Response: False
Score: 1 out of 1 Yes
Question 13
 The value of a stock option depends on all of the following EXCEPT:
Response: Bond price.
Score: 1 out of 1 Yes

Question 14
 A swap is a method used to reduce financial risk. Which of the following statements
about swaps, if any, is NOT CORRECT?
Response: A problem with swaps is that no standardized contracts exist, which has
prevented the development of a secondary market.
Score: 1 out of 1 Yes

Question 15
 A riskless hedge can best be defined as
Response: A hedge in which an investor buys a stock and simultaneously sells a call
option on that stock and ends up with a riskless position.
Score: 1 out of 1 Yes

Question 16
 Which of the following statements regarding factors that affect call option prices is
CORRECT?
Response: The price of a call option increases as the risk-free rate increases.
Score: 1 out of 1 Yes

Question 17
 Which of the following statements is CORRECT?
Response: The market value of an option depends in part on the option's length of time
until expiration and on the variability of the underlying stock's price.
Score: 1 out of 1 Yes

Question 18
 A call option whose underlying stock value is less than the corresponding exercise
price is an example of a(n)
Response: Out-of-the-money option.
Score: 1 out of 1 Yes

Question 19
 In theory, reducing the volatility of its cash flows will always increase a company's
value.
Response: False
Score: 1 out of 1 Yes

Question 20
 Which of the following statements is most CORRECT?
Response: Futures contracts generally trade on an organized exchange and are
marked to market daily.
Score: 1 out of 1 Yes

Question 21
 The two basic types of hedges involving the futures market are long hedges and short
hedges, where the words "long" and "short" refer to the maturity of the hedging
instrument. For example, a long hedge might use Treasury bonds, while a short hedge
might use 3-month T-bills.
Response: False
Score: 1 out of 1 Yes

Question 22
 Which of the following is NOT a way risk management can be used to increase the
value of a firm?
Response: Risk management can allow managers to defer receipt of their bonuses and
thus postpone tax payments
Score: 1 out of 1 Yes

Question 23
 An investor who "writes" a call option without the stock in his or her portfolio to back it
up is selling a(n)
Response: Naked option.
Score: 1 out of 1 Yes

Question 24
 A 6-month call option on Meyers Inc.'s stock has a strike price
of 45andsellsinthemarketfor8.25. Meyers' current stock price is $48. What is the
option premium?
Response: $5.25
Score: 1 out of 1 Yes

Question 25
 There are call options on the common stock of XYZ Corporation. Which of the following
best describes the factors that affect call option values?
Response: The price of call options will rise if XYZ's stock price rises.
Score: 1 out of 1 Yes

Question 26
 A 6-month put option on Smith Corp.'s stock has a strike price
of 45andsellsinthemarketfor8.90. Smith's current stock price is $41. What is the
option premium?
Response: $4.90
Score: 1 out of 1 Yes

Question 27
 Deeble Construction Co.'s stock is trading
at 30ashare.Therearealsocalloptionsonthecompany
′sstock,somewithanexercisepriceof25 and some with an exercise price of $35. All
options expire in 3 months. Which of the following best describes the value of these
options?
Response: If Deeble's stock price rose by 5,theexercisevalueoftheoptionswiththe25
exercise price would also increase by $5.
Score: 1 out of 1 Yes

Question 28
 Speculative risks are symmetrical in the sense that they offer the chance of a gain as
well as a loss, while pure risks are those that can only lead to losses.
Response: True
Score: 1 out of 1 Yes

Question 29
 One objective of risk management can be to reduce the volatility of a firm's cash flows.
Response: True
Score: 1 out of 1 
Question 1
 Suppose a foreign investor who holds tax-exempt Eurobonds paying 9% is considering
investing in an equivalent-risk domestic bond in a country with a 28% withholding tax on
interest paid to foreigners. If 9% after-tax is the investor's required return, what before-
tax rate would the domestic bond need to pay to provide the required after-tax return?
Response: 12.50%
Score: 1 out of 1 Yes

Question 2
 The cash flows relevant for a foreign investment should, from the parent company's
perspective, include the financial cash flows that the subsidiary can legally send back to
the parent company plus the cash flows that must remain in the foreign country.
Response: False
Score: 1 out of 1 Yes

Question 3
 In Japan, 90-day securities have a 4% annualized return and 180-day securities have a
5% annualized return. In the United States, 90-day securities have a 4% annualized
return and 180-day securities have an annualized return of 4.5%. All securities are of
equal risk, and Japanese securities are denominated in terms of the Japanese yen.
Assuming that interest rate parity holds in all markets, which of the following statements
is most CORRECT?
Response: The yen-dollar spot exchange rate equals the yen-dollar exchange rate in
the 90-day forward market.
Score: 1 out of 1 Yes

Question 4
 If one U.S. dollar buys 0.63 euro, how many dollars can you purchase for one euro?
Response: 1.5873
Score: 0 out of 1 No

Question 5
 Today in the spot market 1=1.82Swissfrancsand1 = 130 Japanese yen. In the 90-
day forward market, 1=1.84Swissfrancsand1 = 127 Japanese yen. Assume that
interest rate parity holds worldwide. Which of the following statements is most
CORRECT?
Response: Interest rates on 90-day risk-free U.S. securities are higher than the interest
rates on 90-day risk-free Japanese securities.
Score: 1 out of 1 Yes
Question 6
 Which of the following statements is NOT CORRECT?
Response: The term Eurobond applies only to foreign bonds denominated in U.S.
currency
Score: 1 out of 1 Yes

Question 7
 If one U.S. dollar sells for 0.60 British pound, how many dollars should one British
pound sell for?
Response: 1.6667
Score: 1 out of 1 Yes

Question 8
 Exchange rate quotations consist solely of direct quotations.
Response: False
Score: 1 out of 1 Yes

Question 9
 When the value of the U.S. dollar appreciates against another country's currency, we
may purchase more of the foreign currency with the U.S. dollar.
Response: True
Score: 1 out of 1 Yes

Question 10
 If the inflation rate in the United States is greater than the inflation rate in Britain, other
things held constant, the British pound will
Response: appreciate against the U.S. dollar.
Score: 1 out of 1 Yes

Question 11
 Suppose 144 yen could be purchased in the foreign exchange market for one U.S.
dollar today. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S.
dollar buy tomorrow?
Response: 155.5200
Score: 1 out of 1 Yes

Question 12
 Calculating a currency cross rate involves determining the exchange rate for two
currencies by using a third currency as a base.
Response: True
Score: 1 out of 1 Yes

Question 13
 Exchange rate risk is the risk that the cash flows from a foreign project, when converted
to the parent company's currency, will be worth less than was originally projected
because of exchange rate changes.
Response: True
Score: 1 out of 1 Yes

Question 14
 Because political risk is seldom negotiable, it cannot be explicitly addressed in
multinational corporate financial analysis.
Response: False
Score: 1 out of 1 Yes

Question 15
 A Eurodollar is a U.S. dollar deposited in a bank outside the United States.
Response: True
Score: 1 out of 1 Yes

Question 16
 The United States and most other major industrialized nations currently operate under
a system of floating exchange rates
Response: True
Score: 1 out of 1 Yes

Question 17
 If one Swiss franc can purchase $0.76 U.S. dollars, how many Swiss francs can one
U.S. dollar buy?
Response: 1.3158
Score: 1 out of 1 Yes

Question 18
 If a dollar will buy fewer units of a foreign currency in the forward market than in the
spot market, then the forward currency is said to be selling at a premium to the spot
rate.
Response: True
Score: 1 out of 1 Yes

Question 19
 Multinational financial management requires that financial analysts consider the effects
of changing currency values.
Response: True
Score: 1 out of 1 Yes

Question 20
 If an investor can obtain more of a foreign currency for a dollar in the forward market
than in the spot market, then the forward currency is said to be selling at a discount to
the spot rate.
Response: True
Score: 1 out of 1 Yes

Question 21
 The cost of capital may be different for a foreign project than for an equivalent domestic
project because foreign projects may be more or less risky.
Response: True
Score: 1 out of 1 Yes

Question 22
 If one U.S. dollar buys 1.64 Canadian dollars, how many U.S. dollars can you purchase
for one Canadian dollar?
Response: 0.6098
Score: 1 out of 1 Yes

Question 23
 A foreign currency will, on average, depreciate against the U.S. dollar at a percentage
rate approximately equal to the amount by which its inflation rate exceeds that of the
United States.
Response: True
Score: 1 out of 1 Yes

Question 24
 Multinational financial management requires that
Response: the effects of changing currency values be included in financial analyses.
Score: 1 out of 1 Yes
Question 25
 Individuals and corporations can buy or sell forward currencies to hedge their exchange
rate exposure. Essentially, the process involves simultaneously selling the currency
expected to appreciate in value and buying the currency expected to depreciate.
Response: False
Score: 1 out of 1 Yes

Question 26
 When considering the risk of a foreign investment, a higher risk might arise from
exchange rate risk and political risk while lower risk might result from international
diversification.
Response: True
Score: 1 out of 1 Yes

Question 27
 Legal and economic differences among countries, although important, do NOT pose
significant problems for most multinational corporations when they coordinate and
control worldwide operations and subsidiaries
Response: False
Score: 1 out of 1 Yes

Question 28
 If one British pound can purchase $1.98 U.S. dollars, how many British pounds can one
U.S. dollar buy?
Response: 0.5051
Score: 1 out of 1 Yes

Question 29
 LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest
rates offered by London banks to smaller U.S. corporations on all deposits.
Response: False
Score: 1 out of 1 Yes

Question 30
 Currently, a U.S. trader notes that in the 6-month forward market, the Japanese yen is
selling at a premium (that is, you receive more dollars per yen in the forward market
than you do in the spot market), while the British pound is selling at a discount. Which of
the following statements is CORRECT?
Response: If interest rate parity holds among the three countries, Britain should have
the highest 6-month interest rates and Japan should have the lowest rates
Score: 1 out of 1