Practice Midterm Solutions Fin 410 Spring 2007 Midterm 1 Solutions

1568 words - 7 pages

Name: ________KEY____________________

Midterm I
Finance 410
International Financial Management
Spring 2007


1. There are 10 multiple-choice questions, each worth 3 points and 6 problems worth a total of 70 points.

2. Write your answers (IN CAPITAL LETTERS) for the multiple choice questions
on the answer sheet provided at the back of the exam.

3. You need a calculator and some writing utensil; all the formulas are provided in the back of the exam in a separate formula sheet.

4. Do not forget to write your names at the top of this page. Exams without names will not be graded.

5. GOOD LUCK!!!!!!!!


1. ...view middle of the document...

portfolio investment; direct investment

4. The current U.S. dollar to Japanese Yen spot exchange rate is 125¥/$. If the 90-day forward exchange rate is 127¥/$, then the Yen is selling at a per annum forward __________ of ___________.

A. premium; 1.57%
B. premium; 6.30%
C. discount; 1.57%
D. discount; 6.30%

5. Which of the following would not be considered a direct investment either into or from the United States?

A. The purchase of U.S. Treasury securities
B. Ford Motor Company building an assembly plant in Mexico
C. Honda of Japan building a manufacturing plant in Alabama
D. Intel purchasing a chip manufacturing plant in Thailand

6. Which of the following statements is correct?

A. The unrestricted supply of newly minted gold, helped expand international trade under the classical gold standard.
B. Under the Bretton Woods system, each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary
C. Under the Bretton Woods system, the British pound was the only currency that was fully convertible to gold
D. Gresham’s law implies that under bimetallism, the most valuable metal would tend to circulate. Good money would drive bad money out.
E. All of the above statements are correct.

7. Covered interest arbitrage moves the market __________ equilibrium because _______________.

A. toward; purchasing a currency on the spot market and selling in the forward market narrows the difference between the two rates.
B. toward; investors are now more willing to invest in risky securities
C. away from; purchasing a currency on the spot market and selling in the forward market increases the difference between the two rates.
D. away from; demand for the stronger currency forces up interest rates on the
weaker currency

8. The $/£ bid and ask prices are $1.4484 and $1.5281, respectively. What are the corresponding £/$ bid and ask prices?

A. £0.6904/$ and £0.6544/$
B. £0.6544/$ and £0.6904/$
C. $1.52181/£ and $1.4484/£
D. Cannot be determined until a dealer posts these bid ask quotes

9. Under an international regime of fixed exchange rates, countries with a BOP ____________ should consider ________________ their currency while countries with a BOP ____________________ should consider ______________ their currency.

A. deficit, revaluing; surplus, revaluing
B. deficit, devaluing; surplus, devaluing
C. surplus, devaluing; deficit, revaluing
D. surplus, revaluing; deficit, devaluing

10. According to the International Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor...

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