Question1. The theory of comparative advantage 

1. The theory of comparative advantage
(Points : 5)
A. claims that economic well-being is enhanced if each country’s citizens produce only a single product.

B. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries.

C. claims that economic well-being is enhanced if each country’s citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production.

D. claims that no country has an absolute advantage over another country in the production of any good or service.

2. We are now living in a world where all the major economic functions—consumption, production, and investment (Points : 5)
A. are still inherently local.
B. are still regional in nature.
C. are slowly becoming globalized.
D. are highly globalized.

3. Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is (Points : 5)
A. €1.00 = $1.25.
B. €0.80 = $1.00.
C. £1.00 = $1.80.
D. None of the above

4. Most foreign exchange transactions are for (Points : 5)
A. intervention by central banks.
B. interbank trades between international banks or nonbank dealers.
C. retail trade.
D. purchase of hard currencies.

5. An investor believes that the price of a stock, say IBM’s shares, will increase in the next 60 days. If the investor is correct, which combination of the following investment strategies will show a profit in all the choices?

(i) – buy the stock and hold it for 60 days
(ii) – buy a put option
(iii) – sell (write) a call option
(iv) – buy a call option
(v) – sell (write) a put option
(Points : 5)
A. (i), (ii), and (iii)
B. (i), (ii), and (iv)
C. (i), (iv), and (v)
D. (ii) and (iii)

6. The source of translation exposure
(Points : 5)
A. is a mismatch of net assets and net liabilities denominated in the same currency.
B. is a mismatch of net assets and net liabilities denominated in different currencies.
C. is a mismatch of current assets and current liabilities denominated in different currencies.
D. none of the above

7. Merchant banks are different from traditional commercial banks in what way(s)?
(Points : 5)
A. Merchant banks can engage in investment banking activities.
B. Merchant banks can arrange for foreign exchange transactions.
C. Merchant banks can assist their clients in hedging exchange rate risk.
D. All of the above.

8. In terms of the types of instruments offered,
(Points : 5)
A. the Yankee bond market has been more innovative than the international bond market.
B. the international bond market has been much more innovative than the U.S. market.
C. the most innovations have come from Milan, just like any other fashion.
D. none of the above.

9. The sale of new common stock by corporations to initial investors occurs in (Points : 5)
A. the primary market.
B. the secondary market.
C. the OTC market.
D. the dealer market.

10. Stock in Daimler AG, the famous German automobile manufacturer trades on both the Frankfurt Stock Exchange in Germany and on the New York Stock Exchange. On the Frankfurt bourse, Daimler closed at a price of €54.34 on Wednesday, March 5, 2008. On the same day, Daimler closed in New York at $83.55 per share. To prevent arbitrage trading between the two exchanges, the shares should trade at the same price when adjusted for the exchange rate. The $/€ exchange rate on March 5 was $1.5203/€1.00. Thus, €54.34 ´ $1.5203/€ = $82.61, while the closing price in New York was $83.55. The difference is easily explainable by the fact that: (Points : 5)
A. transactions costs exceeded the price difference, so no arbitrage was possible even for market makers.
B. no one noticed the arbitrage that day, but in a day or so the opening price will adjust.
C. the New York market closes several hours after the Frankfurt exchange, and thus market prices or exchange rates had changed slightly.
D. none of the above.

11. When firms undertake foreign direct investment, (Points : 5)
A. they become multinational corporations (MNCs).
B. they reduce their tax rate since they can tell each country that they do business in that they paid their taxes in other countries.
C. the can exploit workers by paying them below-market wages in depreciating currencies.
D. all of the above

12. Systematic risk: (Points : 5)
A. is the opposite of market risk.
B. is also known as non-diversifiable risk.
C. is completely eliminated after investors fully diversify their portfolio holdings.
D. all of the above

13. North Korea, Iran, and Cuba are examples of (Points : 5)
A. countries with low levels of political risk.
B. countries with high levels of political risk.
C. countries that are politically and economically isolated from the rest of the world.
D. both b) and c)

14. Corporations are becoming multinational not only in the scope of their business activities but also in their capital structure (Points : 5)
A. by raising funds from domestic as well as government sources.
B. by raising funds from foreign as well as domestic sources.
C. this trend reflects not only a conscious effort on the part of firms to raise the cost of capital by international sourcing of funds but also the ongoing liberalization and deregulation of international financial markets that make them accessible for many firms.
D. both b) and c)

15. The cost of capital is (Points : 5)
A. the minimum rate of return an investment project must generate in order to pay its financing costs.
B. the minimum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit.
C. the maximum rate of return an investment project must generate in order to pay its financing costs.
D. the maximum rate of return an investment project must generate in order to pay its financing costs plus a reasonable profit.

16. The cost of equity capital is (Points : 5)
A. the expected return on the firm’s stock that investors require.
B. difficult to estimate by using the Capital Asset Pricing Model (CAPM).
C. a nonlinear function of the political risk inherent in the security.
D. none of the above

17. Perhaps the most important decisions that confront the financial manager are (Points : 5)
A. which capital projects to select.
B. the correct capital structure for the firm.
C. the correct capital structure for projects.
D. none of the above

18. Capital budgeting analysis is very important, because it (Points : 5)
A. involves relatively inexpensive, noncritical investments in consumables.
B. has to do with the firm’s reputation among the public.
C. will determine how competitive and profitable a firm will be.
D. all of the above

19. Efficient cash management techniques can (Points : 5)
A. reduce the investment in cash balances and foreign exchange transaction expenses.
B. provide for minimum return from the investment of excess cash.
C. result in borrowing at highest rates when a temporary cash shortage exists.
D. all of the above

20. The idea that an ideal tax should be effective in raising revenue for the government but not have any negative effects on the economic decision-making process of the taxpayer is referred to as
(Points : 5)
A. capital-export neutrality.
B. capital-import neutrality.
C. national neutrality.
D. none of the above.

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