Part 2 Derivatives International Finance

Question 1
The notional amount of a derivative refers to the:

A. initial purchase price of the contract.

B. specified quantity of the underlying asset.
C. fee for exercising the contract before maturity.
D. fixed price of the contract.

Question 2
A U.S.-based book publisher expects to earn and receive €500 million in sales revenue on June 30 from
its retailers in Europe. To protect itself from the volatility of forex rates, the company had entered into a
forward contract at an exchange rate of $1.20 when the current spot exchange rate was $1.21. If the
spot exchange rate of U.S. dollar to euro decreased by 10%, how much revenue in U.S. dollars will the
company earn on June 30?

A. $55.5 million
B. $544.5 million
C. $600 million
D. $605 million

Question 3
Which of the following financial tools refers to a lender guaranteeing the acceptance of a payment
request from an importer?

A. Letters of credit
B. Time drafts
C. Bankers’ acceptance
D. Sight drafts

Question 4
If interest rates are expected to increase, which of the following bonds is most attractive to buy on the
secondary market when interest rates are low?

A. U.S. Treasury bond.

B. Bond with a rating of Aaa or AAA.
C. Floating rate bonds.
D. Zero coupon bonds.

Question 5
Which one of the following statements about a bond is not true?

A. To compute a bond's price, one needs to calculate the present value of the bond's expected
cash flows.
B. The value, or price, of any asset is the future value of its cash flows.
C. The required rate of return, or discount rate, for a bond is the market interest rate called the
bond's yield to maturity.
D. The expected future cash flows are estimated using the coupons that the bond will pay and the
maturity value to be received.
 Part 2 Derivatives International Finance

Question 6
Which one of the following statements concerning debt instruments is correct?

A. The coupon rate and yield of an outstanding long-term bond will change over time as economic
factors change.
B. A 25-year bond with a coupon rate of 9% and one year to maturity has more interest rate risk
than a 10-year bond with a 9% coupon issued by the same firm with one year to maturity.
C. For long-term bonds, price sensitivity to a given change in interest rates is greater the longer the
maturity of the bond.
D. A bond with one year to maturity would have more interest rate risk than a bond with 15 years
to maturity.

Question 7
Which of the following is the expected, required, or actual rate of return on the firm's stock that, if
earned, will leave the market value of the stock unchanged?

A. Cost of capital
B. Cost of preferred stock
C. Cost of debt
D. Cost of common equity

Question 8
In FASB ASC 815 (SFAS 133), Accounting for Derivatives and Hedging Activities, the FASB used the term
“underlying.” Which of the following items is an example of an underlying?

A. A foreign exchange rate

B. Number of currency units
C. Number of pounds
D. An embedded derivative

Question 9
Which of the following statements is true about zero-coupon bonds?

A. They typically sell at a premium over par when they are first issued.
B. They typically sell for a higher price than similar coupon bonds.
C. They are always convertible to common stock.
D. They typically sell at a deep discount below par when they are first issued.

Question 10
Given that the spot rate is ¥106.74/$ and the 180-day forward quote is ¥100.37/$, we can say which of
the following?

A. The U.S. dollar is at a forward premium against the Yen.

B. The Yen is at a forward premium against the U.S. dollar.
C. The Yen is at a forward discount against the U.S. dollar.
D. The U.S. dollar is at neither a premium nor a discount against the Yen.

Question 11
The seller of a call option has:
 Part 2 Derivatives International Finance

A. the obligation to buy an asset at a fixed price.

B. the right to sell an asset at a fixed price.
C. an obligation to sell an asset at a fixed price.
D. the right to buy an asset at a fixed price.

Question 12
All of the following are advantages of a flexible floating exchange rate system except:

A. floating exchange rates result in consistent exchange rates.

B. floating exchange rates are believed to have prevented severe economic turmoil.
C. proponents believe that floating exchange rates prevent extreme pressures that a fixed rate
system would cause.
D. floating exchange rates facilitate international adjustments to negative economic developments.

Question 13
Baljit Inc. purchased machinery from a Japanese firm and will have to pay ¥278,450,000 in 90 days. Baljit
has three choices: (1) wait 90 days and purchase the Yen on the spot market on settlement date, (2)
enter into a forward contract with a rate of ¥105.46/$ to buy the required Yen on the settlement date,
or (3) purchase the Yen today on the spot market at a rate of ¥102.50/$. The risk-free rate is 6% in both
Japan and the US. Assuming Baljit is risk averse, what is its best option?

A. Wait and purchase the Yen on the spot market on settlement date.
B. Enter into the forward contract to purchase the Yen.
C. Purchase the Yen today on the spot market.
D. Baljit does not need to purchase Yen.

Question 14
A corporation has just issued a 10-year bond with a coupon rate of 6% and semiannual coupon
payments. The bond was issued to yield 8%, and the issue price was $864.10. What is the interest
expense related to the bonds for the first six months after issuance?

A. $60
B. $30
C. $34.56
D. $25.44

Question 15
All of the following statements refer to futures except:

A. A futures contract has standardized terms and fixed maturity dates.

B. Futures are traded on an exchange and are guaranteed by clearinghouses.
C. Futures are private and customized arrangements between parties.
D. The market for futures is highly liquid because futures are settled daily.

Question 16
Consider two countries: Country A and Country B. If Country A's currency is more valuable than Country
B's, how will country A's imports from Country B be affected?

A. Imports will increase.

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B. Imports will decrease.

C. Imports will not be affected.
D. Not enough information is given.

Question 17
Which of the following statements about callable bonds is false?

A. The call premium typically starts at one year's interest and decreases over a period of years.
B. The call feature represents additional risk, which must be borne by the bondholder.
C. Call protection refers to a period of time during which the bond cannot be called.
D. When a bond is callable, the bondholder has the right to surrender the bond at any time to the
firm for redemption.

Question 18
Using the graph below, what was the price of the euro in U.S. dollars in July?

A. $1.15
B. $1.13
C. $0.93
D. $1.10

Question 19
Forfaiting is:

A. a method of stalling payment on an import by requiring a certain amount of time before

payment is due.
B. a purchase of a trade debt by a bank from an exporter.
C. making a written agreement where an importer agrees to sell products for an importer and
remit proceeds of the sale when completed.
D. payment of a note at a specified time in the future or upon completion of specified
requirements by the exporter.

Question 20
A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing
market yield is 10%. What happens to the bond?
 Part 2 Derivatives International Finance

A. The bond price is not affected by the change in market yield, and will continue to trade at
$1,000.
B. The company has to issue a new 2% coupon bond.
C. The bond is traded at a market price of less than $1,000.
D. The bond is traded at a market price higher than $1,000.

Question 21
All of the following statements concerning American Depository Receipts (ADRs) are correct except:

A. ADRs allow foreigners to raise capital in the U.S.

B. ADRs facilitate the banking procedures for U.S. multinational firms.
C. ADRs are securities issued by American banks acting as custodians of shares of foreign firms.
D. ADRs allow Americans to invest abroad.

Question 22
Which of the following statements accurately describes a bond instrument?

A. A bond is generally considered a conservative equity instrument.

B. Short-term bonds normally provide higher yields than do long-term bonds.
C. Most bonds are sold in multiples of $1,000.
D. The trustee defines the details of the bond issue.

Question 23
Dorsy Manufacturing plans to issue mortgage bonds subject to an indenture. Which of the following
restrictions or requirements are likely to be contained in the indenture?

A. I, II, III, and IV

B. I, III, and IV only
C. I and IV only
D. II and III only

Question 24
Which of the following is not a financial instrument used to reduce risk exposure associated with foreign
currency exchange rates?

A. Currency future
B. Currency swap
C. Currency stock
D. Currency option
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Question 25
The cross-rates for foreign exchange are shown below.

FCU = foreign currency unit

These spot rates present an opportunity for:

A. triangular arbitrage.
B. exchange rate hedging.
C. purchasing power parity.
D. interest rate parity.

Question 26
Which of the following statements describes an option that is at-the-money?

A. The owner of the contract decides not to sell the underlying asset.
B. The owner can exercise the option at any time before maturity.
C. The underlying asset price equals the strike price.
D. The strike price exceeds the price of the underlying asset.

Question 27
Which one of the following provides the best measure of interest rate risk for a corporate bond?

A. Duration
B. Maturity
C. Bond rating
D. Yield to maturity

Question 28
For a bond issue which sells for less than its par value, the market rate of interest is:

A. dependent on the rate stated on the bond.

B. higher than the rate stated on the bond.
C. equal to the rate stated on the bond.
D. less than the rate stated on the bond.

Question 29
Which type of foreign exchange system allows for governments to intervene and influence exchange
rates?

A. Managed floating exchange rate

B. Flexible exchange rate
C. Floating exchange rate
D. Fixed exchange rate
 Part 2 Derivatives International Finance

Question 30
Under a floating exchange rate system, which one of the following should result in a depreciation of the
Swiss franc?

A. Swiss interest rate rise relative to the U.S. rates.

B. Decrease in outflows of Swiss capital to the U.S.
C. U.S. inflation declines relative to the Swiss inflation.
D. U.S. income levels improve relative to the Swiss.

Question 31
Celio Inc. purchased equipment from a French firm and needs to pay €1,249,425 in 30 days. Celio is risk
averse. Celio has 3 choices on how to pay the payable: (1) wait and purchase the Euros on the spot
market on settlement date, (2) enter into a forward contract to purchase the Euros at the 30-day
forward rate of $1.5512/€, or (3) or purchase the Euros today on the spot market at a rate of $1.5708/€.
The risk-free rate is 5%. In France and in the U.S. What is the cost today of the forward contract choice?

A. $1,938,108
B. $1,930,066
C. $1,244,241
D. $1,954,453

Question 32
Trident Corp. recently purchased machinery parts worth 23.5 million Mexican Pesos (MP). Management
needs to find out the U.S. dollar cost of the payables. It has access to two quotes for Canadian dollars
(C$): C$1.0774/$ and C$0.0981/MP. What will it cost Trident in U.S. dollars to purchase 23.5 million
Mexican pesos?

A. $2,483,784
B. $2,305,350
C. $2,139,735
D. $25,318,900

Question 33
Zylex Corporation's German unit is looking to borrow €4.5 million from Deutsche Bank. Deutsche Bank
quotes a rate of three-month LIBOR plus 0.5% for the 90-day loan. Currently, the three-month LIBOR is
4.175%. If the exchange rate on the payoff date is €0.8334/$, what is Zylex's interest cost in U.S. dollars?
(Round your final answer to two decimal places.)

A. $63,107.45
B. $252,429.81
C. $39,143.76
D. $43,831.63

Question 34
The technique of reducing the risk of an investment by taking an offsetting position in a second
investment instrument is called:

A. diversification.
 Part 2 Derivatives International Finance

B. arbitrage.
C. hedging.
D. speculation.

Question 35
A proper way for a U.S. firm to hedge accounts payables denominated in pesos is through:

A. call options on pesos.

B. a forward contract to sell pesos.
C. any of the other options.
D. put options on pesos.

Question 36
Bank of America quoted the 180-day forward rate on the Japanese Yen at $0.009702/¥. The spot rate
was quoted at $0.009466/¥. What is the forward premium or discount on the Japanese Yen? (Round
your final answer to the nearest percentage.)

A. 2.5% premium
B. 2.5% discount
C. 5% premium
D. 5% discount

Question 37
Countertrading is:

A. a method of stalling payment on an import by requiring a certain amount of time before

payment is due.
B. a form of trade where goods and services are exchanged for goods and services rather than
cash.
C. payment of a note at a specified time in the future or upon completion of specified
requirements by the exporter.
D. making a written agreement where an importer agrees to sell products for an importer and
remit proceeds of the sale when completed.

Question 38
Which of the following statements about option payoffs is false? Assume S = stock price and X = strike
price.

A. S = X, a put option is at-the-money.

B. S > X, a put option is in-the-money.
C. S − X > 0, a call option is in-the-money.
D. S − X = 0, a call option is at-the-money.

Question 39
A private agreement between two parties to exchange future cash payments is a(n):

A. warrant.
B. convertible security.
C. option.
 Part 2 Derivatives International Finance

D. swap.

Question 40
Debentures are:

A. bonds backed by the full faith and credit of the issuing firm.
B. subordinated debt and rank behind convertible bonds.
C. income bonds that require interest payments only when earnings permit.
D. mortgage bonds secured by a lien on specific assets of the firm.

Question 41
Tamcon Industries has purchased equipment from a Brazilian firm for a total cost of 1,272,500 Brazilian
reals (BR). The firm has to pay in 30 days. Citicorp has given the firm a 30-day forward quote of
$0.6123/BR to purchase Brazilian reals forward, and a quote of $0.6421 to sell Brazilian reals forward.
Tamcon decided to wait and purchase the Brazilian reals on the spot market on settlement date. On the
day the payment is due, Tamcon purchases the Brazilian reals at the spot rate of $0.6317/BR. How much
would Tamcon have saved or lost by hedging with a forward contract? (Round your final answer to the
nearest dollar.)

A. $24,686 savings
B. $24,686 loss
C. $13,234 savings
D. $13,234 loss

Question 42
A company has a floating rate loan that requires it to pay LIBOR+0.5% every interest-paying date. If
management prefers to fix its interest payments, which of the following instruments will best achieve
this goal?

A. Foreign currency swaps

B. Commodity swaps
C. Credit default swaps
D. Interest rate swaps

Question 43
Which one of the following rights is ordinarily sacrificed by the holders of preferred stock in exchange
for other preferences received over common shareholders?

A. The right to vote for members of the board of directors and in other matters requiring a vote
B. The right to share in the residual assets of the company upon liquidation.
C. The right to share in the periodic earnings of the company through the receipt of dividends.
D. The right to accrue dividend payments in arrears when payments are not made for a period of
time.

Question 44
In an international trade between a Japanese exporter and an Italian importer, the Italian company will
request a ______ whereas the Japanese company will issue a ______.

A. bill of exchange; bill of lading.

 Part 2 Derivatives International Finance

B. bill of lading; letter of credit.

C. time draft; letter of credit.
D. letter of credit; time draft.

Question 45
Warrants differ from options in that:

A. warrants are issued on stock exchanges whereas options are issued by a company.
B. warrants are issued by a company whereas options are issued on stock exchanges.
C. warrants are for preferred stock whereas options are for common stock.
D. warrants are for common stock whereas options are for preferred stock.

Question 46
Xecor Pharma just received revenues of A$2,372,300 in Australian dollars (A$). The only quotes
management received are A$2.0651/£ and $1.8538/£. What is the U.S. dollar value of the company's
revenues? (Do not round your intermediate calculation. Round your final answer to the nearest dollar.)

A. $9,081,834
B. $619,677
C. $2,129,567
D. $2,646,042

Question 47
Which of the following is an example of a cross exchange rate from an American perspective?

A. £0.5125/$
B. $0.006900/¥
C. $1.5637/€
D. ¥115.23/€

Question 48
Each of the following should be considered when completing a project cash flow analysis, except:

A. increased sales related to the project.

B. lease payments on previously existing equipment.
C. increased depreciation expense.
D. the effect of inflation.

Question 49
If the U.S. dollar appreciated against the British pound, other things being equal, we would expect that:

A. trade between the U.S. and Britain would decrease.

B. the British demand for U.S. products would increase.
C. U.S. demand for British products would increase.
D. U.S. demand for British products would decrease.

Question 50
Baljit Inc. purchased machinery from a Japanese firm and will have to pay ¥278,450,000 in 90 days. Baljit
has three choices: (1) wait 90 days and purchase the Yen on the spot market on settlement date, (2)
 Part 2 Derivatives International Finance

enter into a forward contract with a rate of ¥105.46/$ to buy the required Yen on the settlement date,
or (3) purchase the Yen today on the spot market at a rate of ¥102.50/$. The risk-free rate is 6% in both
Japan and the US. What is the cost today if Baljit purchases the Yen today on the spot market?

A. $2,640,338
B. $2,601,318
C. $274,334,975
D. $2,676,439

Question 51
Which one of the following describes a disadvantage to a firm that issues preferred stock?

A. Preferred stock dividends are legal obligations of the corporation.

B. Most preferred stock is owned by corporate investors.
C. Preferred stock typically has no maturity date.
D. Preferred stock is usually sold on a higher-yield basis than bonds.

Question 52
All of the following factors influence the theoretical value of an option except the:

A. time until expiration of the option.

B. strike price of the option.
C. current price of the underlying asset.
D. net settlement specifications.

Question 53
If a $1,000 bond sells for $1,125, which of the following statements are correct?

A. I and V
B. II and V
C. II and IV
D. I and IV

Question 54
Palermo, Corp. sold equipment to a French firm. Palermo will be paid €4,275,000 in 90 days. The bank
has given the firm a 90-day forward quote of $1.5487/€ to purchase Euros forward, and $1.5922/€ to
sell Euros forward. Palermo decided to wait 90 days to sell the Euros, when the spot rate was $1.5645/€.
How much additional dollar revenue did Palermo gain or lose by waiting to sell the Euros on the spot
market instead of selling forward the Euros? (Round your final answer to the nearest dollar.)

A. $118,417 gain
B. $118,417 loss
C. $67,545 gain
 Part 2 Derivatives International Finance

D. $67,545 loss

Question 55
Which of the following is an example of a direct exchange rate from an American perspective?

A. £0.5125/$
B. $0.006900/¥
C. €0.6395/$
D. ¥115.23/€

Question 56
Which of the following scenarios would justify entering into forward contracts?

A. A retail investor desires to avoid counterparty risk and has no means of finding a counterparty
to arrange a contract specific to his needs.
B. Liquidity and the option to easily exit from the contract is among the priority features in
consideration.
C. A firm has enough funds to keep a maintenance margin for daily settlement of cash
transactions.
D. A company wants to have flexibility in negotiating the terms of the contract, including the
expiration date, units of underlying asset and settlement provisions, among others.

Question 57
Venkat Ram purchased a pair of dress shoes in Italy for €131.25. If the spot exchange rate is $1.5621/€,
what is the equivalent cost of the shoes in American dollars? (Round your final answer to two decimal
places.)

A. $205.03
B. $84.02
C. €131.25
D. €84.02

Question 58
A $1,000 bond that costs $500 when issued and pays the full par value at maturity best describes a:

A. junk bond.
B. zero coupon bond.
C. fixed interest rate bond.
D. floating rate bond.

Question 59
An analyst observes a 15-year, 7% option-free bond with semiannual coupons. The required yield on this
bond was 7%, but suddenly it drops to 6.5%. The price of this bond:

A. will decrease.
B. cannot be determined without additional information.
C. will increase.
D. will stay the same.
 Part 2 Derivatives International Finance

Question 60
Which of the following are methods used to maintain a managed floating exchange rate system?

A. I and II only
B. I, III, and IV only
C. I, II, III, IV, and V
D. II and IV only