FIN 370 FINAL EXAM QUIZ SPRING 2023

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Irvine Valley College *

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FIN350

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Finance

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Apr 3, 2024

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FIN 370 FINAL EXAM QUIZ 3) ________ cash flows arise from intracompany and intercompany receivables and payments, while ________ cash flows are payments for the use of loans and equity. A) Financing; operating B) Operating; financing C) Operating; accounting D) Accounting; financing 5) Which of the following is NOT an example of an operating cash flow? A) management fees and distributed overhead B) royalties and license fees C) rent and lease payments D) dividend paid to parent company 4) The particular strategy of trying to offset stable inflows of cash from one country with outflows of cash in the same currency is known as: A) hedging. B) diversification. C) matching. D) balancing. 12) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet. A) forward loan B) currency hedge C) counterparty D) currency swap 16) NorthRim Inc. (NRI), imports extreme condition outdoor wear and equipment from The Allofit Territories Company (ATC) located in Canada. With the steady decline of the U.S dollar against the Canadian dollar NRI is finding a continued relationship with ATC to be an increasingly difficult proposition. In response to NRI's request, ATC has proposed the following risk-sharing arrangement. First, set the current spot rate of C$1.20/$ as the base rate. As long as spot rates stay within 5% (up or down) NRI will pay at the base rate. Any rate outside of the 5% range, ATC will share equally with NRI the difference between the spot rate and the base rate. If NRI had a payable of C$100,000 due today and the current spot rate were C$1.17/$, how much does would NRI owe in U.S. dollars? A) $83,333 B) $85,470 C) $85,837 D) $117,000 1

19) Most swap dealers arrange swaps so that each firm that is a party to the transaction does not know who the counterparty is. 23) After being introduced in the 1980s, currency swaps have remained a relatively insignificant financial derivative instrument. 1) Translation exposure may also be called ________ exposure. A) transaction B) operating C) accounting D) currency 9) Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity. A) domestic; integrated B) self-sustaining; domestic C) integrated; self-sustaining D) self-sustaining; integrated 10) Exchange rate imbalances that are passed through the balance sheet affect a firm's reported income, but imbalances transferred to the income statement do not. 1) If the European subsidiary of a U.S. firm has net exposed assets of €750,000, and the euro drops in value from $1.30/euro to $1.20/€ the U.S. firm has a translation: A) gain of $75,000. B) loss of $75,000. C) gain of $625,000. D) loss of €576,923. 1) The main technique to minimize translation exposure is called a/an ________ hedge. A) balance sheet B) income statement C) forward D) translation 5) If the parent firm and all subsidiaries denominate all exposed assets and liabilities in the parent's reporting currency this will ________ exposure but each subsidiary would have ________ exposure. A) maximize translation; no transaction B) eliminate translation; transaction C) maximize transaction; no translation D) eliminate transaction; translation 2

10) One possible reason for a balance sheet hedge could be because the firm has debt covenants or bank agreements that state the firm's debt/equity ratios will be maintained within specific limits. 6) Losses from ________ exposure generally reduce taxable income in the year they are realized. ________ exposure losses may reduce taxes over a series of years. A) accounting; Operating B) operating; Transaction C) transaction; Operating D) transaction; Accounting 1) Assuming no transaction costs (i.e., hedging is "free"), hedging currency exposures should ________ the variability of expected cash flows to a firm and at the same time, the expected value of the cash flows should ________. A) increase; not change B) decrease; not change C) not change; increase D) not change; not change 5) A U.S. firm sells merchandise today to a British company for £150,000. The current exchange rate is $1.55/£ , the account is payable in three months, and the firm chooses to avoid any hedging techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $1.58/£ the U.S. firm will realize a ________ of ________. A) loss; $4,500 B) gain; $4,500 C) loss; £4,500 D) gain; £4,500 2) Individual borrowers — whether they be governments or companies — possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following EXCEPT: A) cost of capital C) credit risk premium B) access to capital D) risk-free rate 13) Interest rate calculations differ by the number of days used in the period's calculation and in the definition of how many days there are in a year (for financial purposes). One of the practices is to use 260 business days in a year. 3

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4) Which of the following would be considered an example of a currency swap? A) exchanging a dollar interest obligation for a British pound obligation B) exchanging a eurodollar interest obligation for a dollar obligation C) exchanging a eurodollar interest obligation for a British pound obligation D) All of the above are examples of a currency swap. 7) The interest rate swap strategy of a firm with fixed rate debt and that expects rates to go up is to: A) do nothing. B) pay floating and receive fixed. C) receive floating and pay fixed. D) none of the above 13) Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives. 5) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a: A) collateralized deposit. B) marked market sum. C) margin. D) settlement. 7) A speculator that has ________ a futures contract has taken a ________ position. A) sold; long B) purchased; short C) sold; short D) purchased; sold 8) Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit? A) Sell a pound currency futures contract. B) Buy a pound currency futures contract. C) Sell pounds today. D) Sell pounds in six months. 12) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. Jasper should ________ at ________ to profit from changing currency values. A) buy yen; the forward rate C) sell yen; the forward rate B) buy dollars; the forward rate D) There is not enough information to answer this question. 4

18) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper would earn a higher rate of return by buying yen and selling a forward contract than if he had invested her money in 6-month US Treasury securities at an annual rate of 2.50%. 15) A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) ¥100/$ B) ¥105/$ C) ¥110/$ D) ¥115/$ 3) If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is: A) correctly priced. B) under priced. C) over priced. D) There is not enough information to determine if the price is appropriate or not. 1) ________ states that nominal interest rates in each country are equal to the required real rate of return plus compensation for expected inflation. A) Absolute PPP B) Relative PPP C) The Law of One Price D) The Fisher Effect 5

5) Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price 6) In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets. A) wholesalers; retailers B) central banks; treasuries C) speculators; arbitrageurs D) dealers; brokers 2) A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange. A) spot B) forward C) futures D) none of the above 19) A contract to deliver dollars for euros in six months is both "buying euros forward for dollars" and "selling dollars forward for euros." 14) A German firm is attempting to determine the euro/pound exchange rate and has the following exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€. Therefore, the euro/pound rate must be: A) £1.2719/€. B) €1.2719/£. C) €0.7316/£. D) €0.7863/£. 6

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