1. 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 would allow the investor to speculate on their beliefs? (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 Student Response A. (i), (ii), and (iii) B. (i), (ii), and (iv) C. (i) and (iv) D. (ii) and (iii) Score: 2. Comparing "forward" and "futures" exchange contracts, we can say that: Student Response A. They both have standardized contract sizes. B. Their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity. C. A forward contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while a futures contract is tailor-made by an international bank for its clients. D. all of the above. Score: 3. If you think that the dollar is going to appreciate against the euro Student Response A. You should buy put options on the euro B. You should sell put options on the euro C. You should buy call options on the euro D. None of the above Score: 4/4 4/4 4/4

4. You enter into a futures contract to buy 125,000 at $1.53 per euro. The spot exchange rate when you enter the contract is $1.63. Your initial performance bond is $6,100 and your maintenance level is $2,400. At what settle price will you get a demand for additional funds to be posted to your account? Student Response A. 1.6596 B. 1.7596 C. 1.8896 D. 1.5004 E. 1.5596 F. 1.6004 Score: 5. Four days ago you entered into a futures contract to buy 125,000 at $1.10 per euro. The spot exchange rate when you entered the contract was $1.07. Your initial performance bond was $5,800 and your maintenance level was $2,300. Over the past four days (in order) the contract has settled at $1.08, $1.12, $1.06, and $1.13. How much in total have you made or lost? Student Response A. lost $3,750 B. made $7,500 C. lost $7,500 D. lost $10,000 E. made $10,000 F. made $3,750 Score: 6. Four days ago you entered into a futures contract to sell 125,000 at $1.41 per euro. The spot exchange rate when you entered the contract was $1.37. Your initial performance bond was $7,300 and your maintenance level was $2,900. Over the past four days (in order) the contract has settled at $1.42, $1.41, $1.45, and $1.43. What should your performance account balance be at the end of the four days? (Assume you do not withdraw excess funds and only add funds if required.) 4/4 0/4

Student Response A. $4,800 B. $2,500 C. $11,050 D. $1,250 E. $14,800 F. $9,800 Score: 7. The current spot exchange rate is $1.29 = 1.00 and the three-month forward rate is $1.33 = 1.00. You buy a call option on 62,500 with a strike price of $1.25 = 1.00 and pay an option premium (price) of $3750. At expiration, at what exchange rate will you break-even? Student Response A. $1.19 = 1.00 B. $1.23 = 1.00 C. $1.27 = 1.00 D. $1.31 = 1.00 E. $1.35 = 1.00 F. $1.39 = 1.00 Score: 8. The current spot exchange rate is $1.48 = 1.00 and the three-month forward rate is $1.51 = 1.00. You buy a call option on 62,500 with a strike price of $1.45 = 1.00 and pay an option premium (price) of $0.05 per euro. If the exchange rate at expiration is $1.41 = 1.00, what is your profit or loss from the option position? Student Response A. loss of $2,500 B. loss of $1,250 C. loss of $5,625 D. gain of $2,500 0/4 4/4

E. gain of $1,250 F. loss of $3,125 Score: 9. To hedge a foreign currency payable, Student Response A. Buy call options on the foreign currency B. Buy put options on the foreign currency C. Sell call options on the foreign currency D. Sell put options on the foreign currency Score: 10. If you owe a foreign currency denominated debt, you can hedge with: Student Response A. A long position in a currency forward contract B. A short position in an exchange-traded futures option C. Buying the foreign currency today and investing it in the foreign county. D. Both a) and c) Score: 11. The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is: Student Response A. Transaction exposure B. Translation exposure C. Economic exposure D. None of the above Score: 4/4 0/4 4/4 0/4

12. CHOOSE ANY ANSWER AND RECEIVE FULL CREDIT: A Japanese IMPORTER has a 1,000,000 PAYABLE due in one year. The one-year risk free rates are i$ = 4.03%; i = 6.05%; and i = 1%. Detail a strategy using forward contracts that will hedge his exchange rate risk. Have an estimate of how many contracts of what type.

Student Response A. Go short in 12 yen forward contracts. Go long in 16 euro contracts. B. Go long in 12 yen forward contracts. Go short in 16 euro contracts C. Go short in 16 yen forward contracts. Go long in 12 euro contracts D. None of the above Score: 13. Consider a U.S.-based MNC with a wholly-owned Italian subsidiary. Following an appreciation of the dollar against the euro, which of the following conclusions are correct? Student Response A. The cash flow in euro could be altered due an alteration in the firm's competitive position in the marketplace. B. A given operating cash flow in euro will be translated to a higher U.S. dollar cash flow. C. a) and b) D. None of the above Score: 14. When exchange rates change, Student Response A. U.S. firms that sell only to domestic customers will be unaffected. B. U.S. firms that sell only to domestic customers can be affected if they compete against imports. C. U.S. firms that sell only to domestic customers will be affected only if they borrow in foreign currency to finance their domestic operations. D. Both a) and b) Score: 4/4 4/4 4/4

15. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate Student Response A. Can have a significant economic consequences for U.S. firms. B. Can have a significant economic consequences for Japanese firms. C. Can have a significant economic consequences for both U.S. and Japanese firms. D. None of the above Score: 16. Investments in R&D Student Response A. enhance product differentiation B. Can allow the firm to maintain and strengthen its competitive position. C. Can allow the firm to cut costs and enhance productivity. D. all of the above Score: 17. Determinants of translation exposure include: Student Response A. proportion of business conducted by foreign subsidiaries B. location of foreign subsidiaries C. accounting method used D. all of the above E. none of the above Score: 18. MNCs have invested in China because of: 4/4 4/4 4/4

Student Response A. lower material costs. B. lower labor costs. C. a desire to preempt the entry of rivals into China's potentially huge market. D. All of the above Score: 19. Cross-border acquisition involves: Student Response A. building new production facilities in a foreign country B. buying existing foreign business C. a and b D. none of the above Score: 20. Trade barriers can arise naturally. Which of the following represent a natural barrier to trade? Student Response A. Transportation costs B. Quotas C. Tariffs D. Transactions costs Score: 21. Regarding the mechanics of international portfolio diversification, which statement is true? Student Response A. Security returns are less correlated across countries than within a county. B. Security returns are more correlated across countries than within a county. 4/4 4/4 4/4

C. Security returns are about as equally correlated across countries as they are within a county. D. None of the above Score: 22. The three basic types of taxation are: Student Response A. income tax, withholding tax, and value-added tax B. income tax, withholding tax, business tax C. withholding tax, value-added tax, corporate tax D. personal tax, corporate tax, and operating tax Score: 23. A withholding tax is Student Response A. An indirect tax B. A direct tax C. a sales tax D. none of the above Score: 24. National neutrality Student Response A. Is the criterion that an ideal tax should be effective in raising revenue of the government and not have any negative effects on the economic decision-making process of the taxpayer. B. Requires that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned. C. Implies that the tax burden a host country imposes on the foreign subsidiary of the MNC should be the same regardless of which country the MNC is incorporated and the same as that placed on domestic firms. 4/4 4/4 4/4

D. None of the above Score: 25. Fundamentally, there are two types of tax jurisdiction: Student Response A. The worldwide and the territorial. B. The existential and the visiting C. The passive and the active income D. The earned and the unearned Score: 4/4 4/4