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Eun & Resnick 4e

CHAPTER 13 International Equity Markets


A Statistical Perspective
Market Capitalization of Developed Countries
Market Capitalization of Developing Countries
Measures of Liquidity
Measures of Market Concentration
Market Structure, Trading Practices, and Costs
International Equity Market Benchmarks
iShares MSCI
International Finance in Practice: Foreign Interest in South Africa Takes Off
Trading in International Equities
Cross-Listing of Shares
Yankee Stock Offerings
The European Stock Market
American Depository Receipts
Global Registered Shares
Factors Affecting International Equity Returns
Macroeconomic Factors
Exchange Rates
Industrial Structure
Summary
MINI CASE: San Picos New Stock Exchange
A Statistical Perspective
1 A primary stock market is
a) A big internationally-important market like the NYSE
b) A market where corporations issue new shares to initial investors
c) Where brokers and market makers trade
d) None of the above
Answer: b)
Market Capitalization of Developed Countries
2 The market cap of the developed world
a) Is about 90 percent of the market cap of the entire world
b) Is about 80 percent of the market cap of the entire world
c) Is about 70 percent of the market cap of the entire world
d) Is about 60 percent of the market cap of the entire world
Answer: a)

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Market Capitalization of Developing Countries


3

In general, Standard & Poors Emerging Markets Data Base classified a stock market
as emerging if
a) It is located in a low- or middle-income economy as defined by the World Bank
b) Its investable market capitalization is low relative to its most recent GNI figures
c) a) or b)
d) none of the above
Answer: c)
4

Investment in foreign equity markets


a) Is a real backwater in finance
b) Became common practice in the 1980s as investors diversified their portfolios.
c) During the 1980s was largely confined to the developed world
d) All of the above
Answer: d)
5

In mutual funds, investment in emerging foreign equity markets


a) Represents less than one percent of investments in U.S.-based mutual funds.
b) Represents about five percent of investments in U.S.-based mutual funds.
c) Represents more than twenty percent of investments in U.S.-based mutual funds.
d) Declined during the 1990s
Answer: a)
Measures of Liquidity
6

Which investment is likely to be the most liquid:


a) A share of publicly traded company trading on the NYSE.
b) A bond issued by a Fortune 500 company.
c) A house in a nice part of town.
d) a) and b) are equally liquid
Answer: a)
Rationale: bonds really arent that liquidespecially when compared to stocks.
7

A measure of liquidity for a stock market is


a) the turnover ratio
b) the ratio of stock market transactions over a period of time divided by the size, or
market capitalization, of the stock market
c) the LIBOR rate
d) a) and b)
Answer: d)

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As a measure of liquidity
a) Generally, the lower the turnover, the greater the liquidity of a secondary stock
market.
b) Generally, the higher the turnover, the greater the liquidity of a secondary stock
market.
c) The more a financial asset gurgles when shook the greater the liquidity
d) None of the above
Answer: b)
9

Many of the small foreign equity markets (e.g. Chile, Sri Lanka)
a) Have poor liquidity at present.
b) Are very liquid stock markets, since the poor people living there are eager to sell
their securities.
c) Have fairly high turnover ratios indicating strong liquidity.
d) None of the above
Answer: a)
10 In general if an investment
a) Has poor liquidity it should offer investors a liquidity premium.
b) Can be sold fairly quickly at a fair price, it has good liquidity
c) a) and b)
d) None of the above
Answer: c)
11 Many of the larger foreign equity markets (e.g. Korea, India)
a) Have poor liquidity at present.
b) Are very liquid stock markets, since the poor people living there are eager to sell
their securities.
c) Have high turnover ratios
d) None of the above
Answer: c)
Measures of Market Concentration
12 The more concentrated a national stock market is
a) The greater opportunity a global investor has to include shares from that county in
an internationally diversified portfolio.
b) The less opportunity a global investor has to include shares from that county in an
internationally diversified portfolio.
c) The broader the investor base across a number of different shares and industries.
d) None of the above
Answer: b)

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Market Structure, Trading Practices, and Costs


13 The secondary stock markets
a) Are the markets for pre-owned or used shares of stock
b) Provide marketability to shares.
c) Provide price discovery or share valuation.
d) All of the above
Answer: d)
14 Price discovery in the secondary stock markets
a) Occurs due to the competitive trading between buyers and sellers, just like on
eBay.
b) Is set once a day at the close.
c) Is set by the investment bankers at the IPO.
d) All of the above
Answer: a)
15 A market order
a) Is an instruction from a customer to a broker to buy or sell at the best price
available when the order is received (immediately)
b) Is an instruction from a customer to a broker to buy or sell in a particular market
(e.g. NYSE).
c) Is always and everywhere fill or kill.
d) Is always and everywhere good till cancelled.
Answer: a)
Rationale: c) and d) are tempting, but you should always be suspicious of answer choices
that include always and everywheretheres got to be an exception sometimes or
somewhere.
16 A limit order
a) Is an instruction from a customer to a broker to buy or sell in at a particular price
(or better)
b) Can be a day orderthat is the order is cancelled if not executed during that
days trading.
c) Can be good till cancelled.
d) All of the above
Answer: d)
17 Dealers in an OTC market
a) Stand ready to buy at the bid and sell at the ask price.
b) Set their own bid and ask prices
c) Do not charge commissions
d) All of the above
Answer: d)

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18 The OTC market


a) Does not accept creditonly take cash
b) Is a dealer market
c) Includes the NASDAQ in the U.S.
d) b) and c)
Answer: d)
19 A specialist
a) Makes a market by holding an inventory of a particular security, like IBM or Intel,
b) Is a participant on the floor of the exchange, like the NYSE
c) Has a designated station on the floor of the exchange
d) All of the above
Answer: d)
20 A crowd of floor traders on the NYSE
a) May arrive at a more favorable price for their clients inside the specialists bid
and ask quotes.
b) Are obliged to execute their trades through a specialist.
c) Are allowed to front run their own trades ahead of customer trades.
d) All of the above
Answer: a)
21 A specialist on the NYSE
a) Is obliged to fill limit orders if they are more favorable than the specialists posted
bid and ask quotes.
b) Is obliged to fill limit orders at the specialists posted bid and ask quotes.
c) Is actually a computer program, not a human
d) a) and c)
Answer: a)
22 A call market
a) Is OTC and over-the-phone
b) Features an agent of the exchange that accumulates a batch of orders that are
periodically executed by written or verbal auction throughout the day.
c) Provides traders with execution at certain prices.
d) b) and c)
Answer: b)
23 The Toronto Stock exchange
a) Is a fully automated
b) Features electronic matching of public orders
c) Has continuous order flow
d) All of the above
Answer: d)
24 Call market and crowd trading take place on
a) a non-continuous exchange trading system
b) a continuous trading exchange system
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c) non-continuous markets and continuous markets, respectively


d) continuous markets and non-continuous markets, respectively
Answer: a)
25 Comparing agency versus dealer markets, which combination of the following
statements is true:
(i)-In a dealer market, the broker takes the clients order through the agent,
who matches it with another public order.
(ii)- In an agency market, the broker takes the trade through the dealer, who
participates in trades as a principal by buying and selling the security for his
own account.
(iii)- In an agency market, the broker takes the clients order through the agent,
who matches it with another public order.
(iv)- In a dealer market, the broker takes the trade through the dealer, who
participate in trades as a principal by buying and selling the security for his
own account.
(v)- An agent can be viewed as a brokers broker.
(vi)- A dealer can be viewed as a brokers broker.
a) (i), (ii), and (v)
b) (i), (ii), and (vi)
c) (iii), (iv), and (v)
d) (iii), (iv), and (vi)
Answer: c)
International Equity Market Benchmarks
26 A market-value index
a) Is calculated such that the proportion of the index a stock represents is determined
by its proportion of the total market capitalization of all stocks in the index.
b) Is calculated as the average price of all the stocks in the index that trade that day,
one example is the NASDAQ.
c) Is calculated like the DJIA
d) None of the above
Answer: a)

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iShares MSCI
27 iShares MSCI are:
a) Exchange traded funds that are subject to U.S. SEC and IRS diversification
requirements.
b) Open-end mutual funds sold OTC.
c) Exchange traded funds that are NOT subject to U.S. SEC and IRS diversification
requirements.
d) None of the above
Answer: a)
Trading in International Equities
Cross-Listing of Shares
28 A firm may cross-list its share to:
a) establish a broader investor base for its stock
b) establish name recognition in foreign capital markets, thus paving the way for the
firm to source new equity and debt capital from investors in different markets
c) expose the firms name to a broader investor and consumer groups
d) All of the above
Answer: d)
29 Companies domiciled in countries with weak investor protection can reduce agency costs
between shareholders and management
a) By moving to a better county
b) By listing their stocks in countries with strong investor protection
c) By voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act
d) Having a press conference and promising to be nice to their investors.
Answer: b)
30 Benetton, an Italian clothier, is listed on the New York Stock Exchange.
a) This decision provides their shareholders with a higher degree of protection than is
available in Italy.
b) This decision can be a signal of the companys commitment to shareholder rights.
c) This may make investors both in Italy and abroad more willing to provide capital and to
increase the value of the pre-existing shares.
d) All of the above
Answer: d)
Yankee Stock Offerings
31 Yankee stock offerings are
a) shares in foreign companies originally sold to U.S. investors
b) dollar-denominated shares in foreign companies originally sold to U.S. investors
c) U.S. stocks held abroad
d) none of the above.
Answer: b)
32 Which factors fuel the sale of Yankee stock offerings?
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a) Privatization by many Latin American and Eastern European government-owned


companies
b) The rapid growth in the economies of the developing world
c) The expected large demand for new capital by Mexican companies now that
NAFTA has been approved.
d) All of the above
Answer: d)
The European Stock Market
33 Following monetary union and the advent of the euro:
a) The countries of the European union have enacted common securities regulation
b) A pan-European stock exchange has developed in London, similar to the NYSE in
scope and trading practices.
c) Development of a common securities regulations, even among the countries of the
European Union, has not as yet occurred
d) None of the above
Answer: c)
34 The European Stock Exchange, comparable to the NYSE being the U.S. Stock
Exchange:
a) Is located in Milan
b) Is located in London
c) Is located in Frankfurt
d) None of the above
Answer: d)
Rationale: it doesnt exist yet.
American Depository Receipts
35 American Depository Receipt (ADRs) represent foreign stocks:
a) denominated in U.S. dollars that trade on European stock exchanges
b) denominated in U.S. dollars that trade on a U.S. stock exchange
c) denominated in a foreign currency that trade on a U.S. stock exchange
d) non-registered (bearer) securities
Answer: b)
36 Yankee stocks
a) often trade as ADRs and have higher risks than trading the actual shares
b) often trade as ADRs and have lower risks than trading the actual shares
c) are bank receipts representing a multiple of foreign shares deposited in a U.S. bank
d) b and c
Answer: d)

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37 ADRs
a) Are American Depository Receipts
b) denominated in U.S. dollars that trade on a U.S. stock exchange
c) are depository receipts for foreign stocks held by the U.S. depositorys custodian
d) all of the above
Answer: d)
38 Sponsored ADRs
a) Created by a bank at the request of the foreign company that issued the underlying
security.
b) Can trade on the NASDAQ
c) Can trade on the NYSE
d) All of the above
Answer: d)
39 ADR trades
a) Clear in three days, just like trades in U.S. shares
b) Settle only after the trade in the underlying stocks clear, which can take time
depending on the clearing practices of the national market.
c) Are price in the currency of the underlying security
d) all of the above
Answer: a)
40 On the Paris bourse, shares of Avionelle trade at 45. The spot exchange rate is $1.40 =
1.00. What is the no-arbitrage U.S. dollar price of an ADR? Assume that transactions costs
are negligible.
a) $63
b) $32.14
c) $45
d) $45.50
Answer: a)
41 ADRs
a) Frequently represent a multiple of the underlying shares
b) Can trade on the NYSE
c) Can trade on the NASDAQ
d) All of the above
Answer: d)
Rationale: Sponsored ADRs trade on NASDAQ or major exchanges.

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42 In the London market, Rolls-Royce stock closed at 0.875 per share on Thursday,
April 17, 2005. Rolls Royce trades as an ADR in the OTC market in the United
States. Five underlying Rolls-Royce shares are packaged into one ADR. On April, 17,
2005, the British Pound sterling to the U.S. spot exchange rate was 0.6366/$1.00.
The no-arbitrage U.S. price of one ADR is:
a) $4.87
b) $5.87
c) $6.87
d) $7.87
Answer: c)
Rationale: Equivalent value of one ADR in British pounds = 5 0.875 = 4.38
Dollar value of one ADR = 4.38/0.6366 = $6.87
43 In the London market, Rolls-Royce stock closed at 0.875 per share on Thursday,
April 17, 2005. Rolls Royce trades as an ADR in the OTC market in the United
States. Five underlying Rolls-Royce shares are packaged into one ADR. On April, 17,
2005, the British Pound sterling to the U.S. spot exchange rate was 0.6366/$1.00. If
the Rolls Royce ADRs were trading at $5.75 when the underlying shares were trading
in London at 0.875, ignoring transaction costs, the arbitrage trading profit would be:
a) $0.00
b) $1.12
c) $2.12
d) $3.12
Answer: b)
Rationale: $6.87 - $5.75 = $1.12
Global Registered Shares
44 Global Registered Shares
a) Are created when a MNC issues shares globally
b) Purchased on one exchange (say NYSE) is fully fungible with shares purchased on
another exchange (e.g. Frankfurt Stock Exchange).
c) Can trade in multiple currencies.
d) All of the above
Answer: d)
Factors Affecting International Equity Returns
45 Factors affecting international equity returns are:
a) macroeconomic variables that influence the overall economy
b) exchange rate changes
c) the industrial structure of the country
d) all of the above
Answer: d)

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46 Cross-correlations among major stock markets and exchange markets are:


a) relatively high
b) relatively low
c) essentially perfect
d) practically zero
Answer: b)
Macroeconomic Factors
47 Macroeconomic factors affecting international equity returns include
a) Exchange rate changes
b) Interest rate differentials
c) Changes in inflationary expectiations
d) All of the above
Answer: d)
Exchange Rates
48 Changes in exchange rates
a) Explain a larger portion of the variability foreign bond indexes than foreign equity
indexes.
b) Do not affect all foreign equity markets equally.
c) Do affect dollar-denominated foreign equity returns, but this risk can be hedged.
d) All of the above
Answer: d)
49 Calculate the dollar-based percentage return an American would have if he bought a British
stock at 50 per share and sold it one year later at 60. The spot exchange rate one year ago
was $1.50 = 1 and the spot rate prevailing at the end of the year was $1.20 = 1.
a) 20% gain
b) 0%
c) 4% loss
d) 9.6% gain
e) None of the above
Answer: c)
Rationale: At the exchange rate of $1.50 = 1, a 50 share costs $75
At the end of the year, the share is worth 60, but the pound has depreciated to $1.20 = 1.00, so
that share is worth $72. In dollar terms, this represents a 4% loss.
Industrial Structure
50 Studies examining the influence of industrial structure on foreign equity returns
a) Conclusively show a connection
b) Have been inconclusive
c) Show that industrialized economies outperform lesser developed economies
d) None of the above.
Answer: b)

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