FNCE 313 Chapters 10, 12, 13, and 19 (Test 3) Exam Questions With Verified Answers
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Course
FNCE 313
Institution
FNCE 313
FNCE 313 Chapters 10, 12, 13, and 19 (Test
3) Exam Questions With Verified Answers
_____ has the highest market capitalization of listed corporations among developed markets. -
answerThe United States
Limiting your investments to the top six countries in the world in terms of market capitalizat...
FNCE 313 Chapters 10, 12, 13, and 19 (Test
3) Exam Questions With Verified Answers
_____ has the highest market capitalization of listed corporations among developed markets. -
answer✔The United States
Limiting your investments to the top six countries in the world in terms of market capitalization
may make sense for _________ investor but probably does not make sense for ________
investor. - answer✔a passive; an active
Which one of the following allows you to purchase the stock of a specific foreign company? -
answer✔ADR
Generally speaking, countries with ______ capitalization of equities ________. - answer✔larger;
have higher GDP
If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is .98,
what is the indirect quote? - answer✔1.02
Which one of the following country risks includes the possibility of expropriation of assets,
changes in tax policy, and restrictions on foreign exchange transactions? - answer✔political risk
Suppose that U.S. equity markets represent about 35% of total global equity markets and that the
typical U.S. investor has about 95% of her portfolio invested only in U.S. equities. This is an
example of _________. - answer✔home-country bias
The proper formula for interest rate parity is ___________. - answer✔[1 + rf(US)]/[1 +
rf(foreign)] = F0/E0
Corruption is _________ risk variable. - answer✔a political
The annual inflation rate is ______ risk variable. - answer✔an economic
A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32 per euro,
and in 6 months the exchange rate is expected to be $1.35. The 6-month forward rate is currently
$1.36 per euro. If the insurer's goal is to limit its risk, should the insurer hedge this transaction?
If so how? - answer✔The insurer should hedge by buying the euro forward even though this will
cost more than the expected cost of not hedging.
A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-month
forward rate for the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121 yen
per dollar. The 6-month forward rate for the euro versus the yen should be ________ per euro. -
answer✔X164.56
RATIONALE:
($1.36/€)(×121/$) = ×164.56/€
The quoted interest rate on a 3-month Canadian security is 2%. The current exchange rate is C$1
= US$.68. The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that a
U.S. investor can earn by investing in the Canadian security is __________. - answer✔20%
RATIONALE:
Assume initial investment amount is $1
($1/0.68) (1+2%) (0.70)=$1.05
(1.05-1)/1=5% rate of return (3 months)
APR=5%x(12/3)=20% (one year rate of return)
The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The yield
on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors
indifferent between investing in the U.S. bill and the Canadian bill. - answer✔9.7%
RATIONALE:
[1+i(us)]/[1+i(ca)]=F1/E0
[1+4%]/[1+i(ca)]=0.73/0.77
i(ca)=9.7%
Inclusion of international equities in a U.S. investor's portfolio has historically produced
___________________. - answer✔a substantially reduced portfolio variance
You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the
British pound cost $1.35. No dividends were paid on the British securities in the past year. Your
total return based on U.S. dollars was __________ if the value of the securities is now 4,200
pounds and the pound is worth $1.15. - answer✔2.2%
RATIONALE:
(4200/3500)*(1.15/1.35)-1=.022
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