Deck 20: International Portfolio Investment

Question 1

The number of dollars needed to buy one Euro is known as a(n) _________ quote of the exchange rate.

A) authorized
B) official
C) indirect
D) reduced
E) direct

Answer 1

E

Question 2

When Japanese yen is said to appreciate, dollars will _________ as a result.

A) go flat
B) strengthen
C) appreciate
D) depreciate
E) collateralize

Answer 2

D

Question 3

If the exchange rate between British pounds and Canadian dollars is C$2.020.4 = $\le$ 1, then

A) It takes 2.04 British pound to buy one Canadian dollar
B) The Canadian dollar is worth more than one British pound
C) Each Canadian dollar is worth approximately 0.49 British pound
D) $0.2 Canadian dollar will purchase one British pound
E) None of the above

Answer 3

Each Canadian dollar is worth approximately 0.49 British pound

Question 4

If your Canadian dollars buy less of Japanese yen, yen _________.

A) depreciates
B) stays
C) rotates
D) floats
E) appreciates

Question 5

Over average, investors using the forward exchange market pay a _________ premium to avoid exchange-rate risk in a highly efficient foreign market.

A) Zero
B) 1.5%
C) 3.2%
D) 4.8%
E) 6.1%

Question 6

An indirect exchange rate can be converted into a direct exchange rate by

A) Dividing the indirect rate by number of US dollars required to purchase one unit of the other currency.
B) Dividing the indirect rate by 100.
C) Multiplying the indirect rate by the spot rate.
D) Taking the inverse of the indirect rate.
E) Insufficient information.

Question 7

_________ is a strategy designed to reduce risk by spreading the investments across many countries.

A) Assortment
B) Bundling
C) International diversification
D) Focusing
E) Arbitrage

Question 8

The _________ risk arises whenever you convert domestic currency into a foreign currency.

A) country
B) interest-rate
C) translation
D) credit
E) foreign exchange

Question 9

A _________ rate indicates the price of currency for delivery at some time in the future.

A) forward
B) bilateral
C) cross
D) net return
E) certified

Question 10

_________ refers to a stock market in a fast-developing country that has little history of domestic capital markets.

A) Inverted market
B) Emerging market
C) Nonperforming market
D) Mature market
E) Staled market

Question 11

Which of the following are benefits of investing in international markets: I) Exposure to high returns provided by some emerging market
II) Increased diversification due to low correlation amongst international markets
III) Protection from foreign exchange risk

A) I only
B) I and III only
C) I, II and III
D) I and II only
E) None of these are benefits

Question 12

Shares of companies are simultaneously sold in more than one stock exchange. Such a process is called _________

A) cross-listing
B) crowd-trading
C) head-hunting
D) spin-off
E) market dumping

Question 13

The risk that a Canadian investor who buys British bonds will lose money in trying to convert bond interest payments in pounds into Canadian dollar is called

A) Transfer risk
B) Foreign exchange rate risk
C) Credit risk
D) Interest rate risk
E) Liquidity risk

Question 14

A(n) _________ shows the price of one currency in terms of another.

A) cross rate
B) foreign exchange rate
C) e-money
D) swap
E) London Interbank Offered Rate

Question 15

A change in the investing environment arising from political events such as nationalization and corruption is called _________.

A) foreign exchange risk
B) political risk
C) translation risk
D) transaction risk
E) operating risk

Question 16

The number of Euros that you can buy for a dollar is known as a(n) _________ of the exchange rate.

A) direct quotation
B) indirect quotation
C) revert quotation
D) explicit quotation
E) implicit quotation

Question 17

_________ is the implicit exchange rate between two currencies (usually non-US) quoted in some third currency (usually the US dollar).

A) Circular rate
B) Annualized rate
C) Cross-rate
D) Floating rate
E) Market rate

Question 18

The foreign exchange rate at a given moment for immediate delivery is called the _________.

A) special drawing rights
B) forward rate
C) cross rate
D) spot rate
E) transfer risk

Question 19

_________ is a measure of how closely two stock markets move together.

A) Skewness
B) Correlation coefficient
C) Weighted average
D) Variance
E) Standard deviation

Question 20

The biggest advantage to purchase foreign currency using the forward rate is to

A) Earn a premium on the exchange
B) Lock into a price now
C) Gain from future price reductions
D) Avoid the more expensive spot rates
E) All of the above

Question 21

The report, "101 Years of Global Investment Returns", by Princeton University shows that the correlation coefficients between the Canadian stock market and other developed countries generally fall into the range of

A) 0.9 or above
B) 0 and 0.5
C) Zero
D) Negative
E) None of the above

Question 22

When Canadians buy US Treasury bonds, they are actually making two investments, one in the foreign securities and the other in

A) U.S. dollars
B) Canadian dollars
C) the US government
D) Euros
E) None of the above

Question 23

In 2010, the Hungarian stock market provided an average return of _________ in US dollars.

A) -55.1%
B) +20.7%
C) +29.1%
D) +182.2%
E) +70.5%

Question 24

What is the proposed maximum amount of foreign content in an RRSP account after 2005?

A) 10%
B) 20%
C) 100%
D) 30%
E) Not allowed

Question 25

Potential barriers to international investment include

A) Limited benefit from diversification
B) Double taxation of foreign investment income
C) Exchange rate fluctuation
D) Ethnic strife
E) All of the above

Question 26

Exchange rate risk refers to

A) An expected drop in an exchange rate
B) A highly fluctuate exchange rate
C) Lower return due to an expected decrease in an exchange rate
D) Lower return due to an unexpected change in an exchange rate
E) None of the above

Question 27

The diversification advantage correlation amongst international stock markets has been diminished in recent years due to:

A) The decrease in yields of US Treasury Bills.
B) The emergence of new markets in South America, Asia and Africa
C) The standardization of international accounting practices governing reporting.
D) Increased cooperation amongst international government agencies.
E) Improvements in information technology and globalization.

Question 28

Regarding political risk, foreign investors care

A) Foreign fund transfers
B) Expropriation
C) Withholding interests
D) Exchange rate controls
E) All of the above

Question 29

An individual has well-performed investments in a foreign stock market. If domestic currency depreciates, this will certainly

A) Hurt the net return
B) Enhance the net return
C) Affect the net return, but the direction (negative or positive) depends on the amount of depreciation
D) Have no impact on the net return
E) Reduce the volatility of the net return

Question 30

Major differences between international and domestic portfolio investment include all of the following except

A) Political risks
B) Foreign exchange risks
C) Information availability
D) All of the above
E) None of the above

Question 31

In 2010, the Spanish stock market provided an average return of _________ in US dollars.

A) -55.1%
B) +20.7%
C) +29.1%
D) +182.2%
E) +70.5%

Question 32

Emerging markets with high risk will likely have the

A) Weakest currency
B) Highest real interest rate
C) Lowest growth
D) Strongest currency
E) Perfect correlations with developed countries

Question 33

Getting into the international markets, Canadian investors are far better off to

A) Invest in single foreign stocks
B) Trade hard currencies of emerging countries
C) Keep only a 30% foreign content in their portfolios
D) Buy international index funds
E) Focus on foreign bonds only

Question 34

Which of the following is not an example of political risk?

A) Unanticipated changes in environmental regulations.
B) Adverse movements in tax rules.
C) Change in government.
D) Nationalization of certain industries.
E) None of the above

Question 35

Which of the following involves political risk?

A) A Finland importer will owe $\le$ 500,000 and the pounds are expected to appreciate.
B) A distributor of Japanese electronic goods in Switzerland expects the Swiss francs to depreciate.
C) A German auto manufacturer has parts suppliers in Canada and the exchange rate has been unstable.
D) A Canadian subsidiary of a British manufacturer transfers $\le$ 1,000,000 to the parent company annually.
E) None of the above

Question 36

A lower correlation between a foreign stock market and the Canadian stock market may

A) Increase the volatility of a globally diversified Canadian portfolios
B) Add no advantage to a well-diversified Canadian portfolios
C) Stop global diversification of Canadian portfolios
D) Encourage more foreign diversification of Canadian portfolios
E) Stimulate more diversification in local Canadian portfolios

Question 37

Which of the follow are examples of political risk?
I) The President of the United States decides not to approve a North American oil pipeline.
II) The Governor of the Bank of Canada makes public comments about the high level of personal debt in Canada.
III) The United Nations threatens an embargo against countries developing nuclear weapons.
IV) The Government of Canada passes a law calling for a reduction in government services.

A) II only.
B) I, III and IV only.
C) I and III only.
D) IV only.
E) None are an example of political risk.

Question 38

Which of the following carries the least risk?

A) US Treasury bills
B) US Treasury notes
C) US Treasury bonds
D) US corporate bonds
E) US stocks

Question 39

The performance of an international funds can be influenced by the selection of

A) Component
B) Countries
C) Currency
D) Timing
E) All of the above

Question 40

International investing

A) Should not involve with foreign derivative securities
B) Should stick to operations such as precious metals mining
C) Should choose countries with low correlations
D) Should hedge currency exposures
E) Should get financing from the home country

Question 41

Why do Canadian investors prefer using international funds rather than the single foreign stocks to invest globally?

A) Lower transactions cost
B) Higher returns
C) Less risk involved
D) Greater liquidity
E) Fewer regulations to comply

Question 42

A pair of running shoes costs HK$588 in Hong Kong, but C$97.85 in Canada. If goods must be sold with one price, what is the spot rate? Ignore transportation costs for simplicity.

A) C$0.2535 = HK$1
B) C$0.3396 = HK$1
C) C$0.4265 = HK$1
D) C$0.1664 = HK$1
E) C$0.6029 = HK$1

Question 43

The spot and 12-month forward rates in dollar per yen are C$0.011868 = $\times$ 1 and C$0.012185, respectively. The forward rate for the Japanese yen is selling at a _________ to the spot rate.

A) Premium of 2.67%
B) Premium of 7.62%
C) Discount of 2.67%
D) Discount of 7.62
E) None of the above

Question 44

While the 3-month forward rate for US dollar is C$1.2991 per USD, the spot rate is US$0.7706 per C$. According to a forward contract, how much C$ will be needed to settle a payment of US$1,000,000 in three months?

A) $1,297,690
B) $1,299,100
C) $770,600
D) $769,765
E) Insufficient information

Question 45

If one Swiss franc can purchase 1.039 Canadian dollars now, how many Swiss francs can one Canadian dollar buy?

A) $0.8005
B) $0.1626
C) $1.2323
D) $1.4124
E) $0.9625

Question 46

While international investing can reduce risk below domestic levels, one important risk factor is not considered. What is that?

A) Foreign exchange risk
B) Reinvestment risk
C) Refinancing risk
D) Liquidity risk
E) Operational risk

Question 47

While globalization encourages security markets in different countries move together, _________ will be realized from international diversification.

A) Greater returns
B) Smaller advantage
C) Larger risk
D) Bigger advantage
E) None of the above

Question 48

While you are looking for the spot exchange rates for the British pound ( $\le$ ), the Japanese yen ( $\times$ ), and the Canadian dollar ($), you find the following quotes: $\le$ 0.4230 = $1 and $\times$ 84.26 = $1. What is the cross-rate for British pound per Japanese yen ( $\le$ / $\times$ )?

A) 0.0050
B) 199.19
C) 0.0119
D) 109.11
E) Undetermined

Question 49

Lululemon is found on the NASDAQ under the symbol LULU and _______ on the TSX under the symbol LLL.

A) crosslisted
B) dually registered
C) double certified
D) symmetrically traded
E) hypothenticated

Question 50

With a direct quote for the Renminbi (the currency unit in China) is 0.1568. Which of the following is true?
I) It costs you C$1.00 for 0.1568 Renminbi
II) It costs you C$0.1568 for 1.00 Renminbi
III) Your C$1.00 can buy 6.3776 Renminbi
IV) You have to use C$6.3776 to buy 1.00 Renminbi

A) I only
B) II only
C) III only
D) Both II and III
E) Both II and IV

Question 51

The spot and 12-month forward rates in dollar per yen are C$0.011868 = $\times$ 1 and C$0.012185, respectively. The forward rate for the Canadian dollar is selling at a _________ to the spot rate.

A) Premium of 2.67%
B) Premium of 7.62%
C) Discount of 2.67%
D) Discount of 7.62
E) None of the above

Question 52

Canadian stocks are cross-listed in the United States as

A) Globally registered shares
B) Ordinary shares
C) American Depository receipts
D) International Depository receipts
E) Street-name registered shares

Question 53

With an indirect quote for the Dinar (the currency unit in Jordan) is 0.5456. Which of the following is true?
I) You can buy C$1.00 for 0.5456 Dinar
II) You can buy C$0.5456 for 1.00 Dinar
III) You can buy C$1.00 for 1.8329 Dinar
IV) You can buy C$1.8329 for 1.00 Dinar

A) I only
B) II only
C) Both I and IV
D) Both II and III
E) Both II and IV

Question 54

Suppose we observe the two exchange rates: $\times$ /US$ = 100, A$/US$ = 1.5. If the current cross-rate ( $\times$ /A$) between $\times$ and A$ is 50, which of the following is true?

A) The correct cross-rate ( $\times$ /A$) should be 33.33
B) It costs less to buy $\times$ with US$
C) An US$33.33 arbitrage profit can be realized
D) All of the above
E) None of above

Question 55

The benefits of the cross-listing are all except

A) Lower cost of capital
B) Higher visibility
C) Less risk involved
D) Greater liquidity
E) Fewer regulations to comply

Question 56

Given three hypothetical exchange rates: $\le$ /$ = 0.6, $\times$ /$ = 0.9 and $\times$ / $\le$ = 1.6, what is the arbitrage profit assuming you have $100?

A) $10.00
B) $3.33
C) $5.00
D) $6.67
E) No arbitrage is possible

Question 57

The 6-month forward rate for Euro is 1.6003 Canadian dollars per Euro. The spot rate is 1.5992 Canadian dollars per Euro. With a forward contract, how many Canadian dollars will be received for 50,000 Euros in six months?

A) $79,960
B) $31,245
C) $80,015
D) $31,265
E) Insufficient information

Question 58

A liquid stock market in the one where

A) Investors can buy and sell shares quickly at the current prices
B) Investors can buy shares quickly at the current prices
C) Investors can sell shares quickly at the current prices
D) Investors can buy and sell shares quickly above the current price
E) Investors can buy and sell shares quickly below the current price

Question 59

Companies may cross-list their shares to

A) Expand investor base for their stock
B) Increase name recognition in foreign market
C) Enhance market liquidity
D) All of the above
E) None of the above

Question 60

Suppose that a commodity costs the same regardless of what currency is used to purchase or where it is selling. The spot exchange rate is 2.3638 Canadian dollars per British pound. If a computer notebook costs C$1,695 in Canada, how much should it cost in Britain?

A) $\le$ 253
B) $\le$ 396
C) $\le$ 4,007
D) $\le$ 682
E) $\le$ 717

Question 61

What are the possible concerns for international investments compared with domestic investments?

Question 62

$\begin{array}{|l|r|r|rr} \hline& \text { Expected Return } & \begin{array}{r}\text { Standard Deviation of } \\\text { Return }\end{array} &{\text { Correlation }} \\& & & \text { Coefficients } \\& & & \text { X }& \text {Y} \\\hline \text { Canadian Stock X } & 6 \% & 9 \% & 1.00 & \\\hline \text { American Stock Y } & 4 \% & 8 \% & 0.80 & 1.00\\ \hline\end{array}$

A Canadian plans to buy 100 shares of this American stock for US $20 per share. The current spot rate is C$1.2977 = US $1. Suppose that this investor can sell the stock for US $30 a share a year later. The spot rate at the time of the sale is C$1.3029 = US $1.

-How much does this investor have to pay in Canadian funds for those American stocks now?

A) $2,605.80
B) $1,541.20
C) $2,595.40
D) $2,302.50
E) None of the above

Question 63

Given the opening price of a British stock is $\le$ 50 a share with a spot rate of $\le$ 0.5/$, what will be the real return rate if the ending price becomes $\le$ 40 with an ending spot rate at $\le$ 0.4/$?

A) -36%
B) -20%
C) 80%
D) Zero
E) 64%

Question 64

The exchange rate was 1.5 Canadian dollars per one Euro a year ago. Now the same exchange rate is 0.6329 Euro per Canadian dollar. What is your return on this foreign exchange?

A) 6.10%
B)-5.86%
C) 5.06%
D) D.-57.81%
E) 5.33%

Question 65

$\begin{array}{|l|r|r|rr} \hline& \text { Expected Return } & \begin{array}{r}\text { Standard Deviation of } \\\text { Return }\end{array} &{\text { Correlation }} \\& & & \text { Coefficients } \\& & & \text { X }& \text {Y} \\\hline \text { Canadian Stock X } & 6 \% & 9 \% & 1.00 & \\\hline \text { American Stock Y } & 4 \% & 8 \% & 0.80 & 1.00\\ \hline\end{array}$

A Canadian plans to buy 100 shares of this American stock for US $20 per share. The current spot rate is C$1.2977 = US $1. Suppose that this investor can sell the stock for US $30 a share a year later. The spot rate at the time of the sale is C$1.3029 = US $1.

-What is the variance of a portfolio with an equal funding between these two stocks?

A) 0.54%2
B) 0.84%2
C) 0.74%2
D) 0.94%2
E) 0.65%2

Question 66

$\begin{array}{|l|r|r|rr} \hline& \text { Expected Return } & \begin{array}{r}\text { Standard Deviation of } \\\text { Return }\end{array} &{\text { Correlation }} \\& & & \text { Coefficients } \\& & & \text { X }& \text {Y} \\\hline \text { Canadian Stock X } & 6 \% & 9 \% & 1.00 & \\\hline \text { American Stock Y } & 4 \% & 8 \% & 0.80 & 1.00\\ \hline\end{array}$

A Canadian plans to buy 100 shares of this American stock for US $20 per share. The current spot rate is C$1.2977 = US $1. Suppose that this investor can sell the stock for US $30 a share a year later. The spot rate at the time of the sale is C$1.3029 = US $1.

-What will the annual percentage return be on foreign exchange measured with Canadian dollars for this investor?

A) -0.50%
B) -0.20%
C) -0.10%
D) -0.40%
E) -0.30%

Question 67

The RBC shares are trading at $35.75 per share in Canada. Their shares are also listed in London with four RBC shares packaged into one ADR. In the London market, RBC stock closed at $\le$ 5.8886 per share. If the spot rate is $\le$ 0.6366 per Canadian dollar, what is the Canadian dollar price for one ADR?

A) $82.13
B) $10.92
C) $45.75
D) $29.92
E) $37.00

Question 68

$\begin{array}{|l|r|r|rr} \hline& \text { Expected Return } & \begin{array}{r}\text { Standard Deviation of } \\\text { Return }\end{array} &{\text { Correlation }} \\& & & \text { Coefficients } \\& & & \text { X }& \text {Y} \\\hline \text { Canadian Stock X } & 6 \% & 9 \% & 1.00 & \\\hline \text { American Stock Y } & 4 \% & 8 \% & 0.80 & 1.00\\ \hline\end{array}$

A Canadian plans to buy 100 shares of this American stock for US $20 per share. The current spot rate is C$1.2977 = US $1. Suppose that this investor can sell the stock for US $30 a share a year later. The spot rate at the time of the sale is C$1.3029 = US $1.

-With 80% of the funds invested in domestic stock X and 20% in Y, what is the expected return of this portfolio?

A) 5.6%
B) 7.4%
C) 3.8%
D) 5.0%
E) Undetermined

Question 69

One British pound can buy 1.8215 US dollars today in the foreign exchange market. US dollars are expected to appreciate 5% over the next 30 days. How many US dollars will a pound buy by then?

A) 1.8165
B) 1.9126
C) 1.7304
D) 0.5779
E) 2.3582

Question 70

If the current spot rate is $1.5995/EUR, the 12-month forward rate is $1.6047/EUR. The interest rate is 10% on one-year German guaranteed investment certificates (GIC). Using the forward contract, what is the real return for such an investment over this one-year period?

A) 8.27%
B) 9.39%
C) 10.36%
D) 10.85%
E) 11.32%

Question 71

You plan to purchase US $1,000 worth of Panama stock for a year. The current spot rate is one US dollar for one Balboa in local Panama. If a 10% annual growth is expected from the Panama stock market, how much will this investment be worth at the end of the year?

A) US $1,200
B) 1,100 Balboas
C) US $1,100
D) 1,000 Balboas
E) Both (B) and (C)

Question 72

You have $30,000 to invest in the stock of a British company trading at $\le$ 40 a share. The spot rate is $\le$ 0.5/$. How many shares can you purchase?

A) 1,000
B) 500
C) 375
D) 1,250
E) 750

Question 73

A British stock starts with the price $\le$ 50 a share investing at a spot rate of $2/ $\le$ . Over one year, the stock price rises to $\le$ 60 a share while the British pounds appreciates to $2.5/ $\le$ . If you have $1,000 to invest initially, determine the dollar return for this investment.

A) $2,000
B) $500
C) $250
D) $750
E) $1,000

Question 74

$\begin{array}{|l|r|r|rr} \hline& \text { Expected Return } & \begin{array}{r}\text { Standard Deviation of } \\\text { Return }\end{array} &{\text { Correlation }} \\& & & \text { Coefficients } \\& & & \text { X }& \text {Y} \\\hline \text { Canadian Stock X } & 6 \% & 9 \% & 1.00 & \\\hline \text { American Stock Y } & 4 \% & 8 \% & 0.80 & 1.00\\ \hline\end{array}$

A Canadian plans to buy 100 shares of this American stock for US $20 per share. The current spot rate is C$1.2977 = US $1. Suppose that this investor can sell the stock for US $30 a share a year later. The spot rate at the time of the sale is C$1.3029 = US $1.

-What is the standard deviation of a portfolio if each stock has a 50% weight?

A) 7.50%
B) 8.00%
C) 7.00%
D) 8.50%
E) 6.00%

Question 75

Assume that the spot rate is $\times$ 84.26/C$ at the beginning of the year and $\times$ 82.07/C$ at the end of the year. Over the same period, the Japanese stock market has gained 20%. What is the real return for a Canadian investor?

A) 23.20%
B) 32.43%
C) 67.58%
D) 10.27%
E) 2.67%

Question 76

A notebook sells for US $1,199 in the United States. The spot rate is US $1.2323 per Euro. If goods must be sold for the same price, what is the price in Netherlands?

A) 811.49 Euros
B) 972.99 Euros
C) 1,232.00 Euros
D) 1,477.50 Euros
E) 1,199.00 Euros

Question 77

Suppose that you bought a Japan Fund at 84.26 Japanese yens per Canadian dollar a year ago. Unfortunately, the fund lost 20% over this period. What is the real return for this investment in terms of yens? Assume that the spot rate is 82.07 yens per Canadian dollar today.

A) 82.13%
B) 10.92%
C) 27.65%
D) -10.11%
E) -17.92%

Question 78

Assume Nestle is trading for SF100 in Zurich and Nestle ADRs (with 2 ADRs per share) are trading for $40 on the New York Stock Exchange. To prevent arbitrage, what is the relevant US $/SF spot exchange rate?

A) 0.8
B) 1.0
C) 1.25
D) 4.0
E) Undetermined

Question 79

In order to have a return of 5.33% over a month from the exchange between British pounds and Canadian dollars, what is the spot rate if the same exchange rate was 0.424 British pounds per Canadian dollar last month?

A) C$1.8165 per pound
B) C$1.9126 per pound
C) C$2.4842 per pound
D) 0.5779 pound per Canadian dollar
E) 0.4466 pound per Canadian dollar

Question 80

The cost of one pound of red grapes in Philippines is Peso 85.35 and $1.99 in Canada. Suppose that purchasing powers are equal across countries, what is the spot exchange rate?

A) 0.01797 dollar per peso
B) 0.02332 peso per dollar
C) 42.8894 peso per dollar
D) 0.06029 dollar per peso
E) Insufficient information