Deck 19: Globalization and International Investing

Question 1

The proper formula for interest rate parity is given by ___________.

A) (1 + r_f(for))/(1 + r_f(US)) = F₁/E₀
B) (1 + r_f(US))/(1 + r_f(for)) = E₀/F₁
C) (1 + r_f(US))/(1 + r_f(for)) = F₀/E₀
D) (1 + r_f(for))/(1 + r_f(for)) = F₀/E₁

Answer 1

C

Question 2

Which one of the following country risks refers to the possibility of expropriation of assets,changes in tax policy and the possibility of restrictions on foreign exchange transactions?

A) Default risk
B) Foreign exchange risk
C) Market risk
D) Political risk

Answer 2

D

Question 3

Which one of the following allows you to purchase stock of a specific foreign company?

A) WEBS
B) MSCI
C) ADR
D) EAFE

Answer 3

C

Question 4

Passive investors with well-diversified international portfolios _________.

A) can safely ignore all political risk in emerging markets
B) can expect very large diversification gains from their international investing
C) do not need to be concerned with hedging exposure to foreign currencies
D) can expect returns to be better than the EAFE on a consistent basis

Question 5

Research indicates that that exchange risk of the major currencies has been _________ over time.

A) relatively stable
B) increasing rapidly
C) declining slightly
D) declining rapidly

Question 6

In 2007,U.S.securities represented ______ of the world market for equities.

A) less than 25%
B) more than 2/3
C) between 30% and 40%
D) a consistent 50%

Question 7

Among the factors explaining the return on a stock,_______ factors are generally most important while _______ factors are generally least important.

A) domestic; industrial
B) domestic; currency
C) world; industrial
D) currency; domestic

Question 8

EAFE stands for _______.

A) Equity And Foreign Exchange
B) European, Australian, Far East
C) European, Asian, Foreign Exchange
D) European, American, Far East

Question 9

WEBS are ____________________.

A) investments in country specific portfolios
B) traded exactly like mutual funds
C) identical to ADRs
D) designed to give investors foreign currency exposure to multiple countries

Question 10

According to a regression of market cap on GDP virtually all countries without major oil revenues that restrict private sector growth and/or suffer from major political strife wind up with _______ per capita GDP than/as predicted by the regression.

A) higher
B) lower
C) equal
D) sometimes lower and sometimes higher

Question 11

Limiting your investments to the top six countries in the world in terms of market capitalization may make sense for a/an _________ investor but probably does not make sense for a/an ________ investor.

A) active; passive
B) passive; active
C) security selection expert; market timer
D) fundamental; technical

Question 12

It appears from empirical work that exchange rate risk is ____________.

A) declining for individual investments in recent years
B) mostly diversifiable
C) mostly systematic risk
D) unimportant for an investment in a single foreign country

Question 13

If you limit your investment opportunity set to only the largest six countries in the world in terms of equity capitalization as a percentage of total global equity capital you will include about _______ of the world's equity.

A) 35%
B) 45%
C) 55%
D) 65%

Question 14

Total capitalization of corporate equity in the U.S.at the beginning of 2009 was about _______ trillion.

A) $10
B) $20
C) $30
D) $40

Question 15

Generally speaking,countries with ______ capitalization of equities have ________.

A) larger; higher GDP
B) smaller; wealthier
C) larger; smaller GDP
D) larger; higher growth countries

Question 16

_____ has the largest number of listed corporations among developed markets.

A) The United States
B) Japan
C) The United Kingdom
D) Switzerland

Question 17

The __________ index is a widely used index of non-U.S.stocks.

A) CBOE
B) Dow Jones
C) EAFE
D) Lehman Index

Question 18

Four largest economies in the world in 2007 were ____________.

A) U.S., India, China, and Japan
B) U.S., China, Canada, and Japan
C) U.S., Japan, Germany, and China
D) China, UK, Canada, and U.S.

Question 19

25 countries with largest equity capitalization made up about _____ of the word GDP in 2007.

A) 22%
B) 44%
C) 75%
D) 85%

Question 20

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 their portfolio invested only in U.S.equities.This is an example of _________.

A) home country bias
B) excessive diversification
C) active management
D) passive management

Question 21

The yield on a 1-year bill in the U.K.is 6% and the present exchange rate is 1 Pound = US $2.00.If you expect the exchange rate to be 1 Pound = US $1.95 a year from now,the return a U.S.investor can expect to earn by investing in U.K.bills is approximately __________.

A) -3%
B) 3%
C) 3.35%
D) 8.72%

Question 22

The quoted interest rate on a 3 month Canadian security is 8%.The current exchange rate is C $1 = US $0.68.The 3 month forward rate is C $1 = US $0.70.The APR (denominated in US$)that a U.S.investor can earn by investing in the Canadian security is __________.

A) 5.00%
B) 7.25%
C) 20.00%
D) 22.43%

Question 23

Assume there is a fixed exchange rate between the Canadian and U.S.dollar.The expected return and standard deviation of return on the U.S.stock market are 10% and 15% respectively.The expected return and standard deviation of return on the Canadian stock market are 12% and 16% respectively.The covariance of returns between the U.S.and Canadian stock markets is .012.If you invested 50% of your money in the Canadian stock market and 50% in the U.S.stock market,the standard deviation of return on your portfolio would be __________.

A) 10.96%
B) 12.25%
C) 13.42%
D) 15.50%

Question 24

Annual inflation rate is a(n)_______ risk variable.

A) firm specific
B) political
C) financial
D) economic

Question 25

You invest in various broadly diversified international mutual funds as well as your U.S.portfolio.The one risk you probably don't have to worry about affecting your returns is __________.

A) business cycle risk
B) beta risk
C) inflation risk
D) currency risk

Question 26

Assume there is a fixed exchange rate between the Canadian and U.S.dollar.The expected return and standard deviation of return on the U.S.stock market are 13% and 15% respectively.The expected return and standard deviation of return on the Canadian stock market are 12% and 16% respectively.The covariance of returns between the U.S.and Canadian stock markets is 1.2%.If you invested 50% of your money in the Canadian stock market and 50% in the U.S.stock market,the expected return on your portfolio would be __________.

A) 12.0%
B) 12.5%
C) 14.0%
D) 15.5%

Question 27

According to the International Country Risk Guide in 2008,which of the following countries was the riskiest according to the current composite risk rating?

A) Japan
B) United States
C) China
D) India

Question 28

In 2007,the ___ countries with the largest capitalization of equities made up approximately 60% of the world equity portfolio.

A) 2
B) 4
C) 6
D) 12

Question 29

The risk-free interest rate in the US is 4% while the risk-free interest rate in the UK is 9%.If the British pound is worth $2.00 in the spot market,a 1-year futures rate on the British pound should be worth __________.

A) $1.83
B) $1.91
C) $2.08
D) $2.18

Question 30

Corruption is a(n)_________ risk variable.

A) firm specific
B) political
C) financial
D) economic

Question 31

The annual standard deviation of an asset's returns is 15%.What is the standard deviation of the average annual return on a five year investment in this asset,assuming there is no serial correlation in the returns?

A) 75.00%
B) 33.54%
C) 15.00%
D) 6.71%

Question 32

A fund has assets denominated in euros and liabilities in yen due in six months.The six month forward rate for euro is $1.36 per euro and the six month forward rate for the yen is 121 yen per dollar.The six month forward rate for the euro versus the yen should be ________ per euro.

A) ¥88.97
B) ¥145.34
C) ¥154.67
D) ¥164.56

Question 33

Suppose the 1-year risk-free rate of return in the USA is 5% and the 1-year risk-free rate of return in Britain is 8%.The current exchange rate is $1 = ₤0.50.A
1-year future exchange rate of __________ would make a U.S.investor indifferent between investing in the U.S.security and investing in the British security.

A) ₤0.5150
B) ₤0.5142
C) ₤0.5123
D) ₤0.4859

Question 34

Investor portfolios are notoriously over weighted in home country stocks.This is commonly called ________.

A) local fat
B) nativism
C) home country bias
D) misleading representation

Question 35

The risk-free interest rate in the US is 8% while the risk-free interest rate in the UK is 15%.If the 1-year futures price on the British pound is $2.40,the spot market value of the British pound today should be __________.

A) $1.93
B) $2.22
C) $2.56
D) $2.76

Question 36

The correlation coefficient between the U.S.stock market index and stock market indices of major countries is __________.

A) between -1 and -0.50
B) between -0.50 and 0.00
C) between 0.00 and 0.50
D) between 0.50 and 1

Question 37

The present exchange rate is C $1 = US $0.77.The 1-year future rate is C $1 = US $0.73.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.

A) 9.7%
B) 2.9%
C) 2.8%
D) 2.0%

Question 38

A U.S.hedge fund owns Swiss franc bonds.The fund manager believes that if Swiss interest rates rise relative to U.S.interest rates the value of the franc will rise.To limit the risk to the fund's dollar return,the fund manager should __________.

A) sell the Swiss franc bonds now
B) sell the Swiss franc forward
C) probably do nothing because the franc move will offset the lower bond price
D) enter into an interest rate swap to pay variable and receive fixed

Question 39

Suppose the 6 month risk-free rate of return in the USA is 5%.The current exchange rate is 1 Pound = US $2.05.The 6 month forward rate is 1 Pound = US $2.00.The minimum yield on a 6 month risk-free security in Britain that would induce a U.S.investor to invest in the British security is ________.

A) 5.06%
B) 6.74%
C) 8.48%
D) 10.13%

Question 40

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?

A) The insurer need not hedge because the expected exchange rate move will be favorable.
B) The insurer should hedge by buying euro forward even though this will cost more than the expected cost of not hedging.
C) The insurer should hedge by selling euro forward because this will cost less than the expected cost of not hedging.
D) The insurer should hedge by buying euro forward even though this will cost less than the expected cost of not hedging.

Question 41

The yen per dollar spot rate is 104.The yen per dollar forward rate is 107.If the US risk free rate is 2.4%,what is the likely yen risk free rate?

A) 1.24%
B) 2.35%
C) 3.98%
D) 5.35%

Question 42

An importer of televisions from Japan has a contract to purchase a shipment of televisions for 2,000,000 yen.The spot rate increases from 105 yen per dollar to 108 yen per dollar.What is the importer's gain or loss?

A) $529 gain
B) $529 loss
C) $619 gain
D) $619 loss

Question 43

The risk free rate in the US is 4.0% and the risk free rate in Japan is 1.2%.If the spot rate of yen to dollars is 105,what is the likely yen per dollar forward rate?

A) 101
B) 102
C) 105
D) 108

Question 44

Inclusion of international equities in a U.S.investor's portfolio has historically produced ___________________.

A) a substantially reduced portfolio variance
B) a slightly reduced portfolio variance
C) a substantially poorer portfolio variance
D) a slightly poorer portfolio variance

Question 45

The risk free rate in the US is 2.5% and the risk free rate in Europe is 3.2%.If the spot rate of dollars per euro is 1.32,what is the likely forward rate in terms of dollars per euro?

A) 1.30
B) 1.31
C) 1.32
D) 1.33

Question 46

The dollar per euro spot rate is 1.2 when an importer of French wines places an order.6 months later,when she takes delivery,the spot rate is 1.3 dollars per euro.If her original invoice was for 30,000 euro,what is her gain or loss due to exchange rate risk?

A) $3,000 gain
B) $3,000 loss
C) $6,000 loss
D) no gain or loss

Question 47

Among emerging countries the largest equity market in 2007 was located in _____________.

A) China
B) India
C) Brazil
D) Russia

Question 48

Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
How many shares can the investor purchase?

A) 140
B) 100
C) 71.43
D) none of the above

Question 49

Which emerging country has the highest percentage growth in market capitalization?

A) Brazil
B) China
C) Taiwan
D) Turkey

Question 50

You are a U.S.investor who purchased British securities for 3,500 pounds one 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 in U.S.dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth $1.15.

A) -3.8%
B) 2.2%
C) 5.6%
D) 15%

Question 51

Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
After one year,the exchange rate is $1.60/₤ and the share price is ₤55.What is the dollar-denominated return?

A) 25.7%
B) 16%
C) 14.3%
D) 9.3%

Question 52

A country has a PRS political risk rating of 75,a financial score of 40 and an economic score of 35.The country's composite rating is _________.

A) 75
B) 50
C) 40
D) 35

Question 53

In the PRS financial risk ratings the U.S.rates poorly because of the U.S.experiences ________.
I)large budget deficit
II)large trade deficit
III)large amount of total debt

A) I only
B) I and II only
C) I and III only
D) I, II and III

Question 54

You find that the exchange rate quote for the yen is 121 yen per dollar.This is an example of a/an ________ quote.You also find that the euro is worth $1.33.This second quote is an example of a/an _______ quote.

A) direct; indirect
B) indirect; direct
C) foreign; U.S.
D) U.S.; foreign

Question 55

Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
After one year,the exchange rate is unchanged and the share price is ₤55.What is the pound-denominated return?

A) 14%
B) 10%
C) 9.3%
D) 7.1%

Question 56

WEBS are _____________.

A) mutual funds marketed internationally on the Internet
B) synthetic domestic stock indices
C) equity indices that replicate the price and yield performance of foreign stock portfolios
D) single stock investments in a foreign security

Question 57

In the PRS country composite risk ratings a score of ______ represents the least risky and a score of _____ represents the most risky.

A) 0; 100
B) 0; 50
C) 50; 0
D) 100; 0

Question 58

Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
After one year,the exchange rate is unchanged and the share price is ₤55.What is the dollar-denominated return?

A) 14%
B) 10%
C) 9.3%
D) 7.1%

Question 59

Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
After one year,the exchange rate is $1.50/₤ and the share price is ₤45.How much of your dollar-denominated return is due to the currency change?

A) 10.00%
B) 6.43%
C) 4.34%
D) 2.12%

Question 60

Real U.S.interest rates move above Japanese interest rates.If you believe that Japanese interest rates won't move and you believe that interest rate parity will hold then ____________.

A) the yen per dollar exchange rate should rise
B) the dollar per yen exchange rate should rise
C) the exchange rate should stay the same if parity holds
D) one can't predict the exchange rate change from the information given

Question 61

The variation in betas of emerging markets suggests that ____________.

A) emerging markets are more uniform than developed markets
B) beta does not hold in international markets
C) international diversification may reduce portfolio risk
D) riskier emerging markets have uniformly lower betas

Question 62

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following questions about decomposing the manager's performance.
What is the difference in return of the manager's portfolio due to currency selection?

A) -5%
B) -3%
C) 2%
D) 1%

Question 63

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following questions about decomposing the manager's performance.
Which stock market has the largest weight in the EAFE index?

A) Japan
B) Germany
C) UK
D) Australia

Question 64

WEBS differ from mutual funds in that __________.
I)Shares of WEBS can be shorted
II)WEBS shares trade continuously on the AMEX
III)WEBS are passively managed

A) II only
B) II and III only
C) I and III only
D) I, II and III

Question 65

The major participants who directly purchase securities in the capital markets of other countries are predominantly ____________.

A) large institutional investors
B) individual investors
C) government agencies
D) central banks

Question 66

One year U.S.interest rates are 7% and European interest rates are 5%.The spot euro direct exchange rate quote is 1.30 and the one year forward rate direct quote is 1.25.If you have $1 million dollars or € 1 million to start with what would be your dollar profits from an interest arbitrage based on this data?

A) $60,384
B) $42,973
C) $68,422
D) $78,500

Question 67

Of the following,which is the most commonly used international index?

A) DJIA
B) EAFE
C) Russell 2000
D) S&P500

Question 68

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following questions about decomposing the manager's performance.
What is the difference in return of the manager's portfolio due to stock selection?

A) 1.15%
B) 3.25%
C) 5.45%
D) 6.13%

Question 69

One year U.S.interest rates are 5% and European interest rates are 7%.The spot euro direct exchange rate quote is 1.32 and the one year forward rate direct quote is 1.35.If you have $1 million dollars or € 1 million to start with what would be your dollar profits from an interest arbitrage based on this data?

A) $94,322
B) $55,345
C) $44,318
D) $33,595

Question 70

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following questions about decomposing the manager's performance.
What is the difference in return of the manager's portfolio due to country selection?

A) -0.60%
B) -0.75%
C) 0.12%
D) 0.22%