Emerging Markets Finance
Test Preparation
Course Introduction
Emerging Markets Finance explores the unique financial environments, challenges, and opportunities present in rapidly developing economies. This course examines the distinctive characteristics of emerging markets, including their financial institutions, regulatory frameworks, capital markets, and investment vehicles. Students will analyze the impact of global economic trends, geopolitical risks, and financial crises on these markets, and learn how multinational corporations and investors navigate currency risk, political risk, liquidity concerns, and corporate governance issues. The course also covers strategies for investment, risk management, and sustainable growth in emerging economies, providing students with practical tools and frameworks for making informed financial decisions in these dynamic settings.
Recommended Textbook
International Financial Management 7th Edition by Cheol S. Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments. Examples of these innovative instruments include
A)currency futures and options, foreign stock index futures and options.
B)multicurrency bonds.
C)international mutual funds, country funds, exchange traded funds.
D)all of the above
Answer: D
Q2) Although the world economy is much more integrated today than was the case 10 or 20 years ago, a variety of barriers still hamper free movements of people, goods, services, and capital across national boundaries. These barriers include A)legal restrictions.
B)excessive transportation costs.
C)information asymmetry.
D)all of the above
Answer: D
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3
Chapter 2: International Monetary System
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Q1) Under a gold standard, if Britain exported more to France than France exported to Great Britain,
A)such international imbalances of payment will be corrected automatically.
B)this type of imbalance will not be able to persist indefinitely.
C)net export from Britain will be accompanied by a net flow of gold in the opposite direction.
D)all of the above
Answer: D
Q2) To pave the way for the European Monetary Union, the member countries of the European Monetary System agreed to achieve a convergence of their economies. Which of the following is NOT a condition of convergence:
A)keep the ratio of government budget deficits to GDP below 3 percent.
B)keep gross public debts below 60 percent of GDP.
C)achieve a high degree of price stability.
D)maintain its currency at a fixed exchange rate to the ERM.
Answer: D
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Chapter 3: Balance of Payments
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Q1) The economic theory of mercantilism holds that
A)a continuing trade surplus should be a government's major policy goal.
B)the main source of wealth of a country is its productive capacity.
C)free trade is the result of countries exploiting their comparative advantage.
D)none of the above
Answer: A
Q2) Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash.
A)Payment by InBev will be recorded as a debit.
B)The deposit of the funds by the sellers will be recorded as a debit.
C)Payment by InBev will be recorded as a credit.
D)The deposit of the funds by the buyer will be credit.
Answer: C
Q3) BKA stands for
A)the balance on the current account.
B)the balance on the capital account.
C)the balance on the official reserves.
D)net imports.
Answer: B
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Page 5
Chapter 4: Corporate Governance Around the World
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Q1) The key to extracting private benefits of control that are not shared by other shareholders on a pro rata basis is to
A)become a large shareholder and acquire control rights exceeding cash flow rights.
B)buy a large block of nonvoting shares.
C)sell your shares in a tender offer.
D)force the firm into bankruptcy.
Q2) Suppose in order to defraud the shareholders, a manager sets up an independent company that he owns buys one of the main company's inputs of production from this company. He would be tempted to set the transfer price
A)below market prices.
B)above market prices.
C)at the market price.
D)in accordance with GAAP.
Q3) When managerial self-dealings are excessive and left unchecked,
A)they can have serious negative effects on share values.
B)they can impede the proper functions of capital markets.
C)they can impede such measures as GDP growth.
D)all of the above
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Chapter 5: The Market for Foreign Exchange
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Q1) Intervention in the foreign exchange market is the process of A)a central bank requiring the commercial banks of that country to trade at a set price level.
B)commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.
C)a central bank buying or selling its currency in order to influence its value.
D)the government of a country prohibiting transactions in one or more currencies.
Q2) Suppose you observe the following exchange rates: 1 = $1.60; £1 = $2.00. Calculate the euro-pound exchange rate.
A) 1.3333 = £1.00
B)£1.3333 = 1.00
C) 3.00 = £1
D) 1.25 = £1.00
Q3) On average, worldwide daily trading of foreign exchange is closest to A)impossible to estimate.
B)$15 billion.
C)$504 billion.
D)$3.21 trillion.
Q4) Using the table what is the 6-month forward pound-yen cross-exchange rate?
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Q1) USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward ASK exchange rate in $ per that that satisfies IRP from the perspective of a customer.
Q2) If the interest rate in the U.S. is i<sub>$</sub> = 5 percent for the next year and interest rate in the U.K. is i<sub>£</sub> = 8 percent for the next year, uncovered IRP suggests that
A)the pound is expected to depreciate against the dollar by about 3 percent.
B)the pound is expected to appreciate against the dollar by about 3 percent.
C)the dollar is expected to appreciate against the pound by about 3 percent. D)both a and c
Q3) If you borrowed 1,000,000 for one year, how much money would you owe at maturity?
Q4) There is (at least) one profitable arbitrage at these prices. What is it?
Q5) USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward BID exchange rate in $ per that satisfies IRP from the perspective of a customer.
Q6) There is (at least) one profitable arbitrage at these prices. What is it?
Q7) If you borrowed 1,000,000 for one year, how much money would you owe at maturity?
Q8) There is (at least) one profitable arbitrage at these prices. What is it?
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Chapter 7: Futures and Options on Foreign Exchange
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Sample Questions
Q1) Draw the binomial tree for this option.
Q2) The current spot exchange rate is $1.55 = 1.00 and the three-month forward rate is $1.60 = 1.00. Consider a three-month American call option on 62,500 with a strike price of $1.50 = 1.00. Immediate exercise of this option will generate a profit of A)$6,125.
B)$6,125/(1 + i<sub>$</sub>)<sup>3/12</sup>.
C)negative profit, so exercise would not occur. D)$3,125.
Q3) In the event of a default on one side of a futures trade,
A)the clearing member stands in for the defaulting party.
B)the clearing member will seek restitution for the defaulting party.
C)if the default is on the short side, a randomly selected long contract will not get paid. That party will then have standing to initiate a civil suit against the defaulting short. D)both a and b
Q4) Find the cost today of your hedge portfolio in pounds.
Q5) USING RISK NEUTRAL VALUATION (i.e. the binomial option pricing model) find the value of the call (in euro).
Q6) Find the risk neutral probability of an "up" move.
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Chapter 8: Management of Transaction Exposure
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Sample Questions
Q1) The current exchange rate is 1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or 12,500.
A)The seller has given the buyer an at-the-money put option.
B)The seller has given the buyer an at-the-money call option.
C)Both a and b are correct
D)None of the above
Q2) Suppose that the exchange rate is 1.25 = £1.00. Options (calls and puts) are available on the London exchange in units of 10,000 with strike prices of £0.80 = 1.00. Options (calls and puts) are available on the Frankfurt exchange in units of £10,000 with strike prices of 1.25 = £1.00. For a French firm to hedge a £100,000 receivable,
A) buy 10 call options on the pound with a strike in euro.
B) buy 8 put options on the pound with a strike in euro.
C) buy 10 put options on the pound with a strike in euro.
D) buy 8 call options on the euro with a strike in pounds.
E) both a and b
F) both c and d
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Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) The price elasticity of demand for unique products tends to be
A)highly elastic.
B)highly inelastic.
C)both a and b
D)none of the above
Q2) The expected value of the investment in U.S. dollars is:
A)$2,083.33
B)$762.50
C)$6,250.00
D)$6,562.50
Q3) Operating exposure measures
A)the extent to which the foreign currency value of the firm's assets is affected by unanticipated changes in exchange rates.
B)the extent to which the firm's operating cash flows will be affected by unexpected changes in exchange rates.
C)the affect of changes in exchange rates will have on the consolidated financial reports of a MNC.
D)the affect of unanticipated changes in exchange rates on the dollar value of contractual obligations denominated in a foreign currency.
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11
Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) Which of the above statements pertain to FASB 52?
A)(i)
B)(i) and (ii)
C)(iii) and (iv)
D)(i), (ii), and (iii)
Q2) Which of the following are true statements?
A)Since translation exposure does not have an immediate direct effect on operating cash flows, its control is relatively unimportant in comparison to transaction exposure, which involves potential real cash flow losses.
B)Since it is generally not possible to eliminate both translation exposure and transaction exposure, it is more logical to effectively manage transaction exposure.
C)Two ways to control translation risk are: a balance sheet hedge and a derivatives "hedge."
D)All of the above are true statements
Q3) Translation exposure,
A)is not entity specific, rather it is currency specific.
B)is not currency specific, rather it is entity specific.
C)involves restatement from Italian to French.
D)none of the above
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Page 12
Chapter 11: International Banking and Money Market
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Sample Questions
Q1) So-called subprime mortgages were typically
A)mortgages granted to borrowers with less-than-perfect credit.
B)backed by the full faith and credit of the U.S. government.
C)held to maturity by the originating lender, thereby assuring that default risk was priced into the rate of return.
D)none of the above
Q2) The payment amount under this FRA is
A)$9,985.
B)$10,111.
C)$60,667.
D)$120,000.
Q3) One enduring truth of banking is that
A)for some reason, bankers always seem willing to lend huge amounts to borrowers with a limited potential to repay.
B)credit ratings work, but only in the aggregate.
C)when liquidity dries up, bankers are typically able to ride out the storm by buying up other investors debt at pennies on the dollar, holding it until the crisis is over, and then selling at a huge profit.
D)none of the above
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Page 13
Chapter 12: International Bond Market
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Q1) The underwriting syndicate of a bond offering is
A)a group of investment banks, merchant banks, and the merchant banking arms of commercial banks that agree to buy the bond from the issuer and then resell it.
B)a group of investment fund managers, brokers, and dealers who specialize in the secondary bond market.
C)a group of investment banks, merchant banks, and the merchant banking arms of commercial banks that specialize in some phase of a public issuance.
D)none of the above
Q2) The withholding tax on bond income was originally called the interest equalization tax.
A)You can thank JohnF. Kennedy for imposing this tax.
B)You can thank Ronald Reagan for imposing this tax.
C)You can thank Jimmy Carter for imposing this tax.
D)You can thank George Washington for imposing this tax.
Q3) Eurobonds sold in the United States may not be sold to U.S. citizens.
A)True
B)False
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Chapter 13: International Equity Markets
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Q1) The smaller the concentration percentage,
A)the more concentrated a market is in a few stock issues.
B)the less concentrated a market is.
C)the more liquid the secondary stock market is.
D)none of the above
Q2) A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price, known as
A)the stop price.
B)the limit price.
C)the last price.
D)the sell price
Q3) The sale of new common stock by corporations to initial investors occurs in
A)the primary market.
B)the secondary market.
C)the OTC market.
D)the dealer market.
Q4) Public traders do not trade directly with one another in a dealer market.
A)True
B)False
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Chapter 14: Interest Rate and Currency Swaps
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Q1) A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. Company X has agreed to one leg of the swap but company Y is "playing hard to get".
A)If the swap bank has already contracted one leg of the swap, they should be anxious to offer better terms to company Y to just get the deal done.
B)The swap bank could just sell the company X side of the swap.
C)Company X should lobby Y to "get on board".
D)Both a and b
Q2) A swap bank has identified two companies with mirror-image financing needs (they both want to borrow equivalent amounts for the same amount of time. Company X has agreed to one leg of the swap but company Y is "playing hard to get".
A)The swap bank could just sell the company X side of the swap.
B)Company X should lobby Y to "get on board".
C)Company Y should calculate the QSD and subtract that from their best outside offer.
D)None of the above
Q3) Explain how this opportunity affects which swap firm B will be willing to participate in.
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16
Chapter 15: International Portfolio Investment
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Sample Questions
Q1) Assume that you have invested $100,000 in British equities. When purchased the stock's price and the exchange rate were £50 and £0.50/$1.00 respectively. At selling time, one year after purchase, they were £45 and £0.60/$1.00. If the investor had sold £50,000 forward at the forward exchange rate of £0.55/$1.00. The dollar rate of return would be:
A)-27.27%
B)-17.42%
C)28.00%
D)-9.09%
Q2) Advantages of investing in U.S.-based international mutual funds include
A)lower transactions costs relative to direct investing.
B)circumvention of many legal and institution barriers to direct portfolio investment in many foreign markets.
C)professional management, potentially expertise in security selection, definitely record-keeping.
D)all of the above
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Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) In 1992, the Enron Development Corporation, a subsidiary of the Houston-based energy company, signed a contract to build the largest-ever power plant in India, requiring a total investment of $2.8 billion. After Enron had spent nearly $300 million, the project was canceled by Hindu nationalist politicians in the Maharashtra state where the plant was to be built. Which of the following are true?
A)Upon the news release of the project cancellation, Enron's share price fell immediately by about 10 percent.
B)In the process of structuring the deal, Enron made a profound political miscalculation: Instead of waiting for the next election results, Enron rushed to close the deal and began construction, apparently believing that a new government would find it difficult to unwind the deal when construction was already under way.
C)Enron had the last laugh, however when they went bankrupt and left the power plant unfinished.
D)All of the above
Q2) Cross-border acquisitions are generally found to be synergy-generating corporate activities.
A)True
B)False
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) With regard to the financial structure of a foreign subsidiary
A)Using local financing can reduce political risk.
B)A MNC that finances a foreign investment with home-country equity faces greater risk of expropriation than if it had financed the investment with at least some local debt or equity.
C)There may be advantages other than a reduction in political risk that encourage MNCs to finance foreign subsidiaries with local money.
D)All of the above
Q2) 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 company's 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
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19
Chapter 18: International Capital Budgeting
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Q1) Capital budgeting analysis is very important, because it
A)involves, usually expensive, investments in capital assets.
B)has to do with the productive capacity of a firm.
C)will determine how competitive and profitable a firm will be.
D)all of the above
Q2) As of today, the spot exchange rate is 1.00 = $1.50 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail?
A) 1.00 = $1.5147
B) 1.00 = $1.4854
C) 1.00 = $0.6602
D)$1.00 = 0.6602
Q3) Using the notion of hedging, make a recommendation vis-à-vis how to undertake the project today without "buying" the option.
Q4) Find the ex post IRR in euro for the American firm if they buy the bond today and then the exchange rate rises to S<sub>1</sub>($| ) = $1.80 per .
Q5) What is CF1 in dollars?
Q6) What is the dollar-denominated IRR?
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Chapter 19: Multinational Cash Management
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Q1) Find the net cash flow in (out of) the U.K. affiliate.
A)$55,000 in
B)$15,000 out
C)$0 in or out
D)$40,000 out
E)None of the above
Q2) Multinational cash management
A)is really no different for a MNC than for a purely domestic firm in a closed economy.
B)concerns itself with the size of cash balances, their currency denominations, and where these cash balances are located among the MNC's affiliates.
C)concerns itself with the size of cash balances and their currency denominations, but not where these cash balances are located among the MNC's affiliates, since intra-affiliate default risk is not an issue.
D)none of the above
Q3) A netting center necessarily implies that the MNC has a central cash manager.
A)True
B)False
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21
Chapter 20: International Trade Finance
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Q1) Determine the amount the exporter will receive if he discounts the B/A with the importer's bank.
Q2) An offset transaction
A)can be viewed as a counterpurchase trade agreement involving the aerospace/defense industry.
B)involves a technology transfer via the sale of a manufacturing plant: as part of the terms, the seller of the plant agrees to purchase a certain portion of the plant output. C)is the purchase by a third party of one country's a clearing agreement balance for hard currency.
D)none of the above
Q3) Suppose the face amount of a promissory note is $1,000,000 and the importer's bank charges an acceptance commission of 1.5 percent. The note is for 60 days. Calculate the amount of the acceptance commission that the bank will charge.
A)$997,500
B)$15,000 = $1,000,000 × (0.015)
C)$2,500
D)None of the above
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Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) A "tax haven" country is one that has a low, or zero percent, national tax rates. Some of the countries that fall into this category are
A)Bahamas, Bahrain, Bermuda, and the Cayman Islands.
B)Denmark, Norway, Switzerland, and Sweden.
C)Bulgaria, Canada, Saudi Arabia, and South Africa.
D)Congo, Egypt, Kuwait, and Zaire.
Q2) The three basic types of taxation are
A)income tax, withholding tax, and value-added tax.
B)income tax, withholding tax, and business tax.
C)withholding tax, value-added tax, and corporate tax.
D)personal tax, corporate tax, and operating tax.
Q3) As a general rule,
A)excess tax credits can be carried back two years.
B)excess tax credits can be carried forward five years.
C)excess tax credits must be used in the year recognized.
D)both a and b
Q4) An income tax is a direct tax.
A)True
B)False
Page 23
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