Financial Risk Management
Chapter Exam Questions
Course Introduction
Financial Risk Management explores the fundamental concepts and techniques used to identify, assess, and mitigate financial risks faced by organizations. The course covers various types of risk including market, credit, operational, and liquidity risks and examines tools such as derivatives, value at risk (VaR), and stress testing. Emphasizing both qualitative and quantitative approaches, students learn how risk management strategies are integrated into the overall financial decision-making process. Practical case studies and real-world scenarios help develop the skills necessary to evaluate risk exposures and implement effective risk controls in todays dynamic financial environment.
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International Financial Management 2nd Edition by Geert J Bekaert
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Chapter 1: Globalization and the Multinational Corporation
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Q1) Which of the following was created in an effort to promote free trade?
A) World Trade Organization
B) the Sarbanes-Oxley Act
C) multilateral development banks
D) the Organization for Economic Cooperation and Development
Answer: A
Q2) What economic field of study explores the problems associated with a firm that arise from a separation of ownership and control and devises ways to resolve them?
A) futures and options
B) agency theory
C) foreign direct investment
D) franchising
Answer: B
Q3) Globally why are certain types of firms seeking others with poor corporate governance?
Answer: Hedge funds and private equity firms are very often looking for these poorly performing firms as potential targets for their value-enhancing activities.
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Chapter 2: The Foreign Exchange Market
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Q1) Which one of the following are the main participants in the global currency markets?
A) commercial banks
B) insurance companies
C) hedge funds
D) private equity funds
Answer: A
Q2) When it comes to trading global currency,all of the following markets are in the top five EXCEPT:
A) London.
B) Singapore.
C) Tokyo.
D) Frankfurt.
Answer: C
Q3) Which one of the following is not a characteristic of a liquid market?
A) Market makers stand ready to buy and sell currencies.
B) Foreign exchange dealers make transactions only with dealers.
C) It becomes easy to match buyers and sellers.
D) Transaction costs are low.
Answer: B
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Page 4
Chapter 3: Forward Markets and Transaction Exchange Risk
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Q1) What is a forward-forward swap?
Answer: A forward-forward swap involves either the purchase of foreign currency at a short maturity forward against the sale of the same amount of foreign currency at a longer maturity forward,or the sale of foreign currency at the short maturity forward against the purchase of the same amount of foreign currency at a longer maturity forward.
Q2) What is the name of the contract where corporations,institutional investors,and individuals are required to pay or to receive a specific amount of foreign currency at a specific exchange rate at a particular date in the future?
A) forward foreign exchange market
B) forward currency contract
C) forward rate contract
D) future hedge contract
Answer: B
Q3) Why would an MNC use a spot-forward swap?
Answer: A spot-forward swap involves either the purchase of foreign currency spot against the sale of the same amount of foreign currency forward,or the sale of foreign currency spot against the purchase of the same amount of foreign currency forward.
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Chapter 4: The Balance of Payments
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Q1) The U.S.Department of Commerce breaks the total net change in U.S.assets abroad into transactions.Which one of the following options is not part of the three categories?
A) transactions in "U.S. official reserve assets"
B) transactions in "other U.S. governmental assets"
C) transactions in "U.S. private assets"
D) transactions in "other U.S. public assets"
Q2) What is the subcategory in the current account that indicates that the government of a country and other residents gave more money to foreign countries and residents as gifts and grants than the country itself received from abroad?
A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services
Q3) A balance of trade deficit results in a current account
A) deficit.
B) surplus.
C) IMF intervention.
D) World Bank loan.
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Chapter 5: Exchange Rate Systems
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Q1) What is the name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market,relative to another currency or a "basket" of currencies?
A) European currency unit
B) fixed currencies
C) floating currencies
D) dirty float currency
Q2) When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds,the practice is known as ________.
A) open market operations
B) a sterilized float
C) a dirty float
D) changing the required reserves
Q3) Which one of the following systems would most often be used by a developing economy?
A) target zone
B) currency board
C) floating exchange rate
D) crawling peg
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Page 7
Chapter 6: Interest Rate Parity
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Q1) An example of an external currency market that was the first to form was the market where the dollar-denominated deposits were known as
A) Euros.
B) Eurodollars.
C) petrodollars.
D) exchange traded funds.
Q2) When the possibility exists that the government of a nation may impose some form of exchange controls or tax on foreign investment,the risk is known as ________ risk.
A) political
B) exchange controls
C) business risk
D) government
Q3) If interest rate parity is in effect,there are ________.
A) no profitable opportunities for covered interest arbitrage
B) many opportunities for covered interest arbitrage
C) currency dealers will arbitrage interest rate differentials in different countries
D) currency dealers will be motivated to arbitrage forward market contracts
Q4) Explain the bid-ask spread in the external currency market?
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Chapter 7: Speculation and Risk in the Foreign Exchange Market
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Q1) The ________ holds that it is the covariance of an asset's return with that of the market portfolio that determines the asset's risk premium.
A) Law of One Price
B) Law of Iterated Expectations
C) Capital Asset Pricing Model
D) Interest Rate Parity Model
Q2) What is the name given to the risk associated with an asset's return arising from the covariance of the return on a large,well-diversified portfolio?
A) covariance
B) systematic risk
C) idiosyncratic risk
D) risk premium
Q3) Regression tests of the unbiasedness hypothesis indicate that it is ________ with real life events.
A) an unbiased indicator of expected future exchange rates
B) very consistent
C) not consistent
D) has a strong correlation to the current account
Q4) What is the main determinant of the volatility of forward market returns?
Page 9
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Chapter 8: Purchasing Power Parity and Real Exchange
Rates
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Q1) The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the
A) relative purchasing power parity
B) equilibrium purchasing power parity
C) absolute purchasing power parity
D) real exchange rate equilibrium
Q2) When people describe what they think an exchange rate value should be,they often use a benchmark model,known as ________.
A) purchasing power parity
B) interest rate parity
C) the Fisher effect
D) the International Fisher effect
Q3) Understanding the theory of purchasing power parity is important because deviations from PPP significantly affect the
A) operations of the central bank.
B) hedging activities of multinational firms.
C) profitability of multinational firms.
D) arbitrage opportunities in the banking markets.
Page 10
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Chapter 9: Measuring and Managing Real Exchange Risk
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Q1) When a currency depreciates,exporters to that country face the trade-off to
A) maintain production or outsource in other markets
B) maintain profits or market share
C) exit the market or choose to stay
D) introduce new products or retire old ones
Q2) Assume foreign currencies are strong in real terms,why would this be the best time to enter the market of a foreign country as an exporter to that market?
Q3) A real depreciation of the domestic currency hurts domestic ________ firms who must then compete against less expensive imports.
A) exporting
B) import-competing
C) importing
D) export-competing
Q4) Why does the strategy of pricing-to-market depend on the assumption of market segmentation?
Q5) What determines how much a foreign producer allows the dollar price of a product sold in the United States to be affected by a change in the real exchange rate?
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Chapter 10: Exchange Rate Determination and Forecasting
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Q1) If a country has a capital account ________,it is ________ net foreign assets.
A) deficit, acquiring B) deficit, losing C) surplus, acquiring D) surplus, in equilibrium as far as its
Q2) If all of the parity conditions hold,then a real interest rate in the U.S.of 5% should be equal to ________ in another country when 3% inflation is expected in the U.S.
A) 2%
B) 5%
C) 8%
D) 15%
Q3) Describe how the macroeconomic fundamental,money supply,affects exchange rates.
Q4) Describe three statistics you should obtain from a currency-forecasting service in order to judge the quality of its currency forecasts.
Q5) Which of the two types of exchange rate analyses emphasizes the use of past exchange rate data and how is it used?
Q6) Why would technical analysis not be useful if the international parity conditions held?
Page 12
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Chapter 11: International Debt Financing
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Q1) Which type of bond is issued in a domestic market by a borrower overseas,denominated in the domestic currency,marketed to domestic residents,and regulated by the domestic authorities?
A) international bond
B) domestic bond
C) Eurobond
D) foreign bond
Q2) The ________ is the discount rate or internal rate of return that equates the present value of all the future interest rate and principal payments to the net proceeds received by the issuer.
A) all-in-cost
B) internal rate of return
C) LIBOR rate
D) floating-rate note
Q3) Which one of the following is NOT an external source of corporate funding?
A) bank loan
B) retained earnings
C) debt security
D) equity
Q4) Why is there a need for international banking regulation?
Page 13
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Chapter 12: International Equity Financing
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Q1) What are the costs of cross-listing?
A) It exploits growth opportunities with additional foreign capital.
B) It reduces the cost of capital.
C) It increases the stock price.
D) It costs money paid in exchange fees and it may impose a high level of examination on the company's managers.
Q2) The stock markets of developing countries are often referred to as ________,and the young stock markets of the least developed countries are called ________.
A) external equity markets, frontier markets
B) emerging markets, frontier markets
C) external equity markets, emerging markets
D) emerging markets, undeveloped markets
Q3) What is the name of the effect related to market liquidity that occurs when a market lacks liquidity and an investor's trade is relatively large and results in an adverse effect on the price the investor gets?
A) turnover
B) blocked funds
C) demutualization
D) market impact
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Chapter 13: International Capital Market Equilibrium
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Q1) The arbitrage pricing theory recognizes that the return on the market portfolio may not be the only potential source of ________ that affect the returns on equities.
A) systematic risks
B) market risks
C) risks premium
D) equity risk
Q2) What is the trend for the home bias phenomenon.
Q3) The portfolio on the minimum-variance frontier that maximizes the sharpe ratio is called
A) mean-variance frontier.
B) MVE portfolio
C) mean standard deviation frontier.
D) efficient frontier.
Q4) What is the name given to the funds that are sometimes restricted to a particular country?
A) restricted funds
B) world funds
C) regional funds
D) country funds
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Chapter 14: Country and Political Risk
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Q1) The Baker Plan of 1985 is named for the U.S.________.
A) secretary of state
B) president
C) federal reserve chair
D) treasury secretary
Q2) A country's credit spread is another indicator of A) sovereign risk.
B) commercial risk.
C) political risk.
D) credit risk.
Q3) Brady bonds were issued in 1989 in response to the Brady Plan in which the A) debt of developing countries was securitized into easily tradable bonds.
B) countries agreed to change their economic policies following guidelines set by the UMF in exchange for new loans to developing countries.
C) repayment of debts from developing countries were severely restricted.
D) debts of developing countries were exchanged in debt-equity swaps.
Q4) What political realities underlie a government budget deficit?
Q5) What are some indicators of country health?
Q6) What is the difference between political risk and sovereign risk?
Q7) How might a government budget deficit lead to inflation?
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Chapter 15: International Capital Budgeting
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Q1) Suppose you are conducting a financial analysis of a potential acquisition target,and you have been asked to identify the firm's engine of growth.Upon which of the following would you focus your analysis?
A) accounts receivable turnover
B) capital expenditures
C) debt to equity ratio
D) the firm's overall capital structure
Q2) When discounting cash flows of the all-equity firm,
A) the revenues and expenses must be measured as they occur rather than on an incremental basis.
B) there is no need to incorporate the risk premium of that the firm's stockholders would demand in the discount rate.
C) all cash flows should be measured in the same currency.
D) revenues and expenses should be measured on a pre-tax cash flow basis.
Q3) How does the role of underwriting affect the issuing of securities?
Q4) Of what importance are good management practices as they relate to working capital?
Q5) Of the following which cash flow provides pure profit to the parent company: licensing agreements,royalties,and overhead allocation fees?
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Chapter 16: Additional Topics in International Capital Budgeting
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Q1) Growth does lead to increases in the firm's value,but only if the ________ exceeds the WACC does the firm's value increase by more than the amount of the investment.
A) return on investment
B) discount rate
C) plowback ratio
D) retention ratio
Q2) Explain how to calculate the rate of return on invested capital?
Q3) What is the name given to the ratio of investment to gross cash flows?
A) payout ratio
B) retention ratio
C) plowback ratio
D) debt to equity ratio
Q4) As an international financial analyst,you inform your superiors that the domestic currency discount rate can be used to do capital budgeting for a foreign project? Explain why.
Q5) With respect to project value,what is meant by the underinvestment problem?
Q6) What is the most important reason to consider real currency appreciation and depreciation forecasts when doing an international capital budgeting analysis?
Page 18
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Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
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Q1) A ________ tax code imposes a larger tax rate on a higher income and a smaller tax rate on lower incomes.
A) convex
B) concave
C) proportional
D) flat-rate
Q2) ________ is the use of derivative securities to take positions in financial markets that offset the underlying sources of risk that arise in a company's normal course of business.
A) Hedging
B) Risk management
C) Asset securitization
D) Option premium
Q3) ________ are typically larger in the forward market than in the spot market for currency.
A) Contract sizes
B) Bank fees
C) The bid-ask spreads
D) Employee costs
Q4) Why is hedging considered a cost center and not a profit center?
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Chapter 18: Financing International Trade
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Q1) The terms and conditions of a(n)________ documentary credit cannot be changed unless all parties involved first agree to the change.
A) revocable
B) irrevocable
C) confirmed
D) straight
Q2) Which one of the following is NOT an advantage to exporters of documentary credits?
A) It substitutes the creditworthiness of the bank for the importer.
B) It enhances the probability the exporter will experience delays due to exchange controls.
C) It requires strict adherence to the terms.
D) It clearly establishes the acts the exporter must perform in order to receive payment.
Q3) Insurance policies that covers all of the exports of a firm are known as
A) umbrella policies.
B) floating policies.
C) clean policies.
D) multi-line policies.
Q4) Explain the fundamental financing problem in international trade?
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Chapter 19: Managing Net Working Capital
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Q1) Cash management can be enhanced using a process where payments and receipts between affiliates are recorded but the actual transfer of funds involves net amounts only for amounts owed between affiliates.The system is known as
A) centralized cash management.
B) multilateral netting.
C) lagging accounts payables.
D) leading accounts receivables.
Q2) To avoid paying the higher ad valorem tariff to a foreign government,a multinational could set the transfer price for its goods entering the country for sale to an affiliate as ________ as possible.
A) high
B) low
C) neutral
D) proportional
Q3) What is the impact on the firm with if it always invoices their customers in hard currencies?
Q4) What are the determinants of leading payments between related international affiliates?
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Chapter 20: Foreign Currency Futures and Options
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Q1) The difference between the current spot price and the futures price is known as the A) spread.
B) barrier.
C) basis.
D) open interest.
Q2) A major difference between foreign currency futures contracts and forward contracts is that forward contracts are ________.
A) sold by government agencies
B) created by banks
C) created by writers
D) marketed on the over-the-counter market
Q3) When the value of the futures contract margin account falls below the maintenance margin,________.
A) no action is necessary by the investor
B) there is a margin call
C) there is a margin call at which point the account must be brought back up to the maintenance margin amount
D) no money changes hands again until the expiration date
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Chapter 21: Interest Rates and Foreign Currency Swaps
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Q1) A currency swap is equivalent to a
A) currency option, with the exercise price equal to the current spot rate.
B) longdated forward foreign exchange contract, where the forward rate is the current spot rate.
C) interest rate swap, where the basis is the differential between the fixed and floating interest rates.
D) short-term currency futures contract.
Q2) What is the name of the clause in a back-to-back loan that stipulates that if one party defaults on a payment,the other party can withhold corresponding payments?
A) right of offset
B) topping-off
C) all-in-cost
D) with-recourse
Q3) A currency swap is most similar in economic purpose to a A) basis swap.
B) parent company loan.
C) debt equity swap.
D) parallel loan.
Q4) What are some factors that underlie the economic benefits of swaps?
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