International Economics
Mock Exam
Course Introduction
International Economics examines the flow of goods, services, and capital across national borders, analyzing the economic relationships and policy issues that arise in a globalized world. The course covers key theories of international trade and finance, the effects of trade policies and regulations, balance of payments, exchange rate determination, and the role of international organizations. By exploring real-world case studies and current events, students gain an understanding of how international economic forces impact countries, businesses, and individuals, and learn to critically assess the challenges and opportunities presented by economic globalization.
Recommended Textbook
International Finance Global 6th Edition by von Cheol Eun
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Page 2
Chapter 1: Globalization and the Multinational Firm
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Q1) The World Trade Organization,WTO,
A)has the power to enforce the rules of international trade.
B)covers agriculture and physical goods, but not services or intellectual property rights.
C)recently expelled China for human rights violations.
D)ruled that NAFTA is to be the model for world trade integration.
Answer: A
Q2) In which product does Northern Ireland have a comparative advantage?
A)Beer
B)Whiskey
C)Neither Answer: B
Q3) Which state has an absolute advantage in producing beer in Case II?
A)South Dakota
B)North Dakota
C)Neither state Answer: A
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Page 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) The main cost of European monetary union is
A)the loss of national monetary and exchange rate policy independence.
B)increased exchange rate uncertainty.
C)lessened political integration.
D)none of the above
Answer: A
Q3) During the 1990s there
A)were three major currency crises.
B)were two major currency crises.
C)was only one currency crisis.
D)were no major currency crises
Answer: A
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Chapter 3: Balance of Payments
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Q1) The capital account may be divided into three categories:
A)cross-border mergers and acquisitions, portfolio investment, and other investment.
B)direct investment, portfolio investment, and Cross-border mergers and acquisitions.
C)direct investment, mergers and acquisitions, and other investment.
D)direct investment, portfolio investment, and other investment.
Answer: D
Q2) The current account is divided into four finer categories:
A)merchandise trade, services, factor income, and statistical discrepancy.
B)merchandise trade, services, factor income, and unilateral transfers.
C)merchandise trade, services, portfolio investment, and unilateral transfers.
D)merchandise trade, services, factor income, and direct investment.
Answer: B
Q3) Over half of all dollar bills in circulation are held outside American's borders. A)True
B)False
Answer: True
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5
Chapter 4: Corporate Governance Around the World
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Q1) The major components of the Sarbanes-Oxley Act are:
A)accounting regulation-The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients.
B)audit committee-The company should appoint independent "financial experts" to its audit committee.
C)internal control assessment-Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention.
D)executive responsibility-Chief executive and finance officers (CEO and CFO) must sign off on the company's quarterly and annual financial statements.If fraud causes an overstatement of earnings, these officers must return any bonuses.
E)all of the above
Q2) The strongest protection for investors is provided by
A)English common law countries, such as Canada, the United States, and the U.K.
B)French civil law countries, such as Belgium, Italy, and Mexico.
C)a weak board of directors.
D)socialized firms.
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Page 6
Chapter 5: The Market for Foreign Exchange
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Q1) Suppose a bank customer with 1,000,000 wishes to trade out of euro and into Japanese yen.The dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.How many yen will the customer get?
A)¥192,000,000
B)¥5,208,333
C)¥75,000,000
D)¥5,208.33
Q2) Find the no-arbitrage cross exchange rate.The dollar-euro exchange rate is quoted as $1.60 = 1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120.
A)¥192/ 1.00
B) 1.92/¥100
C) 1.25/¥1.00
D) 1.00/¥1.92
Q3) Spot foreign exchange trading
A)accounts for about 5 percent of all foreign exchange trading.
B)accounts for about 20 percent of all foreign exchange trading.
C)accounts for about 33 percent of all foreign exchange trading.
D)accounts for about 70 percent of all foreign exchange trading.
Q4) Using the table,what is the Canadian dollar-euro spot 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 BID exchange rate in $ per that satisfies IRP from the perspective of a customer.
Q2) Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/ and the one-year forward exchange rate,is $1.16/ .Assume that an arbitrageur can borrow up to $1,000,000.
A)This is an example where interest rate parity holds.
B)This is an example of an arbitrage opportunity; interest rate parity does NOT hold.
C)This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D)None of the above
Q3) Generally unfavorable evidence on PPP suggests that
A)substantial barriers to international commodity arbitrage exist.
B)tariffs and quotas imposed on international trade can explain at least some of the evidence.
C)shipping costs can make it difficult to directly compare commodity prices.
D)all of the above
Q4) 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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Q1) Today's settlement price on a Chicago Mercantile Exchange (CME)Yen futures contract is $0.8011/¥100.Your margin account currently has a balance of $2,000.The next three days' settlement prices are $0.8057/¥100,$0.7996/¥100,and $0.7985/¥100.(The contractual size of one CME Yen contract is ¥12,500,000).If you have a short position in one futures contract,the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be
A)$1,425.
B)$2,000.
C)$2,325.
D)$3,425.
Q2) Using your results from parts a)and b)find the value of this put option (in ). Your answer is worth zero points if it does not include currency symbols ( )!
Q3) Use your results from the last three questions to verify your earlier result for the value of the call.
Q4) If you think that the dollar is going to appreciate against the euro,you should
A)buy put options on the euro.
B)sell call options on the euro.
C)buy call options on the euro.
D)none of the above
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Chapter 8: Management of Transaction Exposure
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Q1) A call option to buy £10,000 at a strike price of $1.80 = £1.00 is equivalent to A)a put option to sell $18,000 at a strike price of $1.80 = £1.00.
B)a call option on $18,000 at a strike price of $1.80 = £1.00.
C)a put option on £10,000 at a strike price of $1.80 = £1.00.
D)none of the above
Q2) On a recent sale,Boeing allowed British Airways to pay either $18 million or £10 million.
A)At the due date, British airways will be indifferent between paying dollars or pounds since they would of course have hedged their exposure either way.
B)Boeing has provided British Airways with a free option to buy $18 million with an exercise price of £10 million.
C)Boeing has provided British Airways with a free option to sell up to £10 million with an exercise price of $18 million.
D)All of the above
Q3) If you own a foreign currency denominated bond,you can hedge with
A)a long position in a currency forward contract.
B)a long position in an exchange-traded futures option.
C)buying the foreign currency today and investing it in the foreign county.
D)a swap contract where pay the cash flows of the bond in exchange for dollars.
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Chapter 9: Management of Economic Exposure
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Q1) Economic exposure refers to
A)the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
B)the extent to which the value of the firm would be affected by unanticipated changes in exchange rate.
C)the potential that the firm's consolidated financial statement can be affected by changes in exchange rates.
D)ex post and ex ante currency exposures.
Q2) A firm with a highly elastic demand for its products
A)will be unable to pass increased costs following unfavorable changes in the exchange rate without significantly lowering the quantity sold.
B)will be able to raise prices following unfavorable changes in the exchange rate without significantly lowering the quantity sold.
C)can easily pass increased costs on to consumers.
D)will sell about the same amount of product regardless of price.
Q3) Estimate your exposure (b)to the exchange risk.
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Chapter 10: Management of Translation Exposure
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Q1) XYZ Corporation,a U.S.parent firm,has a wholly owned sales affiliate,ABC Ltd.,in the United Kingdom.The affiliate was established to service to the local market. Assume that:
1)the functional currency of ABC is the pound
2)the reporting currency is the dollar
3)the initial exchange rate $1.00 = £ 0.67
ABC's nonconsolidated balance sheets and the footnotes to the financial statements indicate that ABC owes the parent firm £200,000.Assume that,XYZ had made an investment of $500,000 in the affiliate.Under FASB 52,the intercompany debt and investment will appear on the consolidated balance sheet as A)£200,000.
B)$201,493.
C)$298,507.
D)none of the above
Q2) The International Accounting Standards Committee
A)is now known as The International Accounting Standards Board.
B)is charged with accounting standards at the International House of Pancakes.
C)includes many convicted felons among its members.
D)all of the above
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Page 12
Chapter 11: International Banking and Money Market
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Q1) Eurocredits
A)are credit cards that work in the euro zone.
B)are short- to medium-term loans of Eurocurrency extended by Eurobanks to corporations, sovereign governments, nonprime banks, or international organizations.
C)are short- to medium-term loans of euro currency extended by Eurobanks to corporations, sovereign governments, nonprime banks, or international organizations.
D)none of the above
Q2) LIBOR
A)is the London Interbank Offered Rate.
B)is the reference rate in London for Eurodollar deposits.
C)one of several reference rates in London: there is a LIBOR for Eurodollars, Euroyen, Euro-Canadian dollars, and even euro.
D)all of the above
Q3) Banking tends to be
A)a low marginal cost industry.
B)a high marginal cost industry.
C)a constant average cost industry.
D)none of the above
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Chapter 12: International Bond Market
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Q1) With regard to dual-currency bonds versus comparable straight fixed-rate bonds,
A)dual currency bonds usually trade at a premium to reflect the value of the forward contract implicit in their repayment schedule.
B)the interest on dual-currency bonds is usually lower than on comparable straight fixed-rate debt.
C)the interest on dual-currency bonds is usually higher than on comparable straight fixed-rate debt.
D)none of the above
Q2) Consider a British pound-U.S.dollar dual currency bonds that pay £581.40 at maturity per $1,000 of par value.If at maturity,the exchange rate is $1.90 = £1.00,
A)you should insist on getting paid in dollars.
B)investors holding this bond are better off for the exchange rate.
C)the issuer of the bond is worse off for the exchange rate.
D)both b and c
Q3) The secondary market for Eurobonds
A)is an over-the-counter market.
B)is an organized exchange.
C)has never developed-there is only a primary market for Eurobonds.
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Page 14
Chapter 13: International Equity Markets
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Q1) Unlike day orders,a good-til-cancelled (GTC)order is an order to buy or sell a security at a specific or limit price that lasts until the order is completed or cancelled.Which of the following are true?
A)A GTC order will not be executed until the limit price has been reached, regardless of how many days or weeks it might take.
B)Investors often use GTC orders to set a limit price that is far away from the current market price.
C)Some brokerage firms may limit the time a GTC order can remain in effect and may charge more for executing this type of order.
D)All of the above are true
Q2) Which type of trading system is desirable for actively traded issues?
A)Continuous trading systems
B)Call trading systems
C)Crowd trading systems
D)None of the above
Q3) 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) Come up with a swap (exchange of interest and principal)for parties A and B who have the following borrowing opportunities. \[\begin{array} { | l | c c | }
\hline & \epsilon & \$ \\ \hline \mathrm { A } & 5 \% & \$ \mathrm { LIBOR } \% \\ \mathrm {~B} & 6 \% & \$ \mathrm { LIBOR } + 1 / 2 \% \\ \hline \end{array}\] The current exchange rate is $1.60 = 1.00.Company "A" is in Milan,Italy and wishes to borrow $1,000,000 at a floating rate for 5 years and company "B" is a U.S.firm that wants to borrow 625,000 for 5 years at a fixed rate of interest.You are a swap dealer.Quote A and B a swap that makes money for all parties and eliminates exchange rate risk for both A and B.
Q2) When a swap bank serves as a dealer:
A)The swap bank stands willing to accept either side of a swap.
B)The swap bank matches counterparties but does not assume any risk of the swap.
C)The swap bank receives a commission for matching buyers and sellers.
D)None of the above
Q3) FOR YOUR SWAP (the one you have shown above)how would the swap bank quote the swap against prime? (Hint: they are quoting a bid-ask spread against "flat" prime.)
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Chapter 15: International Portfolio Investment
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Q1) The record of investing in U.S.-based international mutual funds
A)shows that most funds have a beta much less than one.
B)shows them to be a raging arbitrage opportunity.
C)shows that they offer less diversification benefits than just investing in U.S.-based MNCs.
D)none of the above
Q2) Compared with bond markets
A)the risk of investing in foreign stock markets is, to a lesser degree, attributable to exchange rate uncertainty.
B)the risk of investing in foreign stock markets is, to a much greater degree, attributable to exchange rate uncertainty.
C)exchange risk is lower than default risk and interest rate risk.
D)all of the above
Q3) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a $50 American stock.One year after investment,the stock pays a $1 dividend,and sells for $54 the exchange rate has changed from .625 per dollar to .6875 per dollar,although he sold $16,000 forward at the forward rate of .65 per dollar.
Q4) Find the Global Minimum Variance Portfolio.
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Page 17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Q1) Which of the following is the most disingenuous argument in favor of FDI?
A)Shareholder diversification
B)The internalization theory of FDI
C)The promise of synergistic gains
D)Vertical integration
Q2) An example of forward vertical FDI
A)U.S.car makers built their own network of dealerships in Japan to help sell their cars.
B)U.S.car makers began to source parts in Japan to lower the cost of their cars.
C)U.S.car makers entered into joint partnerships with car makers in Japan to help sell their cars.
D)None of the above
Q3) Countries may welcome Greenfield investments,
A)as they are viewed as representing new investment and employment opportunities.
B)as they are viewed as substitutes for foreign firms' bids to acquire domestic firms.
C)but they are also often resisted and sometimes even resented by the local firms.
D)none of the above
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Chapter 17: International Capital Structure and the Cost of Capital
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Q1) In the real world,does the cost of capital differ among countries?
A)Yes
B)No
C)None of the above
Q2) The required return on equity for an all-equity firm is 10.0%.They are considering a change in capital structure to a debt-to-equity ratio of ½ the tax rate is 40%,the pre-tax cost of debt is 8%.Find the new cost of capital if this firm changes capital structure.
A)14.93%
B)8.67%
C)7.40%
D)None of the above
Q3) Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1½,a tax rate of 34%,a levered cost of equity of 12% and a pre-tax cost of debt of 10%.
A)9.6%
B)7.968%
C)8.76%
D)none of the above
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Page 19
Chapter 18: International Capital Budgeting
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Q1) What is the levered after-tax incremental cash flow for year 0?
A)-$1,010,000
B)-$1,000,000
C)-$660,000
D)-$2,100,000
E)None of the above
Q2) The firm's tax rate is 34%.The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 3; the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.Calculate the weighted average cost of capital.
A)33.33%
B)8.09%
C)9.02%
D)16.5%
E)None of the above
Q3) The "incremental" cash flows of a capital project is calculated by using:
A)(i), (ii), and (iii)
B)(ii), (iv), and (vi)
C)(i), (iii), (v), and (vii)
D)(iv), (v), (vi), and (vii)
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Page 20
Chapter 19: Multinational Cash Management
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Q1) The formula for the standard deviation of cash held by the centralized depository for N affiliates is \(\sqrt { ( \text { Std. Dev. Affiliate } 1 ) ^ { 2 } + ( \text { Std. Dev. Affiliate } 2 ) ^ { 2 } + \cdots + ( \text { Std. Dev. Affiliate } N ) ^ { 2 } }\)
A)The formula assumes that interaffiliate cash flows have a correlation coefficient of -1.
B)The formula assumes that interaffiliate cash flows have a correlation coefficient of +1.
C)The formula assumes that interaffiliate cash flows have a correlation coefficient of 0.
D)None of the above
Q2) Using your results to the last question,use bilateral netting.
Q3) Find the net cash flow in (out of)the U.S.affiliate.
A)$5,000 in
B)$5,000 out
C)$30,000 in
D)$30,000 out
E)None of the above
Q4) Fill out the following figure with the initial situation shown in the table.
Q5) Using your results to the last question,use multilateral netting to simplify.
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21
Chapter 20: International Trade Finance
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Q1) If the exporter's opportunity cost of capital is 11 percent,should he discount the B/A or hold it to maturity?
Q2) Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q3) Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
Q4) In a forfaiting transaction,the forfait
A)buys the notes at a discount from face value from the importer.
B)buys the notes at a discount from face value from the exporter.
C)redeems the notes at a face value to the exporter.
D)none of the above
Q5) Determine the amount the exporter will receive if he holds the B/A until maturity.
Q6) A typical foreign trade transaction requires three basic documents
A)letter of credit, bill of lading, and shipping documents.
B)time draft, banker's acceptance, and bill of lading.
C)letter of credit, time draft, and bill of lading.
D)letter of credit, banker's acceptance, and bill of lading.
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Page 22
Chapter 21: International Tax Environment and Transfer
Pricing
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Q1) The two main objectives of taxation are
A)tax neutrality and tax equity.
B)complexity and revenue.
C)social engineering and tax equity.
D)progressive taxation and tax neutrality.
Q2) Assume that a product has the following three stages of production: \[\begin{array}{l}
\text { Production Selling }\\
\begin{array} { c c }
\text { Stage } & \text { Price } \\
\hline 1 & 1000 \\ 2 & 2500 \\ 3 & 2,600
\end{array}
\end{array}\] If the value-added tax (VAT)rate is 15%,what would be the VAT over all stages of production?
A) 390
B) 120
C) 465
D) 225
Page 23
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