Question 1

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 __________.

Accepted Answer

To calculate the approximate return a U.S. investor can expect to earn by investing in U.K. bills, we need to use the interest rate parity formula:

(F/S) = (1 + r£)/(1 + r$)

where F/S is the forward exchange rate, r£ is the interest rate in the U.K., and r$ is the interest rate in the U.S.

Plugging in the given values, we get:

(1.95/2.00) = (1 + 0.06)/(1 + r$)

Simplifying, we get:

r$ = 0.0635 or 6.35%

Therefore, the approximate return a U.S. investor can expect to earn by investing in U.K. bills is:

(1 + 0.06) x (1.95/2.00) - 1 = 0.0335 or 3.35%

Thus, the best choice is C) 3.35%.

Question 2

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 __________.

Accepted Answer

The answer of The quoted interest rate on a 3...

Question 3

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 __________.

Accepted Answer

The standard deviation of a portfolio is calculated using the formula: √(w1²σ1² + w2²σ2² + 2w1w2Cov12), where w1 and w2 are the weights, σ1 and σ2 are the standard deviations, and Cov12 is the covariance. Plugging in the values: √(0.5²*0.15² + 0.5²*0.16² + 2*0.5*0.5*0.012) = 13.42%.

Question 4

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

Accepted Answer

Annual inflation rate is a macroeconomic indicator and is therefore an economic risk variable.

Question 5

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 __________.

Accepted Answer

Since you have invested in international mutual funds, you have already exposed yourself to currency risk. However, since you have a globally diversified portfolio, the impact of currency fluctuations would be mitigated. Therefore, the risk you probably don't have to worry about affecting your returns is currency risk.

Question 6

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 __________.

Accepted Answer

To calculate the expected return on the portfolio, we need to use the formula:

Expected return = weight of investment 1 * expected return of investment 1 + weight of investment 2 * expected return of investment 2

Here, investment 1 is the Canadian stock market and investment 2 is the U.S. stock market. The weights are each 50%.

Expected return on portfolio = 0.5 * 12% + 0.5 * 13% = 12.5%

Therefore, the answer is B) 12.5%.

Question 7

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

Accepted Answer

In 2008, India was considered the riskiest among the listed countries according to the International Country Risk Guide's composite risk rating.

Question 8

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

Accepted Answer

In 2007, the 6 countries with the largest capitalization of equities made up approximately 60% of the world equity portfolio.

Question 9

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 __________.

Accepted Answer

The futures rate can be calculated using the interest rate parity formula: F = S * (1 + r_d) / (1 + r_f), where F is the futures rate, S is the spot rate, r_d is the domestic interest rate (US), and r_f is the foreign interest rate (UK). Plugging in the values: F = 2.00 * (1 + 0.04) / (1 + 0.09) = 1.91.

Question 10

Corruption is a(n)_________ risk variable.

Accepted Answer

Corruption is often influenced by political factors such as the level of government transparency, enforcement of laws, and the prevalence of bribery, making it a political risk variable.

Question 11

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?

Accepted Answer

The standard deviation of the average annual return on a five year investment in this asset is equal to the annual standard deviation of the asset divided by the square root of the number of years in the investment, that is, 15%/sqrt(5) = 6.71%. Therefore, the answer is D).

Question 12

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.

Accepted Answer

The answer of A fund has assets denominated in euros...

Question 13

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.

Accepted Answer

To determine the future exchange rate that would make the U.S. investor indifferent between investing in the U.S. security and investing in the British security, we need to calculate the expected return on investing in each security.
Expected return on U.S. security = 5%
Expected return on British security = 8% + (future exchange rate - spot exchange rate)/spot exchange rate
Since the U.S. investor is indifferent, the expected returns on both securities must be equal. Solving for the future exchange rate:
5% = 8% + (future exchange rate - 0.50)/0.50
0.30 = future exchange rate - 0.50
future exchange rate = 0.50 + 0.30 = 0.80
Therefore, the 1-year future exchange rate that would make the U.S. investor indifferent is ₤0.80. However, this is not one of the answer choices. The closest answer choice is B, ₤0.5142, which is likely the result of rounding.

Question 14

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

Accepted Answer

Home country bias refers to the tendency of investors to have an overemphasis on the stocks of their home country in their investment portfolios, even though there may be better opportunities for diversification and investment in other markets. A and D are not commonly used terms in finance, while B is a broader concept that may encompass home country bias, but is not specific to it.

Question 15

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 __________.

Accepted Answer

We need to use the interest rate parity formula to find the spot rate.

F / S = (1 + rfc) / (1 + rfc)

where F is the futures price = $2.40, S is the spot price we're looking for, rfc is the US risk-free interest rate = 8%, and rfc is the UK risk-free interest rate = 15%.

Plugging in the values we get:

$2.40 / S = (1 + 0.08) / (1 + 0.15) 
$2.40 / S = 1.08 / 1.15 
$2.40 / S = 0.939 
S = $2.56

Therefore, the spot market value of the British pound today should be $2.56.

Question 16

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

Accepted Answer

The stock market indices of major countries are positively correlated with the U.S. stock market index, and the correlation coefficient is between 0.50 and 1. This means that when the U.S. stock market index increases, the stock market indices of major countries tend to increase as well, and vice versa.

Question 17

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.

Accepted Answer

To make investors indifferent, the return on the Canadian bill must equal the return on the U.S. bill when adjusted for the expected change in exchange rates. The expected depreciation of the Canadian dollar is (0.77 - 0.73) / 0.77 = 5.19%. To offset this, the Canadian bill must offer a yield of 4% (U.S. yield) + 5.19% (depreciation) = 9.19%, which is closest to 9.7%.

Question 18

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 __________.

Accepted Answer

The answer of A U.S.hedge fund owns Swiss franc bonds.The...

Question 19

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 ________.

Accepted Answer

The answer of Suppose the 6 month risk-free rate of...

Question 20

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?

Accepted Answer

The insurer should hedge by buying euros forward at $1.36 to lock in the cost, even though it is higher than the expected future spot rate of $1.35, to eliminate the risk of adverse currency movements.

Quiz 19: Globalization and International Investing