Financial Risk Management

Midterm Exam

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21 Chapters
2036 Verified Questions
 Financial Risk Management
Midterm Exam
Cou
Financial Risk Management is a comprehensive course that explores the various types of

risks faced by financial institutions and corporations, including market, credit, liquidity,

and operational risk. The course introduces foundational concepts such as risk

identification, measurement, and management techniques, emphasizing the use of

financial instruments like derivatives, insurance, and diversification to mitigate potential

losses. Students will analyze case studies, learn to assess risk using quantitative models,

and gain familiarity with regulatory frameworks and best practices in risk governance.

This course is designed to equip students with the analytical skills and practical

knowledge essential for managing risk in today’s dynamic financial environment.

Recommended Textbook
International Financial Management 8th Edition by Cheol Eun

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21 Chapters
2036 Verified Questions
2036 Flashcards
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Page 2
 Chapter 1: International Monetary System
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Sample Questions
Q1) A central bank can fix an exchange rate
A)in perpetuity.
B)only for as long as the market believes that it has the political will to do so.
C)only for as long as it has reserves of gold.
D)only for as long as it has independence of monetary policy.
Answer: B

Q2) The Mexican Peso Crisis was touched off by

A)an unsurprising announcement by the Mexican government to devalue the peso
against the dollar by 14 percent.
B)an unexpected announcement by the Mexican government to devalue the peso
against the dollar by 14 percent.
C)an announcement by the Mexican government to enact a currency board
arrangement with the [Link].
D)contagion from other Latin American and Asian financial markets.
Answer: B

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Page 3
 Chapter 2: Globalization and the Multinational Firm
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Sample Questions
Q1) Privatization
A)has spurred a tremendous increase in cross-border investment.
B)has allowed many governments to have the funds to nationalize important industries.
C)has guaranteed that new ownership will be limited to the local citizens.
D)has generally decreased the efficiency of the enterprise.
Answer: A

Q2) The euro

A)is the common currency of Europe.
B)is divisible into 100 cents,just like the [Link].
C)may eventually have a transaction domain larger than the [Link].
D)all of the options
Answer: D

Q3) A country like North Korea

A)likely rejects the notion of increased opportunity presented by free trade.
B)engages in free trade.
C)lies on a production possibilities curve superior to South Korea,since North Korea
protects its international producers.
D)none of the options
Answer: A

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Page 4
 Chapter 3: Balance of Payments
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Sample Questions
Q1) The capital account is divided into three subcategories: direct investment,portfolio
investment,and other investment."Other" investment involves
A)acquisitions of controlling interests in foreign businesses.
B)investments in foreign stocks and bonds that do not involve acquisitions of control.
C)bank deposits,currency investment,trade credit,and the like.
D)all of the options
Answer: C

Q2) If a country must make a net payment to foreigners because of a

balance-of-payments deficit,the country should
A)either increase its official reserve assets or borrow anew from foreigners.
B)either run down its official reserve assets or borrow anew from foreigners.
C)either run down its official reserve assets or lend more foreigners.
D)none of the options
Answer: B

Q3) The United States is considered

A)a net creditor nation.
B)a net debtor nation.
Answer: B

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Page 5
 Chapter 4: Corporate Governance Around the World
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Sample Questions
Q1) Suppose you are the CEO of company A,and you serve on the board of company
B,while the CEO of B is on your board.
A)This is a potential conflict of interest for both parties.
B)This is normal and even a desirable situation since it allows for efficient information
sharing between the firms.
C)There is a potential conflict for the shareholders of the two firms.
D)all of the options

Q2) The Dodd-Frank Act was passed

A)in 1933.
B)in 2010.
C)in 1933 and repealed in 2010.
D)none of the options

Q3) Comparing the [Link] the German and Japanese corporate governance systems,
A)the [Link] is "market centered."
B)the German and Japanese systems are "bank centered."
C)it seems fair to say that no country has a perfect system.
D)all of the options.

Q4) In countries with concentrated ownership,

A)hostile takeovers are quite rare.
B)hostile takeovers are quite common.

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answers,
 Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) The euro-pound cross exchange rate can be computed as:
A)S(€/£)= S($/£)× S(€/$)
B)S(€/£)= \(\frac { S ( \$ / £ ) } { S ( \$ / € ) }\)
C)S(€/£)= \(\frac { S ( € / S ) } { S ( £ / \$ ) }\)
D)all of the options

Q2) It is common practice among currency traders worldwide to both price and trade
currencies against the [Link] a currency dealer who makes a market in 5
currencies against the [Link] he were to supply quotes for each currency in terms of all
of the others,how many quotes would he have to provide?
A)36
B)30
C)60
D)120
E)none of the options

Q3) When a currency trades at a premium in the forward market

A)the exchange rate is more than one dollar .
B)the exchange rate is less than one dollar.
C)the forward rate is less than the spot rate.
D)the forward rate is more than the spot rate.

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Page 7
 Chapter 6: International Parity Relationships and

Forecasting Foreign Exchange Rates

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Sample Questions
Q1) Although IRP tends to hold,it may not hold precisely all the time
A)due to transactions costs,like the bid-ask spread.
B)due to asymmetric information.
C)due to capital controls imposed by governments.
D)due to transactions costs,like the bid-ask spread,as well as capital controls imposed
by governments.

Q2) Generating exchange rate forecasts with the fundamental approach involves
A)looking at charts of the exchange rate and extrapolating the patterns into the future.
B)estimation of a structural model.
C)substituting the estimated values of the independent variables into the estimated
structural model to generate the forecast.
D)estimation of a structural model and substitution of the estimated values of the
independent variables into the estimated structural model to generate the forecast.

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Page 8
 Chapter 7: Futures and Options on Foreign Exchange
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Sample Questions
Q1) Comparing "forward" and "futures" exchange contracts,we can say that
A)they are both "marked-to-market" daily.
B)their major difference is in the way the underlying asset is priced for future purchase or
sale: futures settle daily and forwards settle at maturity.
C)a futures contract is negotiated by open outcry between floor brokers or traders and is
traded on organized exchanges,while forward contract is tailor-made by an
international bank for its clients and is traded OTC.
D)their major difference is in the way the underlying asset is priced for future purchase
or sale: futures settle daily and forwards settle at maturity,and a futures contract is
negotiated by open outcry between floor brokers or traders and is traded on organized
exchanges,while a forward contract is tailor-made by an international bank for its clients
and is traded OTC.

Q2) The volume of OTC currency options trading is

A)much smaller than that of organized-exchange currency option trading.
B)much larger than that of organized-exchange currency option trading.
C)larger,because the exchanges are only repackaging OTC options for their customers.
D)none of the options

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Page 9
 Chapter 8: Management of Transaction Exposure
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Sample Questions
Q1) If a firm faces progressive tax rates,
A)they should spread income out across time and subsidiaries.
B)they should focus on maximizing income in one division or subsidiary.
C)they should manage their income recognition without regard to their taxes.
D)none of the options

Q2) With respect to information asymmetry,

A)management knows about the firm's exposure position much better than
stockholders,and therefore should be the ones to manage exchange exposure.
B)stockholders know about the firm's exposure position much better than
management,and therefore should be the ones to manage exchange exposure.
C)regulators know about the firm's exposure position much better than
management,and therefore should be the ones to oversee exchange exposure.
D)none of the options

Q3) A U.S.-based MNC with exposure to the Swedish krona could best cross-hedge with
A)forward contracts on the euro.
B)forward contracts on the ruble.
C)forward contracts on the pound.
D)forward contracts on the yen.

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Page 10
 Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) Operating exposure can be defined as
A)the link between the future home currency values of the firm's assets and liabilities
and exchange rate fluctuations.
B)the extent to which the firm's operating cash flows would be affected by random
changes in exchange rates.
C)the sensitivity of realized domestic currency values of the firm's contractual cash flows
denominated in foreign currencies to unexpected exchange rate changes.
D)the potential that the firm's consolidated financial statement can be affected by
changes in exchange rates.

Q2) Suppose that you hold a piece of land in the city of London that you may want to sell
in one [Link] a [Link],you are concerned with the dollar value of the [Link]
that if the British economy booms in the future,the land will be worth £2,000,and one
British pound will be worth $[Link] the British economy slows down,on the other hand,the
land will be worth less,say,£1,500,but the pound will be stronger,say,$2.20/£.You feel that
the British economy will experience a boom with a 60 percent probability and a
slowdown with a 40 percent probability.
Estimate your exposure (b)to the exchange risk.

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Page 11
 Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) How many methods of foreign currency translation have been used in recent years?
([Link].)
A)One
B)Two
C)Three
D)Four

Q2) The "functional currency" is defined in FASB 52 as

A)the currency of the primary economic environment in which the entity operates.
B)the currency in which the MNC prepares its consolidated financial statements.
C)a currency that is not the parent firm's home country currency.
D)the currency in which the MNC prepares its consolidated financial statements,as well
as a currency that is not the parent firm's home country currency.

Q3) The authoritative body in the United States that specifies accounting policy for
[Link] firms and certified public accounting firms.
A)The Federal Accounting Standards Board (FASB).
B)The International Accounting Standards Board (IASB).
C)The Financial Accounting Standards Board (FASB).
D)The Securities and Exchange Commission (SEC).

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Page 12
 Chapter 11: International Banking and Money Market
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Sample Questions
Q1) Proceeding the Asian crisis,
A)it may have been implicitly assumed that the governments would come to the rescue
of their private banks should financial problems develop.
B)the history of managed growth in the East Asian region at least suggested that the
economic and financial system,as an integral unit,could be managed in an economic
downturn.
C)it may have been implicitly assumed that the governments would come to the rescue
of their private banks should financial problems develop,and the history of managed
growth in the East Asian region at least suggested that the economic and financial
system,as an integral unit,could be managed in an economic downturn.
D)none of the options

Q2) A subsidiary bank is

A)a locally incorporated bank that is wholly owned by a foreign parent.
B)a locally incorporated bank that is majority owned by a foreign parent.
C)a locally incorporated bank that is partially owned (but not controlled)by a foreign
parent.
D)a locally incorporated bank that is wholly (or majority)owned by a foreign parent.

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Page 13
 Chapter 12: International Bond Market
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Sample Questions
Q1) "Samurai" bonds are
A)dollar-denominated foreign bonds originally sold to [Link].
B)yen-denominated foreign bonds originally sold in Japan.
C)pound sterling-denominated foreign bonds originally sold in the U.K.
D)none of the options

Q2) The shorter length of time in bringing a Eurodollar bond issue to market,coupled with
the lower rate of interest that borrowers pay for Eurodollar bond financing in comparison
to Yankee bond financing,are two major reasons why the Eurobond segment of the
international bond market is roughly ________ the size of the foreign bond segment.
A)four times
B)two times
C)ten times
D)one hundred times

Q3) Global bond issues

A)can save [Link] 20 basis points relative to domestic bonds,all else equal.
B)tend to have increased liquidity relative to Eurobonds or domestic bonds.
C)have been partially facilitated by rule 144A.
D)all of the options

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Page 14
 Chapter 13: International Equity Markets
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Sample Questions
Q1) Generally,the lower the turnover ratio,
A)the less liquid the secondary stock market,indicating difficulty in trading.
B)the more liquid the secondary stock market,indicating difficulty in trading.
C)the more liquid the primary stock market,indicating difficulty in trading.
D)the more efficient the stock market is.

Q2) Which factors fuel the sale of "Yankee" stock offerings?

A)Privatization by many Latin American and Eastern European government-owned
companies.
B)The rapid growth in the economies of the developing world.
C)The expected large demand for new capital by Mexican companies now that NAFTA
has been approved.
D)all of the options

Q3) Investment in foreign equity markets became common practice in the 1980s as
investors became aware of the benefits of
A)international portfolio diversification.
B)debt forgiveness.
C)international portfolio diversification and debt forgiveness.
D)none of the options

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Page 15
 Chapter 14: Interest Rate and Currency Swaps
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Sample Questions
Q1) Consider the situation of firm A and firm [Link] current exchange rate is $2.00/£ Firm
A is a [Link] and wants to borrow £30 million for 2 [Link] B is a British MNC and
wants to borrow $60 million for 2 [Link] borrowing opportunities are as shown,both
firms have AAA credit ratings.
\[\begin{array} { l l l }
& \$ & £ \\
\text { A } & \$ 6 \% & £5 \% \\
B & \$7 \% & £ 4\%
\end{array}\] Explain how this opportunity affects which swap firm A will be willing to
participate in.

Q2) Floating-for-floating currency swaps

A)have different reference rates for the different currencies: [Link] LIBOR versus euro
LIBOR.
B)do not exist.
C)offer the swap bank a built-in hedge.
D)none of the options

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Page 16
 Chapter 15: International Portfolio Investment
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Sample Questions
Q1) A fully diversified [Link] is about
A)75 percent as risky as a typical individual stock.
B)27 percent as risky as a typical individual stock.
C)12 percent as risky as a typical individual stock.
D)half as risky as a fully diversified international portfolio.

Q2) Assume that you have invested $100,000 in Japanese [Link] purchased the
stock's price and the exchange rate were ¥100 and ¥100/$1.00 [Link] selling
time,one year after purchase,they were ¥110 and ¥110/$[Link] dollar rate of return would
be
A)0 percent.
B)4.32 percent.
C)28 percent.
D)−9.09 percent.

Q3) When a country is more remote,with an uncommon language

A)domestic investors tend to invest more in country's market and less abroad.
B)foreign investors tend to invest less in country's market.
C)domestic investors tend to invest more in country's market.
D)domestic investors tend to invest more in country's market and less abroad,and
foreign investors tend to invest less in country's market.

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Page 17
 Chapter 16: Foreign Direct Investment and Cross-Border

Acquisitions
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Sample Questions
Q1) 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 options

Q2) FDI can take the form of

A)Greenfield investment.
B)cross-border M &A.
C)establishing new production facilities in a foreign country.
D)all of the options

Q3) Examples of intangible assets include

A)technological,managerial,and marketing know-how.
B)superior R&D capabilities.
C)brand names.
D)all of the options

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Page 18
 Chapter 17: International Capital Structure and the Cost of

Capital
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Sample Questions
Q1) Solve for the weighted average cost of capital. \(\begin{array}{lcl}
10.60 \%&=&K_{1}&=&\text { cost of equity capital for a leveraged firm }\\
1 / 3&=&\lambda&=&\text { debt-to-total-market-value ratio }\\
8.0 \%&=&i&=&\text { before-tax borrowing cost }\\
40.0 \%&=&\tau&=&\text { marginal corporate income tax rate }
\end{array}\)
A)8.67 percent
B)8.00 percent
C)7.60 percent
D)7.33 percent

Q2) Find the weighted average cost of capital for a firm that has a debt-to-equity ratio
of 2,a tax rate of 40 percent,a levered cost of equity of 12 percent and an after-tax cost of
debt of 9 percent.
A)7.6 percent
B)7.968 percent
C)10 percent
D)none of the options

Q3) In the real world,does the cost of capital differ among countries?
A)Yes
B)No Page 19

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 Chapter 18: International Capital Budgeting
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Sample Questions
Q1) i = r_debt = 10% OCF₀ = −$100,000 K_u =
r_assets = 15% OCF_1-4= $39,800 = 25,000 × ($5 −
$3)× (1 − 0.34)+ $20,000 × 0.34
K_l = r_equity = 24.9% OCF₅ = $43,100 = $39,800 +
$5,000 × (1 − 0.34)K = r_WACC = 11.20% Tax rate = 34% Debt-to-equity ratio =
3 Risk-free rate = 2%
The 5-year project requires equipment that costs $100,[Link] undertaken,the
shareholders will contribute $25,000 cash and borrow $75,000 with an interest-only loan
with a maturity of 5 years and annual interest [Link] equipment will be
depreciated straight-line to zero over the 5-year life of the [Link] will be a pre-tax
salvage value of $5,[Link] are no other start-up costs at year [Link] years 1
through 5,the firm will sell 25,000 units of product at $5; variable costs are $3; there are
no fixed costs.
When using the APV methodology,what is the NPV of the depreciation tax shield?
A)$32,051.52
B)$25,777.35
C)$22,794.65
D)$97,152.98

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Page 20
 Chapter 19: Multinational Cash Management
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Sample Questions
Q1) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here
($000): \[\begin{array} { | l | c | c | c | c | c | }
\hline & { \text { Disbursements } } \\
\hline \text { Receipts } & \text { U.S. } & \text { Canana } & \text { Cermany } & \text {
U.K } & \text { Tatal Receipts } \\
\hline \text { U.S. } & & 10 & 15 & 15 & 40 \\
\hline \text { Caruada } & 10 & & 10 & 10 & 30 \\
\hline \text { Germaryy } & 5 & 5 & & 5 & 15 \\
\hline \text { U.K. } & 20 & 20 & 20 & & 60 \\
\hline \text { Total Disburemerts } & 35 & 35 & 45 & 30 & \\
\hline
\end{array}\] Find the net cash flow in (out of)the Canadian affiliate.
A)$5,000 in
B)$5,000 out
C)$30,000 in
D)$30,000 out

Q2) A netting center necessarily implies that the MNC has a central cash manager.
A)True
B)False

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Page 21
 Chapter 20: International Trade Finance
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Sample Questions
Q1) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 90
[Link] importing bank's acceptance commission is 3½ percent and that the market
rate for 90-day B/As is 5 percent.
Calculate the amount the banker will receive if the exporter discounts the B/A with the
importer's bank.

Q2) Assume the time from acceptance to maturity on a $10,000,000 banker's

acceptance is 90 [Link] assume that the importing bank's acceptance
commission is 1 percent and that the market rate for 90-day B/As is 3.0
[Link] the amount the exporter will receive if he discounts the B/A with the
importer's bank.
A)$9,993,750
B)$9,900,000
C)$9,975,000
D)$9,009,375

Q3) The time from acceptance to maturity on a $1,000,000 banker's acceptance is 60

[Link] importing bank's acceptance commission is 1.00 percent and that the market
rate for 60-day B/As is 5 percent.
Determine the amount the exporter will receive if he holds the B/A until maturity.

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Page 22
 Chapter 21: International Tax Environment and Transfer

Pricing
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Sample Questions
Q1) Active income is income
A)that results from production by the firm or individual (of goods or services).
B)earned by professional athletes.
C)that includes dividend and interest income,since the tax court has ruled that taking
risk is a form of work.
D)none of the options

Q2) A tax haven is

A)a country that has a low corporate income tax rate and low withholding tax rates on
passive income.
B)a country with no taxes and no enforcement of foreign tax laws within its borders.
C)any country with a higher tax rate than available domestically.
D)none of the options

Q3) Fundamentally,there are two types of tax jurisdiction.

A)The worldwide and the territorial
B)The residential and the visiting
C)The passive and the active income
D)The earned and the unearned

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Page 23