Also visit www.mhhe.

com/er5e for practice problems for each individual chapter Exam III Questions: 1. They key factors that are important in a firm’s decision to invest overseas are: a. Trade barriers, imperfect labor market, and intangible assets b. Vertical integration, product life cycle, and shareholder diversification services c. Profit maximization and global prestige d. Both a) and b) 2. International markets for goods and services are often imperfect. Which is the MOST common and MOST important? a. Acts of governments b. Natural barriers like distance c. Cultural barriers d. Lack of knowledge 3. Such products as mineral ore and cement that are heavy or bulky relative to their economic values: a. May be suitable for exporting because high transportation costs will be overcome by high profit margins in oligopolistic industries b. Have high “value-to-weight ratios” that protect profit margins c. May not be suitable for exporting because high transportation costs will substantially reduce profit margins d. None of the above 4. Severe imperfections in the labor market arise from immobility of workers due to immigration barriers. As a response, firms should consider: a. Moving to the workers b. Moving to countries where labor services are the lowest in absolute terms c. Moving to countries where labor services are underpriced relative to productivity d. Hiring illegal immigrants 5. In the U.S., the Overseas Private Investment Corporation (OPIC) offers insurance against which of the following: i. An increase in the cost of borrowing due to a rise in interest rates ii. Increase in inflation rates iii. Dumping iv. Unfair competition by local companies v. Inconvertibility of foreign currencies vi. Expropriation vii. Destruction of properties due to war, revolution, and other violent political events in foreign countries viii. Loss of business income due to political violence b. (i), (ii), and (iv) c. (v), (vi), (vii) and (viii) d. both b and c e. none of the above 6. Which of the following statements is true about product life cycle theory for a U.S. MNC? a. In the early stages of the product life cycle, the demand for the new product is relatively insensitive to the price and thus a pioneering firm can charge a relatively high price b. It predicts that over time the U.S. switches from an importing country of new products ot an exporting country c. It has a “j” shaped curve when plotting “quantity sold” versus “time” d. All of the above 7. Considering the fact that many barriers to international portfolio investments have been dismantled in recent years: a. Capital market imperfections as a motivating factor for FDI are likely to become more important forward b. Capital market imperfections as a motivating factor for FDI are likely to become less relevant c. Labor market imperfections as a motivating factor for FDI are likely to become less relevant d. None of the above 8. If cross-border acquisitions generate synergistic gains: a. Then both the acquiring and target shareholders may gain wealth at the same time b. Then one can argue that cross-border acquisitions are mutually beneficial and thus should not be thwarted both from a national and a global perspective c. Then the value of the combined firm is greater than the stand-alone valuations of the individual (acquiring and target) firms. d. All of the above 9. Examples of transfer risk include:

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The unexpected imposition of capital controls, inbound or outbound, and withholding taxes on dividends and interest payments. b. Unexpected changed in environmental policies sourcing local requirements and restriction on access to local credit facilities. c. Restrictions imposed on maximum ownershio shares by foreigners, mandatory transfer of ownership to local firms over a certain period of time (fade-out) requirements), and ……of local operations of MNCs. d. None of the above Country risk includes political risk and a. Intangible Asset Risk b. Credit Risk c. Imperfect Labor Market Risk d. None of the above Asks you to find the WACC using certain variables (note: it will give you the after-tax cost of debt and the tax rate, however, you do not include the tax rate in your calculations since it already gives you the after-tax cost of debt) a. It also gives you the debt to equity ratio of 1.5  this means that wd = (1.5/2.5) and We = (1/2.5) Corporations are becoming multinational not only in the scope of their business activities but also in their capital structure: a. By raising funds from domestic as well as government sources b. By raising funds from foreign as well as domestic sources c. This trend reflects not only a conscious effort on the part of the firms to increase the cost of capital by international sourcing of funds but also the ongoing liberalization and deregulation of financial markets that make them accessible for many firms d. Both b) and c) Asks you to find the WACC using certain variables (note: it will give you the after-tax cost of debt and the tax rate, however, you do not include the tax rate in your calculations since it already gives you the after-tax cost of debt) Systematic risk refers to: a. The non-diversifiable (market) risk of an asset A MNC has to determine their subsidiaries capital structure. Approaches to this problem do not include: a. Conform to parent company’s norm b. Match fund taking into account risk and reward c. Conform to local country norm where the subsidiary resides d. Choose a structure that reduces taxes The common stock of Kansas City Power and Light has a beta of 0.80. The Treasury bill rate is 4% and the market risk premium is 8%. KCP&L is in the 34% tax bracket. What is their cost of equity capital? a. 12.0% b. 10.4% c. 7.20% d. 6.40% e. 8.22% As of today the spot exchange rate is euro1.00 = $1.25 and the rates of inflation expected to prevail for the next three years in the U.S. is 2% and 3% in the euro zone. What spot exchange rate should prevail three years from now? a. Euro 1 .00 = $1.238 b. Euro 1.00 = $1.214 c. Euro 1.00 = $0.990 d. $1 = Euro 1.262 The firm’s tax rate is 34%. The firm’s prêt-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%. What is the firm’s cost of equity capital? a. 33.38% b. 10.85% c. 13.12% d. 16.5% The adjusted present value method is useful for analyzing foreign capital expenditures because: a. It incorporates multiple discount rates b. It’s cash flows are in foreign currency and must be translated to the currency of the parent c. Both A & B d. Neither A or B

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20. Capital Budgeting from the subsidiary’s perspective could be misleading (have lower value from the parent company perspective) due to: a. Lower marginal tax rate in the home country b. Higher marginal tax rate in the home country c. The absence of blocked funds from sub to parent d. B &C 21. Real options in capital budgeting analysis do not include: a. The timing option b. The growth option c. The multi-discount option d. The abandonment option 22. Tax neutrality is determined by three criteria: which of the following doesn’t belong? a. Capital-export neutrality b. Capital import neutrality c. National neutrality d. Income neutrality 23. The idea that an ideal tax should be effective in raising revenue for the government but not have any negative effects on the economic decision-making process of the taxpayer is referred to as: a. Capital-export neutrality b. Capital-import neutrality c. National neutrality d. None of the above 24. The idea that the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same regardless of the country in which the MNC is incorporate and the same as that placed on domestic firms is referred to as: a. Capital-export neutrality b. Capital-import neutrality c. National neutrality d. None of the above 25. Tax equity means that: a. Similarly situated taxpayers should participate in the cost of operating the government according to the same rules b. Regardless of the country in which an affiliate of a MNC earns taxable income, the same tax rate and tax due date apply c. A dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by a domestic affiliate of the MNC d. All of the above are true 26. The organizational form of a MNC can affect the timing of a tax liability. This means a. The principle of tax equity might be violated b. As long as regardless of the country in which an affiliate of a MNC earns taxable income, the same tax rates apply, then the tax due date doesn’t matter. c. Tax timing will even out over a reported cycle, so there is no big deal here. d. None of the above 27. Which of the following statements is false? a. Active income is defined as income that results from production by the firm or individual or from services that have been provided b. Passive income…. c. A withholding tax… d. The current marginal US income tax rate is positioned towards the lower end of the rates assessed by the majority of other countries. 28. The purpose of a withholding tax: a. Is to assure the local tax authority that it will receive the tax due on the active income earned within its tax jurisdiction b. Is to assure the local tax authority that it will receive the tax due on the passive income earned within its tax jurisdiction c. Is to assure the local tax authority that it will receive the tax due on all the income earned within its tax jurisdiction d. None of the above 29. Production Stages: Stage 1 – selling price = 600 euros. Stage 2 – selling price = 1400 euros. Stage 3 – selling price = 1700 euros. If the value-added (VAT) rate is 15%, what is the incremental VAT at stage 2 of the production ?

a. Euros 75 b. Euros 120 c. Euros 210 d. Euros 255 30. A Foreign branch is: a. An extension of the parent and is not an independently incorporated firm separated from the parent b. An affiliate organization of the MNC that is independently incorporated in the foreign country, and one in which the U.S. MNC owns at least 10% of the voting equity stock c. Either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled foreign corporation d. Both B and C 31. The lower the transfer price: a. The higher the net profit reported by the MNC b. The lower the gross profit of the transferring division relative to the receiving division c. The lower the gross profit of the receiving division relative to the transferring division d. None of the above Exam I Questions: 1. An example of political risk is: a. Expropriation of assets b. Adverse change in tax rules c. The opposition party being elected d. Both answers A and B 2. Recently, financial markets have become highly integrated. This development: a. Allows investors to diversify their portfolios internationally b. Allows minority investors to buy and sell stocks c. Has increase the cost of capital for firms d. Answers A and C are both correct 3. Suppose that Great Britain is a major export market for your firm, a U.S. based MNC. If the British pound depreciates against the U.S. dollar, a. Your firm will be able to charge more in dollar terms while keeping pound prices stable b. Your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise c. To protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same. d. Both B and C are correct 4. Suppose Mexico is a major export market for your U.S. based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means: a. Your company’s products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso’s fall b. Your firm will be able to charge more in dollar terms while keeping peso prices stable c. Your domestic competitors will enjoy a period of facing little price competition from Mexican Imports d. Both B and C are correct 5. The current exchange rate is euro 1.00 = $1.50. Compute the correct balances in Bank A’s correspondent account(s) with Bank B, if a currency trader employed at Bank A buys euros 100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B. a. Bank A’s dollar-denominated account at B will fall by $150,000 b. Bank B’s dollar-denominated account at A will fall by $150,000 c. Bank A’s euro-deonominated account at B will fall 100,000 euros d. Bank B’s euro-donominated account at A will rise by 100,000 euros 6. Know the order of the different ages for the evolution of the International Monetary System: a. Bimetallism (1875) b. Classical Gold Standard (1875-1914) c. Interwar Period (1915-1944) d. Bretton Woods System (1945-1972) e. Flexible Exchange Rate Regime (1973-Present) 7. Under the Bretton Woods System, each country was responsible for maintaining its exchange rate within + or – 1 percent of the adopted par value by: a. Buying or selling foreign exchange as necessary b. Buying or selling gold as necessary c. None of the above 8. Corporate governance structure: a. Varies a great deal across countries

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b. Is the same in every country c. None of the above In countries with concentrated ownership… a. The conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders b. The central issue of corporate governance is: a. How to protect outside investors from the controlling insiders b. The European Monetary System (EMS) has the following chief objectives: a. To establish a zone of monetary stability in Europe b. To coordinate exchange rate policies vis-à-vis the non-EMS currencies c. To pave the way for the eventual European Monetary Union d. All of the Above The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$. The forward premium (discount) is: a. The dollar is trading at an 8% premium to the Swiss Franc delivery in 180 days b. The dollar is trading at a 4% premium to the Swiss Franc delivery in 180 days c. The dollar is trading at an 8% discount to the Swiss Franc delivery in 180 days d. The dollar is trading at a 4% discount to the Swiss Franc delivery in 180 days Computational problem over arbitrage. US treasury with $1,000,000 to invest. The $/euro exchange rate is $1.60= 1.00 euro. The $/pound exchange rate is quoted at $2.00= 1.00 pound. The cross-rate is 1.00 pound= 1.20 euro. a. Answer = $41,667 The separation of the company’s ownership and control: a. Is especially prevalent in such countries as the U.S. and U.K., where corporate ownership is highly diffused b. Most shareholders are weak in that they give up control to the managers of the firm: a. This may be rational since many shareholders find it easier to sell their shares in an underperforming firm than to monitor the management b. This may be rational when shareholder may be neither qualified nor interested in making business decisions c. This may be rational to the extent that managers are answerable to the board of directors d. All of the above are explanations for the separation of ownership and control English Common low countries tend to provide a stronger protection of shareholder rights than French Civil law countries because: a. The former countries tend to protect properties rights better than the latter b. Another computational question on correspondent banking. 1.00 pound = $2.00. Bank A buys 45,000 pounds from B for $90,000 Suppose a bank customer with 1,000,0000 Euros wishes to trade out of euro and into Japanese Yen. The dollar-euro exchange rate is quoted at $1.60 = 1.00 euros and the dollar-yen exchange rate is quoted at $1.00 = 120 Yen. How many yen will the customer get? a. 192,000,000 Yen b. 5,208,333 Yen c. 75,000,000 Yen d. 5,208.33 Yen Suppose you observe the following exchange rates: 1 euro = $.85, 1 pound = $1.60, and 2 euros = 1 pound. Starting with $1,000,000, how can you make money? a. Exchange $1,000,000 for 625,000 pounds (at 1 pound = $1.60). Buy 1,250,000 euros (at 2 euros = 1 pound). Trade for $1,062,500 (at 1 euro = $.85) b. Start with dollars, exchange for euros at 1 euro = .85; exchange for pounds at 2 euros = 1 pound; exchange for dollars at 1 pound = $1.60 c. Start with euros, exchange for pounds, exchange for dollars, exchange for euros d. No arbitrage profit is possible Another arbitrage computational question  answer ends up being no arbitrage is possible The forward market: a. Involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today b. Involves contracting today for the future purchase or sale of foreign exchange at the spot rate that will prevail at the maturity of contract. c. Involves the contracting today for the right but not obligation to the future purchase or sale of foreign exchange at a price agreed upon today

d. None of the above 22. Suppose that the one year interest rate is 5.00 % in the U.S., the spot exchange rate is $1.20/euro, and the one year forward exchange rate is $1.16/euro. What must the interest rate in the euro zone be? a. 5.0% b. 6.09% c. 8.62% d. None of the above 23. The spot exchange rate is $1.50/euro and the 90-day forward premium is 10%. Find the 90-day forward price. a. $1.625/ euro b. $1.5375/euro c. $1.4234/euro d. None of the above 24. Arbitrage computational question. 25. Suppose the one-year interest rate is 5% in the U.S. and 3.5% in Germany, and the one-year forward exchange rate is $1.16/euro. What must the spot exchange be? a. $1.1768/euro b. $1.1434/euro c. $1.12/euro d. None of the above 26. Purchasing Power Parity Theory states that: a. The exchange rates between currencies of two countries should be equal to the ratio of the countries’ price levels. b. As the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies c. The prices of standard commodity baskets in two countries are not related d. Both A and B 27. Suppose that the annual interest rate is 5% in the U.S. and 3.5% in Germany and that the spot exchange rate is $1.12/euro and the forward exchange rate, with one-year maturity, is $1.16/euro. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? a. $10,690 b. $15,000 c. $46,207 d. $21,964 28. If IRP fails to hold: a. Pressure from arbitrageurs should bring exchange rates and interest rates back into line b. It may fail to hold due to transaction costs c. It may be due to government-imposed capital grounds d. All of the above 29. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros at a cost of 512,100 euros. The U.S. importer will contact the U.S. bank (where of course he has an account denominated in U.S. dollar) and inquire about the exchange rate, which the bank quotes as 1.0242euros/$1.00. The importer accepts the price, so his bank will __________ the importer’s account in the amount of _____________. a. Reduce. $500,000 b. Increase. 512,000 euros c. Increase. $500,000 d. Reduce. 512,000 euros 30. The Singapore dollar – U.S. dollar spot exchange rate is S1.60/$1.00, the Canadian Dollar—U.S. dollar spot rate is CD1.33/$1.00, and the S1.15/CD. Determine the triangular arbitrage profit that is possible if you have $1,000,000. a. $44,063 profit b. $46,093 loss c. No profit is possible d. $46,093 Exam II Questions: 1. If you owe a foreign currency denominated debt, you can hedge with: a. A long position in a currency forward contract b. A short position in a currency forward contract c. Buying the foreign currency today and investing it in the foreign country d. Both A and C

2. The sensitivity of “realized” domestic currency values of the firm’s contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is: a. Transaction exposure b. Translation exposure c. Economic exposure d. None of the above 3. With any successful hedge: a. You are guaranteed to lose money on one side of the transaction b. You can avoid the accounting ramifications of a loss on one side by keeping it off the books c. Both A and B d. None of the above 4. Suppose that Boeing Corporation exported a Boeing 747 to Luffianse and billed 10 million euros payable in one year. The money market interest rates and foreign exchange rates are given as follows: U.S. interest rate = 6.10% per annum, euro zone one-year interest rate = 9.00%, spot exchange rate = $1.50/euro, and the oneyear forward exchange rate is $1.46/euro. Assume that Boeing Sells a currency forward contract of 10 million euros for delivery in one year, in exchange for a predetermined dollar amount of U.S. dollar. Which of the following is true? On the maturity date of the contract Boeing will: a. Have to deliver 10 million euros to the bank (the counterparty of the forward contract) b. Make a delivery of $14.6 million c. Have a zero net euro exposure d. Have a profit or loss depending on the future change in exchange rate, from the German sale. e. A, B, and C are true 5. Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rat is $1.85 = 1.00 pounds and the one-year forward rate is $1.90 = 1.00 pound. The lead time on the order is such that payment is due in one year. What is the correct exchange rate to use? a. $1.85 = 1 pound b. $1.8750 = 1 pound c. $1.90 = 1 pound d. none of the above 6. XYZ Corporation, located in the United States, has an account payable obligation of 750 million Yen payable in one year to a bank in Tokyo. Which of the following is NOT part of a money market hedge? a. Buy the 750 million Yen at the forward exchange rate b. Find the present value of 750 million yen at the Japanese interest rate c. Buy the present value of the 750 million yen at the spot exchange rate d. Invest in risk-free Japanese securities with the same maturity as the account payable obligations 7. When cross-hedging, the best thing you can do is: a. Try to find one asset that has a positive correlation with another asset b. The main thing is to find one asset that covaries with another asset in some predictable way c. Try to find one asset that has a negative correlation with another asset d. None of the above 8. An exporter can share exchange rate risk with their customer by: a. Invoicing in their customer’s local currency b. Splitting the difference, and invoicing half of sales in local currency and half of sales in home currency c. Invoicing sales in the exporters local currency d. Both B and C 9. An exporter faced with exposure to a depreciating currency (customer’s currency is depreciating) can reduce transaction exposure with a strategy of: a. Paying or collecting early b. Paying or collecting late c. Paying late, collecting early d. Paying early, collecting late 10. Find the net exposure with the following intra affiliate transactions shown: a. $45 b. $55 c. $65 d. None of the above 11. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The change in exchange rate: a. Can have significant economic consequences for U.S. firms b. Can have significant economic consequences for Japanese firms c. Can have significant economic consequences for both U.S. and Japanese firms d. None of the above

12. The Options Market Hedge: a. Limits the downsize risk while preserving the upside potential b. Can be less expensive than the straight forward market hedge if the forward portion of the option is exercised c. Eliminates exchange exposure d. Both A and C 13. Computational problem asking to find the exposure (i.e. the regression coefficient beta) a. 25,000 b. 2500 c. -2500 d. None of the above 14. Question about operational vs. financial hedging a. Operational hedging provides a more stable LT approach than does financial hedging b. Financial hedging, when instituted on a rollover basis, is a superior LT approach to operational hedging c. Since they both have the same goal, stabilizing the firm’s cash flows in domestic currency in the long run, they are equally effective d. None of the above 15. Consider a US-based MNC with a wholly-owned Italian subsidiary. Following a depreciation of the dollar against the euro, which of the following describes the competitive effect of the depreciation? a. The cash flow in euro could be altered due an alteration in the firm’s competitive position in the marketplace b. A given operating cash flow in euro will be translated to a higher US dollar cash flow. c. Answers a) and b) d. None of the above 16. Which of the following is false? a. The competitive effect is that a depreciation may affect operating cash flow in the foreign currency by altering the firm’s competitive position in the marketplace. b. The conversion effect is defined as a given operating cash flow in a foreign currency will be converted into a dollar amount after a currency depreciation c. The competitive effect is defined as a given operating cash flow in a foreign currency will be converted into a dollar amount after a currency depreciation d. None of the above 17. Generally speaking, a firm is subject to high degrees of operating exposure: a. When the costs are sensitive to exchange rate changes b. When the prices are sensitive to exchange rate changes c. When either its cost or its price is sensitive to exchange rate changes d. None of the above 18. When the domestic currency is strong or expected to become strong: a. This could erode the competitive position of the firm’s exports b. This could erode the competitive position of the firm’s import competition c. The firm should consider locating production facilities in a foreign country, where costs are low d. Both A and C 19. A “Eurobond” issue is: a. One denominated in a particular currency but sold to investors in international capital markets other than the country that issued the denominating currency b. Usually a bearer bond c. For example, a Dutch borrower issuing dollar-denominated bonds to investors in the U.K., Switzerland, and the Netherlands d. All of the above 20. Investors will generally accept a lower yield on ______ than on _____ of comparable terms, making them a less costly source of funds for the issuer’s to service. a. Bearer bonds, registered bonds b. Registered bonds, bearer bonds c. Domestic bonds, Eurobonds 21. A “global” bond issue: a. Is a very large international bond offering by several borrowers pooled together b. Is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets c. Has higher yields for the purchasers d. Has a lower liquidity 22. The vast majority of new international bond offerings: a. Are straight fixed-rate notes b. Are callable and convertible

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c. Are convertible adjustable rate d. Are adjustable rate, with interest rate caps and collars Six-month U.S. dollar LIBOR (at an annual rate) is currently 4.875%. Your firm issued floating rate notes indexed to six month U.S. dollar LIBOR plus ½ of 1%. What is the amount of the next semi-annual coupon payment per U.S. $1,000 of face value? a. $43.75 b. $48.75 c. $26.875 d. $46.87 Standard & Poor’s has for years provided credit ratings for international bonds: a. The ratings reflect the safety of principal for a U.S. investor b. Their ratings reflect the creditworthiness of the borrower and not exchange rate uncertainty c. Their ratings reflect creditworthiness of the lender and reflect the exchange rate expected to prevail at maturity d. The ratings are biased since 40% of Eurobond issues are rated AAA and 30% are AA The credit rating of an international borrower: a. Depends on the volatility of the exchange rate b. Depends on the volatility but not absolute level, of the exchange rate c. Is usually never higher than the rating assigned to the sovereign government of the country in which it resides d. Is unrelated to the rating assigned to the sovereign government of the country in which it resides A measure of liquidity for a stock market is the turnover ratio, defined as: a. The ratio of stock market transactions over a period of time divided by the size, or market capitalization, of the stock market b. The ratio of the size, or market capitalization of the stock market divided by the value of the stock market transactions over a period of time c. The ratio of the aggregate company sales over a period of time divided by the size, or market capitalization, of the stock market d. None of the above Benetton, an Italian clothier, is listed on the NYSE: 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 Following monetary union and the advent of the euro: a. The countries of the European Union have enacted common securities regulations b. A pan-European stock exchange has developed in London, similar to the NYSE in scope and trading practices c. Development of a common securities regulations, even among the countries of the European Union, has not yet occurred d. None of the above American Depository Receipt (ADR) represents foreign stocks: a. Denominated in U.S. dollar that trade on European stock exchanges b. Denominated in U.S. dollars that trade on a U.S. stock exchange c. Denominated in a foreign currency that trade on a U.S. stock exchange d. Non-registered (bearer) securities In the Frankfurt market, Aldi stock closed at 5 euros per share. On the same day, the euro U.S. dollar spot exchange rate was .625 euros/$1.00. Aldi trades as an ADR in the OTC market in the United States. Five underlying Aldi shares are packaged into one ADR. The no-arbitrage U.S. price of one ADR is: a. $25.00 b. $15.625 c. $40 d. None of the above Calculate the dollar-based percentage return an American would have if he bought a British stock at 50 pounds per share and sold it one year later at 60 pounds. The spot exchange rate one year ago was $1.50 = 1 pound and the spot rate prevailing at the end of the year was $1.20 = 1 pound. a. 36% gain b. 20% gain c. 4% loss d. None of the above

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