Finance Quiz 4 Assignment 2015

    Question 1
    A hedge
    fund is an actively managed investment fund that seeks an attractive absolute
    return, that is, a return whether markets go up or down.

    TRUE

    FALSE

    Question 2
    All else
    being equal, the greater the demand for a currency, the lower its price; the
    lower the demand for a currency, the higher its price.

    TRUE

    FALSE

    Question 3
    All else
    being equal, the greater the supply of a currency, the lower its price; the
    lower the supply of a currency, the higher its price

    TRUE

    FALSE

    Question 4
    An
    oversupply of money in a country eventually leads to a decrease in the value of
    the nation’s currency.

    TRUE

    FALSE

    Question 5
    Assume
    that current spot rate of MXP is MXP13 per USD. Expected inflation rate in
    Mexico for the coming year is 12% and expected US inflation is 2%. What is the
    approximate expected change in the value of USD against Mexican peso?

    10% appreciation

    10% depreciation

    12% appreciation

    2% appreciation

    Question 6
    Assume
    that the inflation rate becomes much higher in the U.K. relative to the U.S.
    This will place upward pressure on the value of the British pound.

    TRUE

    FALSE

    Question 7
    Big Mac
    prices in Mexico and the US are MXP49 and $4.78 respectively. If the current
    exchange rate (i.e. actual exchange rate) is MXP 14.63 per US dollar MXP is
    _________ by ________%.

    0vervalued; 30%

    Undervalued; 30%

    Overvalued; 42.7%

    Undervalued; 42.7%

    Question 8
    Hedge
    funds ______ engage in speculative market bets ______ take extensive derivative
    positions.

    cannot; and cannot

    cannot; but can

    can; and can

    can; but cannot

    None of these is correct

    Question 9
    Hedge
    funds are ______ transparent than mutual funds because of ______ strict SEC
    regulation on hedge funds.

    more; more

    more; less

    less; less

    less; more

    None of these is correct

    Question 10
    Hedge
    funds may invest or engage in

    distressed firms

    convertible bonds

    currency speculation

    merger arbitrage

    All of these are correct

    Question 11
    If
    corporate profits in the US are expected to increase, investors would expect to
    earn higher returns on their investments. This would ______demand for US dollar
    and _____the value of US dollar against other currencies.

    reduce-decrease

    reduce-increase

    increase-decrease

    increase-increase

    Question 12
    If last
    year one dollar equaled one euro, and then the exchange rate shifted so that
    today one dollar equals two euros, which of the following would most likely NOT
    occur?

    European firms would pay more
    for raw materials imported from the United States.

    European consumers would
    purchase fewer U.S. products and services.

    Fewer Europeans would travel to
    the U.S. or study at U.S. universities.

    European firms would lower
    their prices on goods made with U.S. parts.

    Question 13
    In a
    currency board regime, country’s central bank commits to back its money supply
    entirely with foreign reserves at all times.

    TRUE

    FALSE

    Question 14
    In a currency peg regime, a
    country fixes its exchange rate against a major currencyl like US dollar or
    Euro. This arrangement is expected to remove currency risk from trade and
    investment flows. If the exchange rate is fixed at an undervalued rate as China
    did 1990, this arrangement boosts exports of the country and attract
    substantial investment. However, currency pegs are difficult to maintain.
    Chinese experience?is
    an isolated example of a successful currency peg.

    TRUE

    FALSE

    Question 15
    In a
    currency peg regime, central bank of the currency frequently intervenes to
    maintain the peg. A case in point is Chinese peg against US dollar. During the
    period China pegged its currency against US dollars, it had to intervene in the
    currency markets and buy excess dollars to prevent appreciation of Yuan.

    TRUE

    FALSE

    Question 16
    In a
    merger arbitrage, a hedge fund

    Buys securities of the acquirer
    firm

    Buys securities of the target
    firm

    Short sells the securities of
    the target firm

    Short sells the securities of
    the acquirer firm

    Buys the securities of the
    target firm and sells the securities of the acquirer firm

    Question 17
    In an
    equity market neutral hedge fund strategy the manager identifies a group of
    securities based on the fundamental value, growth rate, and price patterns,
    then buys securities whose value is expected to increase and short sell
    securities whose value is expected to decline. The investments in long and
    short positons are usually similar and the net exposure to market is very low.
    Since the portfolio’s net exposure to market is very low, portfolio performance
    is insulated from market volatility.

    TRUE

    FALSE

    Question 18
    In most
    high-inflation nations, increase in domestic prices reduces demand for these
    countries’ goods and therefore reduces demand for their currency. This leads to
    depreciation of the high inflation countries’ currencies.

    TRUE

    FALSE

    Question 19
    It is argued that the rise of
    Private Equity funds create value by operational, financial and Corporate
    governance engineering. Corporate governance engineering refers to
    _________________.

    Changing
    debt-equity ratio of the firm

    Improving
    operational efficiency of the firm

    Changing
    managerial incentives, compensation and board oversight

    Laying
    off excess workforce to cut costs

    Divesting
    poorly performing assets

    Question 20
    Like
    mutual funds, hedge funds

    allow private investors to pool
    assets to be managed by a fund manager.

    are commonly open to ordinary
    investors

    are subject to extensive SEC
    regulations.

    allow small investment accounts

    are limited in what type of
    risk they can take

    Question 21
    The United States currently
    uses a ________ exchange rate regime.

    crawling
    peg

    pegged

    floating

    fixed

    Question 22
    The
    monetary authority in each country that regulates the money supply, issues
    currency, and manages the exchange rate of the nation’s currency relative to
    other currencies is called the Central Bank.

    TRUE

    FALSE

    Question 23
    Which of
    the following is a characteristic of the fixed exchange rate system?

    utilized by most advanced
    economies

    rates based on supply and
    demand forces

    value of currency is fixed
    relative to the value of another

    allows for monetary policy
    flexibility

    Question 24
    Which one
    of the following is NOT accurate about Macro funds?

    Macro funds aim to profit from
    changes in global economic dynamics

    They build their strategies to
    take advantage of shifts in govt. policy that impact interest rates, in turn
    affecting currency, stock, and bond markets

    They extensively use
    derivatives to amplify the gains from the market moves

    They hedge their positions, but
    largest performance impact is from the leveraged directional investments

    Because they hedge their
    positions, macro fund portfolios’ volatility are usually low.

    Question 25
    Which one
    of the following is a not one of the top Private Equity Firms?

    Black Stone Group

    Carlyle Group

    Kohlberg, Kravis, Roberts (KKR)

    Bain Capital

    Fidelity Investments

    Question 26
    Which one
    of the following is not accurate about Hedge Funds?

    Hedge Funds are relatively new
    institutions that emerged after the massive wave of deregulation in financial
    markets in 1980s and 1990s.

    Hedge fund assets under
    management have increased sharply from 2000 to 2007 and declined
    substantially after the financial crisis.

    Hedge Fund assets under
    management started to recover its decline by 2010.

    Including the considerable
    leverage that hedge funds employ to boost returns, the industry’s gross
    investment assets are estimated to be around $12 trillion.

    Pension Funds have doubled
    their hedge fund investments from 2006 to 2011.

    Question 27
    Which one
    of the following is not accurate about Hedge Funds?

    takes both long and short
    positions

    uses arbitrage

    buys and sells undervalued
    securities

    trades options on commodities,
    stocks and bonds

    invest in only high risk-high
    return opportunities

    Question 28
    Which one
    of the following is not accurate about Private Equity Funds?

    In 1980s Private Equity was
    referred to as Leveraged Buy Outs or LBOs; but after LBOs got a bad name, the
    term “private equity” was adopted by these funds.

    It is estimated that are now
    somewhere around 2,700 funds that can mobilize half a trillion dollars for
    investments. With leverage this represents an enormous amount of investment
    and purchasing power.

    20 years ago, there were
    probably only four private equity firms that had $1 billion funds under
    management. Today there are more than 150 firms of that size.

    Today, Private Equity Funds
    have reputation as corporate philanthropists and good corporate citizens;
    communities strive to attract Private Equity funds to revitalize their
    economies. Their impact on job creation and positive economic impact is
    widely commended.

    Question 29
    Which one
    of the following is not accurate about Private Equity funds/firms?

    Private equity firms provide
    capital to private or publicly-traded businesses as an alternative to raising
    funds through the public equity or debt markets.

    Private equity firms often have
    an industry focus,

    Private Equity funds specialize
    in investment in various types of companies from early stage to mature firms.

    Private equity firms usually
    acquire companies through “Leveraged Buy Out” which requires substantial
    amount of equity investment by the Private Equity Fund

    Question 30
    Which one
    of the following is not accurate for a distressed investment strategy?

    It is an investment strategy
    exploited by the Hedge Funds because majority of institutional investors are
    not allowed to invest in below investment grade securities.

    Hedge Funds use their expertise
    in analysis of the true value of distressed securities and profit from the
    market’s lack of understanding of the true value of the deeply discounted
    securities

    The Hedge funds lose money if
    the distressed companies cannot successfully reorganize and return to
    profitability.

    Hedge funds profit from
    distressed investments if the securities acquired in distressed firms are
    senior debt and they are acquired at prices less than its liquidation value.

    Hedge funds may also profit by
    taking short positions in companies whose situations are expected to worsen,
    rather than improve, in the short term.

    Question 31
    Which one
    of the following is/are among the key participants in FX markets?

    Dealer banks,

    Hedge Funds

    Multinational Corporations

    Central banks

    All of the above

    Question 32
    You
    received CHF1,500,000 from your customer in Switzerland in exchange for your
    shipment of a machinery. When you called your bank to exchange CHF into USD,
    your bank quoted you the following rates: Bid Rate: $1.2010 per CHF and Offer
    Rate: $1.2020 per CHF. How much USD you will receive in exchange for your CHF?

    $1,801,500

    $1,803,000

    $1,248,959

    $1,247,920

    Question 33
    ______ are
    the dominant form of investing in securities markets for most individuals but
    ______ have enjoyed a far greater growth rate in the last decade.

    Hedge funds; hedge funds

    Mutual funds; hedge funds

    Hedge funds; mutual funds

    Mutual funds; mutual funds

    None of these is correct.

    Question 34
    You are an importer and
    required to make a payment of EUR 10,000,000 in two days. You called the
    banks around and you received the following quotes from the banks. Which one of
    the following quotes will be best for you?(all the quotes below express bid and
    offer rates in USDs per EURO).

    EUR/USD 1.0200-1.0250

    EUR/USD 1.0210-1.0240

    EUR/USD 1.0230-1.0260

    EUR/USD
    1.0220-1.0300

    Question 35
    25.A U.S. company buys from a
    supplier whose currency’s value is increasing against the dollar. Which of the
    following will the company most likely have to do if the US company is billed
    in the supplier’s currency and terms of the sales contract cannot be changed?

    pay less in dollars than
    originally expected

    pay more in dollars than
    originally expected

    pay the same amount of
    dollars as originally expected

    pay part of the
    transaction in the supplier’s currency

    Question 36
    In class we have discussed
    causes and implications of changes in the value of US dollar. Briefly explain
    the reasons behind the appreciation of US dollar in the last six months and
    also discuss its implications. As much as possible make references to specific
    class discussions about this issue. Your answer should be substantive, clear
    and to the point.

    Question 37
    We discussed Chinese exchange
    rate regime in several class sessions. Explain the each of the following
    briefly:

    A. Why China decided to use a
    currency peg against US dollar in 1990s?

    B. Why China has allowed Yuan
    to appreciate or practically decided to change its exchange rate regime?

    C. Why China has almost
    accumulated $4tr worth of reserves?

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