Chap 019

Chapter 19 - Globalization and International Investing
Chapter 19
Globalization and International Investing
Multiple Choice Questions
1. In 2007, U.S. securities represented ______ of the world market for equities.
A. less than 25%
B. more than 2/3
C. between 30% and 40%
D. a consistent 50%
2. _____ has the largest number of listed corporations among developed markets.
A. The United States
B. Japan
C. The United Kingdom
D. Switzerland
3. Total capitalization of corporate equity in the U.S. at the beginning of 2009 was about
_______ trillion.
A. $10
B. $20
C. $30
D. $40
4. If you limit your investment opportunity set to only the largest six countries in the world in
terms of equity capitalization as a percentage of total global equity capital you will include
about _______ of the world's equity.
A. 35%
B. 45%
C. 55%
D. 65%
19-1
5. Limiting your investments to the top six countries in the world in terms of market
capitalization may make sense for a/an _________ investor but probably does not make sense
for a/an ________ investor.
A. active; passive
B. passive; active
C. security selection expert; market timer
D. fundamental; technical
6. WEBS are ____________________.

A. investments in country specific portfolios
B. traded exactly like mutual funds
C. identical to ADRs
D. designed to give investors foreign currency exposure to multiple countries
7. Which one of the following allows you to purchase stock of a specific foreign company?
A. WEBS
B. MSCI
C. ADR
D. EAFE
8. Generally speaking, countries with ______ capitalization of equities have ________.

A. larger; higher GDP
B. smaller; wealthier
C. larger; smaller GDP
D. larger; higher growth countries
9. 25 countries with largest equity capitalization made up about _____ of the word GDP in
2007.
A. 22%
B. 44%
C. 75%
D. 85%
19-2
10. According to a regression of market cap on GDP virtually all countries without major oil
revenues that restrict private sector growth and/or suffer from major political strife wind up
with _______ per capita GDP than/as predicted by the regression.
A. higher
B. lower
C. equal
D. sometimes lower and sometimes higher
11. Among the factors explaining the return on a stock, _______ factors are generally most
important while _______ factors are generally least important.
A. domestic; industrial
B. domestic; currency
C. world; industrial
D. currency; domestic
12. EAFE stands for _______.

A. Equity And Foreign Exchange
B. European, Australian, Far East
C. European, Asian, Foreign Exchange
D. European, American, Far East
13. Which one of the following country risks refers to the possibility of expropriation of
assets, changes in tax policy and the possibility of restrictions on foreign exchange
transactions?
A. Default risk
B. Foreign exchange risk
C. Market risk
D. Political risk
14. The __________ index is a widely used index of non-U.S. stocks.

A. CBOE
B. Dow Jones
C. EAFE
D. Lehman Index
19-3
15. Suppose that U.S. equity markets represent about 35% of total global equity markets and
that the typical U.S. investor has about 95% of their portfolio invested only in U.S. equities.
This is an example of _________.
A. home country bias
B. excessive diversification
C. active management
D. passive management
16. Four largest economies in the world in 2007 were ____________.

A. U.S., India, China, and Japan
B. U.S., China, Canada, and Japan
C. U.S., Japan, Germany, and China
D. China, UK, Canada, and U.S.
17. The proper formula for interest rate parity is given by ___________.
A. (1 + rf(for))/(1 + rf(US)) = F1/E0
B. (1 + rf(US))/(1 + rf(for)) = E0/F1
C. (1 + rf(US))/(1 + rf(for)) = F0/E0
D. (1 + rf(for))/(1 + rf(for)) = F0/E1
18. Research indicates that that exchange risk of the major currencies has been _________
over time.
A. relatively stable
B. increasing rapidly
C. declining slightly
D. declining rapidly
19. It appears from empirical work that exchange rate risk is ____________.
A. declining for individual investments in recent years
B. mostly diversifiable
C. mostly systematic risk
D. unimportant for an investment in a single foreign country
19-4
20. Passive investors with well-diversified international portfolios _________.

A. can safely ignore all political risk in emerging markets
B. can expect very large diversification gains from their international investing
C. do not need to be concerned with hedging exposure to foreign currencies
D. can expect returns to be better than the EAFE on a consistent basis
21. 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?
A. 75.00%
B. 33.54%
C. 15.00%
D. 6.71%
22. The correlation coefficient between the U.S. stock market index and stock market indices
of major countries is __________.
A. between -1 and -0.50
B. between -0.50 and 0.00
C. between 0.00 and 0.50
D. between 0.50 and 1
23. In 2007, the ___ countries with the largest capitalization of equities made up
approximately 60% of the world equity portfolio.
A. 2
B. 4
C. 6
D. 12
24. Investor portfolios are notoriously over weighted in home country stocks. This is
commonly called ________.
A. local fat
B. nativism
C. home country bias
D. misleading representation
19-5
25. Corruption is a(n) _________ risk variable.

A. firm specific
B. political
C. financial
D. economic
26. 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 __________.
A. sell the Swiss franc bonds now
B. sell the Swiss franc forward
C. probably do nothing because the franc move will offset the lower bond price
D. enter into an interest rate swap to pay variable and receive fixed
27. Annual inflation rate is a(n) _______ risk variable.

A. firm specific
B. political
C. financial
D. economic
28. 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?
A. The insurer need not hedge because the expected exchange rate move will be favorable.
B. The insurer should hedge by buying euro forward even though this will cost more than the
expected cost of not hedging.
C. The insurer should hedge by selling euro forward because this will cost less than the
D. The insurer should hedge by buying euro forward even though this will cost less than the
19-6
29. 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.
A. ¥88.97
B. ¥145.34
C. ¥154.67
D. ¥164.56
30. 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
__________.
A. business cycle risk
B. beta risk
C. inflation risk
D. currency risk
31. According to the International Country Risk Guide in 2008, which of the following
countries was the riskiest according to the current composite risk rating?
A. Japan
B. United States
C. China
D. India
32. 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 ________.
A. 5.06%
B. 6.74%
C. 8.48%
D. 10.13%
19-7
33. 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 __________.
A. 5.00%
B. 7.25%
C. 20.00%
D. 22.43%
34. 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.
A. ₤0.5150
B. ₤0.5142
C. ₤0.5123
D. ₤0.4859
35. 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 __________.
A. $1.83
B. $1.91
C. $2.08
D. $2.18
36. 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 __________.
A. $1.93
B. $2.22
C. $2.56
D. $2.76
19-8
37. 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.
A. 9.7%
B. 2.9%
C. 2.8%
D. 2.0%
38. 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 __________.
A. -3%
B. 3%
C. 3.35%
D. 8.72%
39. 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
__________.
A. 12.0%
B. 12.5%
C. 14.0%
D. 15.5%
19-9
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 __________.
A. 10.96%
B. 12.25%
C. 13.42%
D. 15.50%
41. Inclusion of international equities in a U.S. investor's portfolio has historically produced
___________________.
A. a substantially reduced portfolio variance
B. a slightly reduced portfolio variance
C. a substantially poorer portfolio variance
D. a slightly poorer portfolio variance
42. WEBS are _____________.

A. mutual funds marketed internationally on the Internet
B. synthetic domestic stock indices
C. equity indices that replicate the price and yield performance of foreign stock portfolios
D. single stock investments in a foreign security
43. You are a U.S. investor who purchased British securities for 3,500 pounds one year ago
when the British pound cost $1.35. No dividends were paid on the British securities in the
past year. Your total return based in U.S. dollars was __________ if the value of the securities
is now 4,200 pounds and the pound is worth $1.15.
A. -3.8%
B. 2.2%
C. 5.6%
D. 15%
19-10
44. Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese
interest rates won't move and you believe that interest rate parity will hold then
____________.
A. the yen per dollar exchange rate should rise
B. the dollar per yen exchange rate should rise
C. the exchange rate should stay the same if parity holds
D. one can't predict the exchange rate change from the information given
Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share.
The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
45. How many shares can the investor purchase?

A. 140
B. 100
C. 71.43
D. none of the above
46. After one year, the exchange rate is unchanged and the share price is ₤55. What is the
dollar-denominated return?
A. 14%
B. 10%
C. 9.3%
D. 7.1%
pound-denominated return?
A. 14%
B. 10%
C. 9.3%
D. 7.1%
19-11
48. After one year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-
denominated return?
A. 25.7%
B. 16%
C. 14.3%
D. 9.3%
49. After one year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your
dollar-denominated return is due to the currency change?
A. 10.00%
B. 6.43%
C. 4.34%
D. 2.12%
50. You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example
of a/an ________ quote. You also find that the euro is worth $1.33. This second quote is an
example of a/an _______ quote.
A. direct; indirect
B. indirect; direct
C. foreign; U.S.
D. U.S.; foreign
51. Among emerging countries the largest equity market in 2007 was located in
_____________.
A. China
B. India
C. Brazil
D. Russia
19-12
52. In the PRS country composite risk ratings a score of ______ represents the least risky and
a score of _____ represents the most risky.
A. 0; 100
B. 0; 50
C. 50; 0
D. 100; 0
53. Which emerging country has the highest percentage growth in market capitalization?
A. Brazil
B. China
C. Taiwan
D. Turkey
54. The dollar per euro spot rate is 1.2 when an importer of French wines places an order. 6
months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original
invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?
A. $3,000 gain
B. $3,000 loss
C. $6,000 loss
D. no gain or loss
55. An importer of televisions from Japan has a contract to purchase a shipment of televisions
for 2,000,000 yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What
is the importer's gain or loss?
A. $529 gain
B. $529 loss
C. $619 gain
D. $619 loss
19-13
56. A country has a PRS political risk rating of 75, a financial score of 40 and an economic
score of 35. The country's composite rating is _________.
A. 75
B. 50
C. 40
D. 35
57. The risk free rate in the US is 2.5% and the risk free rate in Europe is 3.2%. If the spot
rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?
A. 1.30
B. 1.31
C. 1.32
D. 1.33
58. The risk free rate in the US is 4.0% and the risk free rate in Japan is 1.2%. If the spot rate
of yen to dollars is 105, what is the likely yen per dollar forward rate?
A. 101
B. 102
C. 105
D. 108
59. The yen per dollar spot rate is 104. The yen per dollar forward rate is 107. If the US risk
free rate is 2.4%, what is the likely yen risk free rate?
A. 1.24%
B. 2.35%
C. 3.98%
D. 5.35%
19-14
60. In the PRS financial risk ratings the U.S. rates poorly because of the U.S. experiences
________.
I. large budget deficit
II. large trade deficit
III. large amount of total debt
A. I only
B. I and II only
C. I and III only
D. I, II and III
61. The major participants who directly purchase securities in the capital markets of other
countries are predominantly ____________.
A. large institutional investors
B. individual investors
C. government agencies
D. central banks
62. Of the following, which is the most commonly used international index?
A. DJIA
B. EAFE
C. Russell 2000
D. S&P500
63. WEBS differ from mutual funds in that __________.

I. Shares of WEBS can be shorted
II. WEBS shares trade continuously on the AMEX
III. WEBS are passively managed
A. II only
B. II and III only
C. I and III only
D. I, II and III
19-15
64. The variation in betas of emerging markets suggests that ____________.

A. emerging markets are more uniform than developed markets
B. beta does not hold in international markets
C. international diversification may reduce portfolio risk
D. riskier emerging markets have uniformly lower betas
65. One year U.S. interest rates are 5% and European interest rates are 7%. The spot euro
direct exchange rate quote is 1.32 and the one year forward rate direct quote is 1.35. If you
have $1 million dollars or € 1 million to start with what would be your dollar profits from an
interest arbitrage based on this data?
A. $94,322
B. $55,345
C. $44,318
D. $33,595
A. $60,384
B. $42,973
C. $68,422
D. $78,500
All exchange rates are expressed as units of foreign currency that can be purchased with one
U.S. dollar. Answer the following questions about decomposing the manager's performance.
19-16
67. What is the difference in return of the manager's portfolio due to currency selection?
A. -5%
B. -3%
C. 2%
D. 1%
68. What is the difference in return of the manager's portfolio due to country selection?
A. -0.60%
B. -0.75%
C. 0.12%
D. 0.22%
69. What is the difference in return of the manager's portfolio due to stock selection?
A. 1.15%
B. 3.25%
C. 5.45%
D. 6.13%
70. Which stock market has the largest weight in the EAFE index?
A. Japan
B. Germany
C. UK
D. Australia
19-17
Chapter 19 Globalization and International Investing Answer Key
Multiple Choice Questions
1. In 2007, U.S. securities represented ______ of the world market for equities.
A. less than 25%
B. more than 2/3
C. between 30% and 40%
D. a consistent 50%
Difficulty: Medium
2. _____ has the largest number of listed corporations among developed markets.
A. The United States
B. Japan
C. The United Kingdom
D. Switzerland
Difficulty: Easy
3. Total capitalization of corporate equity in the U.S. at the beginning of 2009 was about
_______ trillion.
A. $10
B. $20
C. $30
D. $40
Difficulty: Medium
19-18
4. If you limit your investment opportunity set to only the largest six countries in the world in
terms of equity capitalization as a percentage of total global equity capital you will include
about _______ of the world's equity.
A. 35%
B. 45%
C. 55%
D. 65%
Difficulty: Medium
5. Limiting your investments to the top six countries in the world in terms of market
capitalization may make sense for a/an _________ investor but probably does not make sense
for a/an ________ investor.
A. active; passive
B. passive; active
C. security selection expert; market timer
D. fundamental; technical
Difficulty: Medium
6. WEBS are ____________________.

A. investments in country specific portfolios
B. traded exactly like mutual funds
C. identical to ADRs
D. designed to give investors foreign currency exposure to multiple countries
Difficulty: Medium
7. Which one of the following allows you to purchase stock of a specific foreign company?
A. WEBS
B. MSCI
C. ADR
D. EAFE
Difficulty: Medium
19-19
8. Generally speaking, countries with ______ capitalization of equities have ________.

A. larger; higher GDP
B. smaller; wealthier
C. larger; smaller GDP
D. larger; higher growth countries
Difficulty: Easy
9. 25 countries with largest equity capitalization made up about _____ of the word GDP in
2007.
A. 22%
B. 44%
C. 75%
D. 85%
Difficulty: Medium
10. According to a regression of market cap on GDP virtually all countries without major oil
revenues that restrict private sector growth and/or suffer from major political strife wind up
with _______ per capita GDP than/as predicted by the regression.
A. higher
B. lower
C. equal
D. sometimes lower and sometimes higher
Difficulty: Medium
11. Among the factors explaining the return on a stock, _______ factors are generally most
important while _______ factors are generally least important.
A. domestic; industrial
B. domestic; currency
C. world; industrial
D. currency; domestic
Difficulty: Hard
19-20
12. EAFE stands for _______.

A. Equity And Foreign Exchange
B. European, Australian, Far East
C. European, Asian, Foreign Exchange
D. European, American, Far East
Difficulty: Easy
13. Which one of the following country risks refers to the possibility of expropriation of
assets, changes in tax policy and the possibility of restrictions on foreign exchange
transactions?
A. Default risk
B. Foreign exchange risk
C. Market risk
D. Political risk
Difficulty: Medium
14. The __________ index is a widely used index of non-U.S. stocks.

A. CBOE
B. Dow Jones
C. EAFE
D. Lehman Index
Difficulty: Easy
15. Suppose that U.S. equity markets represent about 35% of total global equity markets and
that the typical U.S. investor has about 95% of their portfolio invested only in U.S. equities.
This is an example of _________.
A. home country bias
B. excessive diversification
C. active management
D. passive management
Difficulty: Easy
19-21
16. Four largest economies in the world in 2007 were ____________.

A. U.S., India, China, and Japan
B. U.S., China, Canada, and Japan
C. U.S., Japan, Germany, and China
D. China, UK, Canada, and U.S.
Difficulty: Medium
17. The proper formula for interest rate parity is given by ___________.
A. (1 + rf(for))/(1 + rf(US)) = F1/E0
B. (1 + rf(US))/(1 + rf(for)) = E0/F1
C. (1 + rf(US))/(1 + rf(for)) = F0/E0
D. (1 + rf(for))/(1 + rf(for)) = F0/E1
Difficulty: Medium
18. Research indicates that that exchange risk of the major currencies has been _________
over time.
A. relatively stable
B. increasing rapidly
C. declining slightly
D. declining rapidly
Difficulty: Medium
19. It appears from empirical work that exchange rate risk is ____________.
A. declining for individual investments in recent years
B. mostly diversifiable
C. mostly systematic risk
D. unimportant for an investment in a single foreign country
Difficulty: Medium
19-22
20. Passive investors with well-diversified international portfolios _________.

A. can safely ignore all political risk in emerging markets
B. can expect very large diversification gains from their international investing
C. do not need to be concerned with hedging exposure to foreign currencies
D. can expect returns to be better than the EAFE on a consistent basis
Difficulty: Medium
21. 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?
A. 75.00%
B. 33.54%
C. 15.00%
D. 6.71%
15%/√5 = 6.708%
Difficulty: Medium
22. The correlation coefficient between the U.S. stock market index and stock market indices
of major countries is __________.
A. between -1 and -0.50
B. between -0.50 and 0.00
C. between 0.00 and 0.50
D. between 0.50 and 1
Difficulty: Medium
19-23
23. In 2007, the ___ countries with the largest capitalization of equities made up
approximately 60% of the world equity portfolio.
A. 2
B. 4
C. 6
D. 12
Difficulty: Medium
24. Investor portfolios are notoriously over weighted in home country stocks. This is
commonly called ________.
A. local fat
B. nativism
C. home country bias
D. misleading representation
Difficulty: Easy
25. Corruption is a(n) _________ risk variable.

A. firm specific
B. political
C. financial
D. economic
Difficulty: Easy
26. 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 __________.
A. sell the Swiss franc bonds now
B. sell the Swiss franc forward
C. probably do nothing because the franc move will offset the lower bond price
D. enter into an interest rate swap to pay variable and receive fixed
Difficulty: Easy
19-24
27. Annual inflation rate is a(n) _______ risk variable.

A. firm specific
B. political
C. financial
D. economic
Difficulty: Easy
28. 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?
A. The insurer need not hedge because the expected exchange rate move will be favorable.
B. The insurer should hedge by buying euro forward even though this will cost more than the
C. The insurer should hedge by selling euro forward because this will cost less than the
D. The insurer should hedge by buying euro forward even though this will cost less than the
Difficulty: Hard
29. 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.
A. ¥88.97
B. ¥145.34
C. ¥154.67
D. ¥164.56
($1.36/€)(¥121/$) = ¥164.56/€
Difficulty: Medium
19-25
30. 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
__________.
A. business cycle risk
B. beta risk
C. inflation risk
D. currency risk
Difficulty: Medium
31. According to the International Country Risk Guide in 2008, which of the following
countries was the riskiest according to the current composite risk rating?
A. Japan
B. United States
C. China
D. India
Difficulty: Medium
32. 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 ________.
A. 5.06%
B. 6.74%
C. 8.48%
D. 10.13%
Difficulty: Hard
19-26
33. 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 __________.
A. 5.00%
B. 7.25%
C. 20.00%
D. 22.43%
Difficulty: Hard
34. 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.
A. ₤0.5150
B. ₤0.5142
C. ₤0.5123
D. ₤0.4859
Difficulty: Medium
19-27
35. 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 __________.
A. $1.83
B. $1.91
C. $2.08
D. $2.18
Difficulty: Medium
36. 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 __________.
A. $1.93
B. $2.22
C. $2.56
D. $2.76
Difficulty: Medium
19-28
37. 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.
A. 9.7%
B. 2.9%
C. 2.8%
D. 2.0%
Difficulty: Medium
38. 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 __________.
A. -3%
B. 3%
C. 3.35%
D. 8.72%
Difficulty: Medium
19-29
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
__________.
A. 12.0%
B. 12.5%
C. 14.0%
D. 15.5%
Difficulty: Medium
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 __________.
A. 10.96%
B. 12.25%
C. 13.42%
D. 15.50%
Difficulty: Medium
19-30
41. Inclusion of international equities in a U.S. investor's portfolio has historically produced
___________________.
A. a substantially reduced portfolio variance
B. a slightly reduced portfolio variance
C. a substantially poorer portfolio variance
D. a slightly poorer portfolio variance
Difficulty: Medium
42. WEBS are _____________.

A. mutual funds marketed internationally on the Internet
B. synthetic domestic stock indices
C. equity indices that replicate the price and yield performance of foreign stock portfolios
D. single stock investments in a foreign security
Difficulty: Easy
43. You are a U.S. investor who purchased British securities for 3,500 pounds one year ago
when the British pound cost $1.35. No dividends were paid on the British securities in the
past year. Your total return based in U.S. dollars was __________ if the value of the securities
is now 4,200 pounds and the pound is worth $1.15.
A. -3.8%
B. 2.2%
C. 5.6%
D. 15%
Difficulty: Medium
19-31
44. Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese
interest rates won't move and you believe that interest rate parity will hold then
____________.
A. the yen per dollar exchange rate should rise
B. the dollar per yen exchange rate should rise
C. the exchange rate should stay the same if parity holds
D. one can't predict the exchange rate change from the information given
Difficulty: Hard
Suppose a U.S. investor wishes to invest in a British firm currently selling for ₤50 per share.
The investor has $7,000 to invest and the current exchange rate is $1.40/₤.
45. How many shares can the investor purchase?

A. 140
B. 100
C. 71.43
D. none of the above
$7,000 = 7,000/1.40 = ₤5,000

₤5,000/50 = 100 shares
Difficulty: Medium
dollar-denominated return?
A. 14%
B. 10%
C. 9.3%
D. 7.1%
₤55 × 100 × 1.40 = $7,700

(7700/7000) - 1 = 1.10 -1 = 10%
Difficulty: Medium
19-32
pound-denominated return?
A. 14%
B. 10%
C. 9.3%
D. 7.1%
₤55 × 100 = ₤5,500

₤50 × 100 = ₤5,000
(5500/5000) - 1 = 1.10 -1 = 10%
Difficulty: Medium
48. After one year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-
denominated return?
A. 25.7%
B. 16%
C. 14.3%
D. 9.3%
₤55 × 100 × 1.60 = $8,800

(8800/7000) - 1 = 1.257 -1 = 25.7%
Difficulty: Medium
19-33
49. After one year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your
dollar-denominated return is due to the currency change?
A. 10.00%
B. 6.43%
C. 4.34%
D. 2.12%
Gain from currency is -3.571% - (-10%) = 6.429%
Difficulty: Hard
50. You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example
of a/an ________ quote. You also find that the euro is worth $1.33. This second quote is an
example of a/an _______ quote.
A. direct; indirect
B. indirect; direct
C. foreign; U.S.
D. U.S.; foreign
Difficulty: Medium
51. Among emerging countries the largest equity market in 2007 was located in
_____________.
A. China
B. India
C. Brazil
D. Russia
Difficulty: Medium
19-34
52. In the PRS country composite risk ratings a score of ______ represents the least risky and
a score of _____ represents the most risky.
A. 0; 100
B. 0; 50
C. 50; 0
D. 100; 0
Difficulty: Easy
53. Which emerging country has the highest percentage growth in market capitalization?
A. Brazil
B. China
C. Taiwan
D. Turkey
Difficulty: Easy
54. The dollar per euro spot rate is 1.2 when an importer of French wines places an order. 6
months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original
invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?
A. $3,000 gain
B. $3,000 loss
C. $6,000 loss
D. no gain or loss
Original cost = €30000 × 1.2 = $36,000

New cost = €30000 × 1.3 = $39,000; $36000 - $39000 = -$3000.
Difficulty: Medium
19-35
55. An importer of televisions from Japan has a contract to purchase a shipment of televisions
for 2,000,000 yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What
is the importer's gain or loss?
A. $529 gain
B. $529 loss
C. $619 gain
D. $619 loss
Original cost = 2,000,000/105 = $19,048

New cost = 2,000,000/108 = $18,519
Change = 19048 - 18519 = 529
Difficulty: Medium
56. A country has a PRS political risk rating of 75, a financial score of 40 and an economic
score of 35. The country's composite rating is _________.
A. 75
B. 50
C. 40
D. 35
PRS = (75 + 40 + 35)/2 = 75
Difficulty: Medium
57. The risk free rate in the US is 2.5% and the risk free rate in Europe is 3.2%. If the spot
rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?
A. 1.30
B. 1.31
C. 1.32
D. 1.33
forward rate = (1.32)(1.025/1.032) = 1.31
Difficulty: Medium
19-36
58. The risk free rate in the US is 4.0% and the risk free rate in Japan is 1.2%. If the spot rate
of yen to dollars is 105, what is the likely yen per dollar forward rate?
A. 101
B. 102
C. 105
D. 108
forward rate = (105)(1.012/1.040) = 102.2
Difficulty: Medium
59. The yen per dollar spot rate is 104. The yen per dollar forward rate is 107. If the US risk
free rate is 2.4%, what is the likely yen risk free rate?
A. 1.24%
B. 2.35%
C. 3.98%
D. 5.35%
Yen rate = (1.024)(107/104) - 1 = .0535
Difficulty: Medium
60. In the PRS financial risk ratings the U.S. rates poorly because of the U.S. experiences
________.
I. large budget deficit
II. large trade deficit
III. large amount of total debt
A. I only
B. I and II only
C. I and III only
D. I, II and III
Difficulty: Easy
19-37
61. The major participants who directly purchase securities in the capital markets of other
countries are predominantly ____________.
A. large institutional investors
B. individual investors
C. government agencies
D. central banks
Difficulty: Easy
62. Of the following, which is the most commonly used international index?
A. DJIA
B. EAFE
C. Russell 2000
D. S&P500
Difficulty: Medium
63. WEBS differ from mutual funds in that __________.

I. Shares of WEBS can be shorted
II. WEBS shares trade continuously on the AMEX
III. WEBS are passively managed
A. II only
B. II and III only
C. I and III only
D. I, II and III
Difficulty: Medium
64. The variation in betas of emerging markets suggests that ____________.

A. emerging markets are more uniform than developed markets
B. beta does not hold in international markets
C. international diversification may reduce portfolio risk
D. riskier emerging markets have uniformly lower betas
Difficulty: Medium
19-38
A. $94,322
B. $55,345
C. $44,318
D. $33,595
This is called covered interest arbitrage, the steps are outlined below:
1. Borrow $1 million, in one year owe: $1 million *1.05 = $1,050,000
2. Sell dollars and buy euro spot: $1,000,000/$1.32 = €757,575.76
3. Invest in euro securities and earn 7.00%: €757,575.76 * 1.07 = €810,606.06
4. Cover $1,050,000 owed in one year by selling euro forward:
€810,606.06 * $1.35 = $1,094,318.18
Repay $1,050,000 and net $1,094,318.18 - $1,050,000 = $44,318.18
Difficulty: Hard
A. $60,384
B. $42,973
C. $68,422
D. $78,500
This is called covered interest arbitrage, the steps are outlined below:
1. Borrow €1 million, in one year owe: €1 million *1.05 = €1,050,000
2. Sell euro and buy $ spot: €1,000,000 * $1.30 = $1,300,000
3. Invest in the U.S. and earn 7%: $1,300,000 * 1.07 = $1,391,000
4. Cover €1,050,000 owed in one year by buying euro forward, will require:
€1,050,000 * $1.25 = $1,312,500
Leaves $1,391,000 - $1,312,500 = $78,500 profit in dollars
Difficulty: Hard
19-39
All exchange rates are expressed as units of foreign currency that can be purchased with one
U.S. dollar. Answer the following questions about decomposing the manager's performance.
67. What is the difference in return of the manager's portfolio due to currency selection?
A. -5%
B. -3%
C. 2%
D. 1%
Currency Selection
EAFE: EAFE weight* [(E1/E0) - 1] = (0.3)(0.8 - 1) + (0.1)(1.1 - 1) + (0.6)(1 - 1) = -5%
Manager: Manager weight * [(E1/E0) - 1] = (0.25)(0.8 - 1) + (0.2)(1.1 - 1) + (0.55)(1 - 1) =
-3%
Gain = -3% - (-5%) = +2%
Difficulty: Hard
68. What is the difference in return of the manager's portfolio due to country selection?
A. -0.60%
B. -0.75%
C. 0.12%
D. 0.22%
Country Selection
EAFE: (EAFE weight)(return equity index) = (0.3)(20%) + (0.1)(15%) + (0.6)(25%) = 22.5%
Manager: (Manager weight)(return equity index) = (0.25)(20%) + (0.2)(15%) + (0.55)(25%)
= 21.75%
Gain = 21.75% - 22.5% = -0.75%
Difficulty: Hard
19-40
69. What is the difference in return of the manager's portfolio due to stock selection?
A. 1.15%
B. 3.25%
C. 5.45%
D. 6.13%
Stock Selection
(Manager's Weights)(Manager Return - Equity Index Return)
Selection = (0.25)(18% - 20%) + (0.2)(20% - 15%) + (0.55)(30% - 25%) = 3.25%
Difficulty: Hard
70. Which stock market has the largest weight in the EAFE index?
A. Japan
B. Germany
C. UK
D. Australia
Difficulty: Medium
19-41

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Chapter 19 - Globalization and International Investing

Multiple Choice Questions

6. WEBS are ____________________.

8. Generally speaking, countries with ______ capitalization of equities have ________.

12. EAFE stands for _______.

14. The __________ index is a widely used index of non-U.S. stocks.

16. Four largest economies in the world in 2007 were ____________.

20. Passive investors with well-diversified international portfolios _________.

25. Corruption is a(n) _________ risk variable.

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

42. WEBS are _____________.

45. How many shares can the investor purchase?

63. WEBS differ from mutual funds in that __________.

64. The variation in betas of emerging markets suggests that ____________.

Chapter 19 Globalization and International Investing Answer Key

Multiple Choice Questions

6. WEBS are ____________________.

8. Generally speaking, countries with ______ capitalization of equities have ________.

12. EAFE stands for _______.

14. The __________ index is a widely used index of non-U.S. stocks.

16. Four largest economies in the world in 2007 were ____________.

20. Passive investors with well-diversified international portfolios _________.

25. Corruption is a(n) _________ risk variable.

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

42. WEBS are _____________.

45. How many shares can the investor purchase?

$7,000 = 7,000/1.40 = ₤5,000

₤55 × 100 × 1.40 = $7,700

₤55 × 100 = ₤5,500

₤55 × 100 × 1.60 = $8,800

Gain from currency is -3.571% - (-10%) = 6.429%

Original cost = €30000 × 1.2 = $36,000

Original cost = 2,000,000/105 = $19,048

PRS = (75 + 40 + 35)/2 = 75

forward rate = (1.32)(1.025/1.032) = 1.31

forward rate = (105)(1.012/1.040) = 102.2

Yen rate = (1.024)(107/104) - 1 = .0535

63. WEBS differ from mutual funds in that __________.

64. The variation in betas of emerging markets suggests that ____________.

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8. Generally speaking, countries with capitalization of equities have __.

8. Generally speaking, countries with capitalization of equities have __.