Reference no: EM13740179

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?