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Chapter Seven

This chapter contains 18 multiple choice questions that test principles of market valuation and asset pricing, including the law of one price, arbitrage, exchange rates, and valuation models. It defines key terms like fundamental value and covers concepts like purchasing power parity and the efficient markets hypothesis. The questions require calculations of implied exchange rates and interest rates based on given data.

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Asif Hossain
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77 views8 pages

Chapter Seven

This chapter contains 18 multiple choice questions that test principles of market valuation and asset pricing, including the law of one price, arbitrage, exchange rates, and valuation models. It defines key terms like fundamental value and covers concepts like purchasing power parity and the efficient markets hypothesis. The questions require calculations of implied exchange rates and interest rates based on given data.

Uploaded by

Asif Hossain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter Seven

Principles of Market Valuation

This chapter contains 18 multiple choice questions.

Multiple Choice

1. In regard to an asset, the ________ is defined as the process well-informed investors must
pay for it in a free and competitive market.

(a) analyst value


(b) technical value
(c) competitive value
(d) fundamental value

Answer: (d)

2. In asset valuation, the method used to accomplish the estimation depends on the
________.

(a) number of participants


(b) quality of calculating instruments
(c) richness of the information set available
(d) geographic location

Answer: (c)
3. The Law of One Price is enforced by a process called ________, the purchase and
immediate sale of equivalent assets in order to earn a sure profit from a difference in their
prices.

(a) swapping
(b) maximization
(c) arbitrage
(d) speculation

Answer: (c)

4. The Law of One price is a statement about the price of one asset ________ the price of
another.

(a) absolute to
(b) relative to
(c) multiplied by
(d) independent of

Answer: (b)

5. If arbitrage ensures that any three currencies are freely convertible in competitive
markets, then:

(a) it is enough to know only one exchange rate to determine the third
(b) we can estimate two exchange rates based on one exchange rate only
(c) it is enough to know the exchange rates between any two in order to determine
the third
(d) it is necessary to know all three rates

Answer: (c)

6. If the dollar price of Japanese Yen is $0.009594 per Japanese Yen and the dollar price of
Chinese Yuan is $0.1433 per Chinese Yuan, what is the Japanese Yen price of a Chinese
Yuan? (i.e., JPY/CNY)

(a) 0.001375 JPY/CNY


(b) 0.066950 JPY/CNY
(c) 9.594 JPY/CNY
(d) 14.936419 JPY/CNY

Answer: (d)

7. Suppose the price of gold is 51.09 British pounds per ounce. If the dollar price of gold is
$100 per ounce, what would you expect the dollar price of a British pound to be?

(a) $1.95733 per GBP


(b) $1.5109 per GBP
(c) $0.5109 per GBP
(d) $0.4891 per GBP

Answer: (a)

Questions 8-12 refer to the following exchange rate table. To answer 14-18 you will have to
fill in the missing exchange rates.
U.S. Dollar Peso (MXN) Euro (EUR) Cdn Dlr (CAD)
(USD)
U.S. Dollar $1
Peso 10.398
Euro 0.6420
Cdn Dlr 1.0003

8. What is the Euro/Peso exchange rate? (i.e., EUR/MXN)

(a) 0.617426EUR/MXN
(b) 0.641807 EUR/MXN
(c) 6.675516 EUR/MXN
(d) 16.196262 EUR/MXN

Answer: (a)

9. What is the Cdn Dlr/Euro exchange rate? (i.e., CAD/EUR)

(a) 0.641807 CAD/EUR


(b) 1.558099 CAD/EUR
(c) 6.420 CAD/EUR
(d) 16.196262 CAD/EUR

Answer: (b)

10. What is the Euro/Cdn Dlr exchange rate? (i.e., EUR/CAD)

(a) 0.3583 EUR/CAD


(b) 0.641807 EUR/CAD
(c) 1.558099 EUR/CAD
(d) 10.394 EUR/CAD

Answer: (b)

11. What is the Peso/Cdn Dlr exchange rate? (i.e., MXN/CAD)

(a) 0.096201 MXN/CAD


(b) 0.641807 MXN/CAD
(c) 10.394882 MXN/CAD
(d) 16.196262 MXN/CAD

Answer: (c)

12. What is the Peso/Euro exchange rate? (i.e., MXN/EUR)

(a) 0.617426 MXN/EUR


(b) 6.675516 MXN/EUR
(c) 15.581112 MXN/EUR
(d) 16.196262 MXN/EUR

Answer: (d)

13. You are travelling in FarOut where you can buy 130 kranes (a krane being the unit of
currency of FarOut) with a U.S. dollar at official FarOut banks. Your tour guide has a
relative who dabbles in the black market and this particular relative will sell you kranes
for just $0.00833 each on the black market. How much will you lose or gain by
exchanging $200 on the black market instead of going to the bank?
(a) you would gain approximately 1,660 kranes
(b) you would lose approximately 1,660 kranes
(c) you would gain approximately 1,990 kranes
(d) you would lose approximately 1,990 kranes

Answer: (d)

14. A firm’s earnings per share are $6 and the industry average P/E multiple is 9. What would
be an estimate of the value of a share of the firm’s stock?

(a) $54.00
(b) $45.00
(c) $1.50
(d) $0.67

Answer: (a)

15. Consider the following stock market reaction to the information contained in a company’s
announcement. A corporation has just announced that it must pursue the issuance of
company equity. We could expect to see ________ in the price of company stock.

(a) a rise
(b) a drop
(c) a rapid rise
(d) zero change

Answer: (b)
16. The ________ is the proposition that an asset’s current price fully reflects all publicly
available information about future economic fundamentals affecting the asset’s value.

(a) public markets hypothesis


(b) efficient markets exchange rates
(c) fundamental value proposition
(d) efficient markets hypothesis

Answer: (d)

17. Assume that the worldwide risk-free real rate of interest is 4% per year. Inflation in
Denmark is 9% per year and in the United States it is 7% per year. Assuming there is no
uncertainty about inflation, what are the implied nominal interest rates denominated in
Danish krone and in U.S. dollars, respectively?

(a) 16.63% (DKK); 13.50% (USD)


(b) 13.50% (DKK); 16.63% (USD)
(c) 13.36% (DKK); 11.28% (USD)
(d) 11.28% (DKK); 13.36% (USD)

Answer: (c)

18. ________ states that exchange rates adjust so as to maintain the same “real” price of a
“representative” basket of goods and services around the world.

(a) Purchasing power parity


(b) Efficient markets hypothesis
(c) Market valuation model
(d) Exchange rate equity

Answer: (a)

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