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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett)
Chapter 6 The Foreign Exchange Theory and Markets
6.1 Geographical Extent of the Foreign Exchange Market
Multiple Choice
Question: Which of the following is NOT true regarding the market for foreign exchange?
A) The market provides the physical and institutional structure through which the money
of one country is exchanged for another.
B) The rate of exchange is determined in the market.
C) Foreign exchange transactions are physically completed in the foreign exchange
market.
D) All of the above are true.
Answer:
Question: A/An ________ is an agreement between a buyer and seller that a fixed amount
of one currency will be delivered at a specified rate for some other currency.
A) Eurodollar transaction
B) import/export exchange
C) foreign exchange transaction
D) interbank market transaction
Answer:
Question: While trading in foreign exchange takes place worldwide, the major currency
trading centers are located in:
A) London, New York, and Tokyo.
B) New York, Zurich, and Bahrain.
C) Paris, Frankfurt, and London.
D) Los Angeles, New York, and London.
Answer:
Question: Because the market for foreign exchange is worldwide, the volume of foreign
exchange currency transactions is level throughout the 24-hour day.
Answer:
Question: Business firms in countries with exchange controls, for example, China
(mainland), often must surrender foreign exchange earned from exports to the central bank
at the daily fixing price.
Answer:
Question: Define spot, forward, and swap transactions in the foreign exchange market and
give an example of how each could be used.
Answer:
Question: The ________ is the mechanism by which participants transfer purchasing
power between countries, obtain or provide credit for international trade transactions, and
minimize exposure to the risks of exchange rate changes.
A) futures market
B) federal open market
C) foreign exchange market
D) LIBOR
Answer:
Question: Which of the following is NOT a motivation identified by the authors as a
function of the foreign exchange market?
A) the transfer of purchasing power between countries
B) obtaining or providing credit for international trade transactions
C) minimizing the risks of exchange rate changes
D) All of the above were identified as functions of the foreign exchange market.
Answer:
Question: Foreign exchange markets are a relatively recent phenomenon, beginning with
the agreement at Bretton Woods.
Answer:
Question: The authors identify two tiers of foreign exchange markets:
A) bank and nonbank foreign exchange.
B) commercial and investment transactions.
C) interbank and client markets.
D) client and retail market.
Answer:
Question: It is characteristic of foreign exchange dealers to:
A) bring buyers and sellers of currencies together but never to buy and hold an inventory
of currency for resale.
B) act as market makers, willing to buy and sell the currencies in which they specialize.
C) trade only with clients in the retail market and never operate in the wholesale market
for foreign exchange.
D) All of the above are characteristics of foreign exchange dealers.
Answer:
Question: Which of the following may be participants in the foreign exchange markets?
A) bank and nonbank foreign exchange dealers
B) central banks and treasuries
C) speculators and arbitrageurs
D) all of the above
Answer:
Question: ________ seek to profit from trading in the market itself rather than having the
foreign exchange transaction being incidental to the execution of a commercial or
investment transaction.
A) Speculators and arbitrageurs
B) Foreign exchange brokers
C) Central banks
D) Treasuries
Answer:
Question: In the foreign exchange market, ________ seek all of their profit from exchange
rate changes while ________ seek to profit from simultaneous exchange rate differences in
different markets.
A) wholesalers; retailers
B) central banks; treasuries
C) speculators; arbitrageurs
D) dealers; brokers
Answer:
Question: Foreign exchange ________ earn a profit by a bid-ask spread on currencies they
purchase and sell. Foreign exchange ________, on the other hand, earn a profit by
bringing together buyers and sellers of foreign currencies and earning a commission on
each sale and purchase.
A) central banks; treasuries
B) dealers; brokers
C) brokers; dealers
D) speculators; arbitrageurs
Answer:
Question: ________ are agents who facilitate trading between dealers without themselves
becoming principals in the transaction.
A) Central banks
B) Foreign exchange brokers
C) Arbitrageurs
D) Foreign exchange dealers
Answer:
Question: Dealers in foreign exchange departments at large international banks act as
market makers and maintain inventories of the securities in which they specialize.
Answer:
Question: Currency trading lacks profitability for large commercial and investment banks
but is maintained as a service for corporate and institutional customers.
Answer:
Question: The primary motive of foreign exchange activities by most central banks is
profit.
Answer:
Question: Banks, and a few nonbank foreign exchange dealers, operate ONLY in the
interbank markets.
Answer:
Question: Dealers in the foreign exchange departments of large international banks often
function as "market makers." Such dealers stand willing at all times to buy and sell those
currencies in which they specialize and thus maintain an "inventory" position in those
currencies.
Answer:
Question: Currency trading is a service center rather than a profit center for commercial
and investment banks.
Answer:
Question: For individuals and firms involved in the import and export of goods and
services ,using the foreign exchange market is necessary, but incidental, to their underlying
commercial or investment purpose.
Answer:
Question: What are some of the reasons central banks and treasuries enter the foreign
exchange markets, and in what important ways are they different from other foreign
exchange participants?
Answer:
Question: ________ are NOT one of the three categories reported for foreign exchange.
A) Spot transactions
B) Swap transactions
C) Strip transactions
D) Futures transactions
Answer:
Question: The greatest amount of foreign exchange trading takes place in the following
three cities:
A) New York, London, and Tokyo.
B) New York, Singapore, and Zurich.
C) London, Frankfurt, and Paris.
D) London, Tokyo, and Zurich.
Answer:
Question: The four currencies that constitute about 80% of all foreign exchange trading
are:
A) U.K pound, Chinese yuan, euro, and Japanese yen.
B) U.S. dollar, euro, Chinese yuan, and U.K. pound.
C) U.S. dollar, Japanese yen, euro, and U.K. pound.
D) U.S. dollar, U.K. pound, yen, and Chinese yuan.
Answer:
Question: A ________ transaction in the foreign exchange market requires an almost
immediate delivery (typically within two days) of foreign exchange.
A) spot
B) forward
C) futures
D) none of the above
Answer:
Question: A ________ transaction in the foreign exchange market requires delivery of
foreign exchange at some future date.
A) spot
B) forward
C) swap
D) currency
Answer:
Question: A forward contract to deliver British pounds for U.S. dollars could be described
either as ________ or ________.
A) buying dollars forward; buying pounds forward
B) selling pounds forward; selling dollars forward
C) selling pounds forward; buying dollars forward
D) selling dollars forward; buying pounds forward
Answer:
Question: A common type of swap transaction in the foreign exchange market is the
________ where the dealer buys the currency in the spot market and sells the same amount
back to the same bank in the forward market.
A) "forward against spot"
B) "forspot"
C) "repurchase agreement"
D) spot against forward"
Answer:
Question: The ________ is a derivative forward contract that was created in the 1990s. It
has the same characteristics and documentation requirements as traditional forward
contracts except that they are only settled in U.S. dollars and the foreign currency involved
in the transaction is not delivered.
A) nondeliverable forward
B) dollar only forward
C) virtual forward
D) internet forward
Answer:
Question: Which of the following is NOT true regarding nondeliverable forward (NDF)
contracts?
A) NDFs are used primarily for emerging market currencies.
B) Pricing of NDFs reflects basic interest rate differentials plus an additional premium
charged for dollar settlement.
C) NDFs can only be traded by central banks.
D) All of the above are true.
Answer:
Question: A ________ transaction in the interbank market is the simultaneous purchase
and sale of a given amount of foreign exchange for two different value dates.
A) spot
B) forward-forward
C) swap
D) futures
Answer:
Question: A spot transaction in the interbank market for foreign exchange would typically
involve a two-day delay in the actual delivery of the currencies, while such a transaction
between a bank and its commercial customer would not necessarily involve a two-day
wait.
Answer:
Question: Swap and forward transactions account for an insignificant portion of the
foreign exchange market.
Answer:
Question: Nondeliverable Forwards were originally envisioned as a method of currency
speculation, but it is now estimated that 70% of NDFs are trading for hedging purposes.
Answer:
Question: In general, NDF markets normally develop for country currencies having large
cross-border capital movements, but still subject to convertibility restrictions.
Answer:
Question: NDFs are traded and settled inside the country of the subject currency, and
therefore are within the control of the countrys government.
Answer:
Question: A contract to deliver dollars for euros in six months is both "buying euros
forward for dollars" and selling dollars forward for euros."
Answer:
Question: Daily trading volume in the foreign exchange market was about ________ per
________ in 2010.
A) $3,200 billion; month
B) $1,000 billion; month
C) $3,200 billion; day
D) $1,000 billion; day
Answer:
Question: The greatest volume of daily foreign exchange transactions are:
A) spot transactions.
B) forward transactions.
C) swap transactions.
D) This question is inappropriate because the volume of transactions are approximately
equal across the three categories above.
Answer:
Question: The United Kingdom and United States together make up nearly ________ of
daily currency trading.
A) 25%
B) 35%
C) 45%
D) 55%
Answer:
Question: The top three currency pairs traded with the U.S. dollar are:
A) U.K. pound, Chinese Yuan, Japanese yen.
B) Swiss franc, euro, Japanese yen.
C) U.K. pound, euro, Japanese yen.
D) euro, Chinese Yuan, Japanese yen.
Answer:
Question: As you might expect, the foreign exchange daily trading volume in in New York
City is roughly twice as large as the daily trading volume in London.
Answer:
Question: The low level of interest rates around the globe in recent years, combined with
slowing economic growth and new debt issuances, has had a dampening impact on the
swap market.
Answer:
Question: Since the global financial crisis of 2008-2009, the Chinese renminbi (yuan) has
become the most widely traded currency with the U.S. dollar surpassing the euro, yen, and
pound as dollar trading pairs.
Answer:
Question: A foreign exchange ________ is the price of one currency expressed in terms of
another currency. A foreign exchange ________ is a willingness to buy or sell at the
announced rate.
A) quote; rate
B) quote; quote
C) rate; quote
D) rate; rate
Answer:
Question: Most foreign exchange transactions are through the U.S. dollar. If the transaction
is expressed as the foreign currency per dollar this known as ________ whereas ________
are expressed as dollars per foreign unit.
A) European terms; indirect
B) American terms; direct
C) American terms; European terms
D) European terms; American terms
Answer:
Question: The following is an example of an American term foreign exchange quote:
A) $20/£
B) €0.85/$
C) ¥100/€
D) none of the above
Answer:
Question: American and British meanings differ for the word billion. Therefore, when
traders refer to an American billion, they call it a/an:
A) Kiwi.
B) Loony.
C) Uncle Sam.
D) Yard.
Answer:
Question: From the viewpoint of a British investor, which of the following would be a
direct quote in the foreign exchange market?
A) SF2.40/£
B) $1.50/£
C) £0.55/€
D) $0.90/€
Answer:
Question: A/an ________ quote in the United States would be foreign units per dollar,
while a/an ________ quote would be in dollars per foreign currency unit.
A) direct; direct
B) direct; indirect
C) indirect; indirect
D) indirect; direct
Answer:
Question: If the direct quote for a U.S. investor for British pounds is $1.43/, then the
indirect quote for the U.S. investor would be ________ and the direct quote for the British
investor would be ________.
A) 0.699/$; 0.699/$
B) $0.699/; 0.699/$
C) 1.43/; 0.699/$
D) 0.699/$; $1.43/
Answer:
Question: ________ make money on currency exchanges by the difference between the
________ price, or the price they offer to pay, and the ________ price, or the price at
which they offer to sell the currency.
A) Dealers; ask; bid
B) Dealers; bid; ask
C) Brokers; ask; bid
D) Brokers; bid; ask
Answer:
Question: Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a
newspaper is ________ or ________.
A) 1.4484/$; $0.6904/
B) $1.4481/; 0.6906/$
C) $1.4484/; 0.6904/$
D) 1.4487/$; $0.6903/
Answer:
Question: Refer to Table 6.1. The one-month forward bid price for dollars as denominated
in Japanese yen is:
A) -20.
B) -18.
C) 129.74/$.
D) 129.62/$.
Answer:
Question: Refer to Table 6.1. The ask price for the two-year swap for a British pound is:
A) $1.4250/.
B) $1.4257/.
C) -$230.
D) -$238.
Answer:
Question: Refer to Table 6.1. According to the information provided in the table, the
6-month yen is selling at a forward ________ of approximately ________ per annum. (Use
the mid rates to make your calculations.)
A) discount; 2.09%
B) discount; 2.06%
C) premium; 2.09%
D) premium; 2.06%
Answer:
Question: Given the following exchange rates, which of the multiple-choice choices
represents a potentially profitable intermarket arbitrage opportunity?
¥129.87/$
€1.1226/$
€0.00864/¥
A) ¥115.69/€
B) ¥114.96/€
C) $0.8908/€
D) $0.0077/¥
Answer:
Question: The U.S. dollar suddenly changes in value against the euro moving from an
exchange rate of $0.8909/euro to $0.08709/€. Thus, the dollar has ________ by ________.
A) appreciated; 2.30%
B) depreciated; 2.30%
C) appreciated; 2.24%
D) depreciated; 2.24%
Answer:
Question: A German firm is attempting to determine the euro/pound exchange rate and has
the following exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate
= $1.2194/€. Therefore, the euro/pound rate must be:
A) £1.2719/€.
B) €1.2719/£.
C) €0.7316/£.
D) €0.7863/£.
Answer:
Question: The European and American terms for foreign currency exchange are square
roots of one another.
Answer:
Question: When the cross rate for currencies offered by two banks differs from the
exchange rate offered by a third bank, a triangular arbitrage opportunity exists.
Answer:
Question: Most transactions in the interbank foreign exchange trading are primarily
conducted via telecommunication techniques and little is conducted face-to-face.
Answer:
Question: A confusing "quirk" of international exchange rates occurs when calculating the
percentage change in spot rates from one period to another. The percent change in the spot
rate from one period to another when quoted using foreign currency terms is always
greater than the percent changes quoted when using home currency terms.
Answer:
