Chapter 03: International Financial Markets
1. Assume that a bank’s bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid/ask percentage spread is:
a.
about 4.44%.
b.
about 4.26%.
c.
about 4.03%.
d.
about 4.17%.
2. Assume that a bank’s bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid/ask percentage spread is:
a.
about 4.99%.
b.
about 4.88%.
c.
about 4.65%.
d.
about 4.43%.
3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent.
a.
b.
c.
d.
4. Which of the following is not a factor that affects the bid/ask spread?
a.
order costs
b.
inventory costs
c.
volume
Chapter 03: International Financial Markets
d.
All of the above factors affect the bid/ask spread
5. The forward rate is the exchange rate used for immediate exchange of currencies.
a.
True
b.
False
6. The ask quote is the price at which a bank offers to sell a currency.
a.
True
b.
False
7. According to the text, the forward rate is commonly used for:
a.
hedging.
b.
immediate transactions.
c.
previous transactions.
d.
bond transactions.
8. If a U.S. firm is receiving 100,000 euros in 90 days and wishes to avoid the risk from exchange rate fluctuations, it
could:
a.
purchase a 90-day forward contract on euros.
b.
sell a 90-day forward contract on euros.
c.
purchase euros 90 days from now at the spot rate.
d.
sell euros 90 days from now at the spot rate.
9. If a U.S. firm will need C$200,000 in 90 days to pay for imports from Canada and it wishes to avoid the risk from
exchange rate fluctuations, it could:
a.
purchase a 90-day forward contract on Canadian dollars.
b.
sell a 90-day forward contract on Canadian dollars.
c.
purchase Canadian dollars 90 days from now at the spot rate.
d.
sell Canadian dollars 90 days from now at the spot rate.
10. Assume the Canadian dollar is equal to $.88 and the Peruvian nuevo sol is equal to $.35. The value of the Peruvian
nuevosol in Canadian dollars is:
a.
about .3621 Canadian dollars.
b.
about .3977 Canadian dollars.
c.
about 2.36 Canadian dollars.
d.
about 2.51 Canadian dollars.
$.35/$.88 = .3977
11. Which of the following is not true with respect to spot market liquidity?
a.
The more willing buyers and sellers there are, the more liquid a market is.
Chapter 03: International Financial Markets
b.
The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
c.
A currency’s liquidity affects the ease with which an MNC can obtain or sell that currency.
d.
If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange
rate.
12. Forward markets for currencies of developing countries are:
a.
prohibited.
b.
less liquid than markets for currencies of developed countries.
c.
more liquid than markets for currencies of developed countries.
d.
only available for use by government agencies.
13. A forward contract can be used to lock in the ____ of a specified currency at a future point in time.
a.
purchase price
b.
sale price
c.
A or B
d.
none of the above
14. The forward market:
a.
for euros is very illiquid.
b.
for currencies of Eastern European countries is very liquid.
c.
does not exist for some currencies.
d.
none of the above
15. ____ is not a bank characteristic important to customers in need of foreign exchange.
a.
Quote competitiveness
b.
Speed of execution
c.
Forecasting advice
d.
Advice about current market conditions
e.
All of the above are important bank characteristics to customers in need of foreign exchange.
16. The Basel III accord requires banks to:
a.
maintain higher levels of capital if they have riskier assets.
b.
increase lending to less developed countries.
c.
pay higher premiums for deposit insurance.
d.
reduce their short-term loans.
17. The international money market primarily concentrates on:
a.
short-term lending (one year or less).
b.
medium-term lending.
c.
long-term lending.
d.
placing bonds with investors.
e.
placing newly issued stock in foreign markets.
18. The international credit market primarily concentrates on:
a.
short-term lending (less than one year).
b.
medium-term lending.
c.
credit cards for individuals.
d.
providing an exchange of foreign currencies for firms that need them.
e.
placing newly issued stock in foreign markets.
19. The main participants in the international money market are:
a.
consumers.
b.
small firms.
c.
large corporations.
d.
small European firms needing European currencies for international trade.
20. LIBOR is:
a.
the interest rate commonly charged for loans between banks.
b.
the average inflation rate in European countries.
c.
the maximum loan rate ceiling on loans in the international money market.
d.
the maximum deposit rate ceiling on deposits in the international money market.
e.
the maximum interest rate offered on bonds that are issued in London.
21. A syndicated loan:
a.
represents a loan by a single bank to a syndicate of corporations.
b.
represents a loan by a single bank to a syndicate of country governments.
c.
represents a direct loan by a syndicate of oil-producing exporters to a less developed country.
d.
represents a loan by a group of banks to a borrower.
e.
A and B
22. The international money market is primarily served by:
a.
the governments of European countries, which directly intervene in foreign currency markets.
b.
government agencies such as the International Monetary Fund that promote development of countries.
c.
several large banks that accept deposits and provide loans in various currencies.
d.
small banks that convert foreign currency for tourists and business visitors.
23. Which of the following is true of international money market securities?
a.
The securities may be exposed to exchange rate risk.
b.
The securities are perceived to be very risky.
c.
The securities issued by corporations are not subject to credit (default) risk.
d.
The securities have a maturity of one to five years.
24. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.
a.
True
b.
False
Chapter 03: International Financial Markets
25. From 1944 to 1971, the exchange rate between any two currencies was typically:
a.
fixed within narrow boundaries.
b.
floating, but subject to central bank intervention.
c.
floating, and not subject to central bank intervention.
d.
nonexistent; that is, currencies were not exchanged, but gold was used to pay for all foreign transactions.
26. As a result of the Smithsonian Agreement, the U.S. dollar was:
a.
the currency to be used by all countries as a medium of exchange for international trade.
b.
forced to be freely floating relative to all currencies without any boundaries.
c.
devalued relative to major currencies.
d.
revalued (upward) relative to major currencies.
27. According to the text, the average foreign exchange trading around the world ____ per day.
a.
equals about $200 billion
b.
equals about $400 billion
c.
equals about $700 billion
d.
exceeds $4 trillion
28. Assume a Japanese firm invoices exports to the United States in U.S. dollars. Assume that the forward rate and spot
rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely
wish to hedge. It could hedge by ____ dollars forward.
a.
depreciate; buying
b.
depreciate; selling
c.
appreciate; selling
d.
appreciate; buying
29. The bid/ask spread on an exchange rate can be used to directly determine:
a.
how an exchange rate will change.
b.
the transaction cost of foreign exchange.
c.
the forward premium.
d.
the currency option premium.
30. Futures contracts are typically ____; forward contracts are typically ____.
a.
sold on an exchange; sold on an exchange
b.
sold in an over-the-counter market; sold on an exchange
c.
sold on an exchange; sold in an over-the-counter market
d.
offered by commercial banks; offered by commercial banks
31. Eurobonds:
Chapter 03: International Financial Markets
a.
are usually issued in bearer form.
b.
typically carry several protective covenants.
c.
cannot contain call provisions.
d.
A and B
32. Which of the following is true?
a.
Non-U.S. firms may desire to issue bonds in the United States due to less regulation there.
b.
U.S. firms may desire to issue bonds in the United States due to less regulation there.
c.
U.S. firms may desire to issue bonds in non-U.S. markets due to less regulation in some other countries.
d.
A and B
33. Eurobonds:
a.
can be issued only by European firms.
b.
can be sold only to European investors.
c.
A and B
d.
none of the above
34. Which currency is used the most to denominate Eurobonds?
a.
the British pound
b.
the Japanese yen
c.
the U.S. dollar
d.
the Swiss franc
35. When the foreign exchange market opens in the United States each morning, the opening exchange rate quotations
will be based on the:
a.
closing prices in the United States during the previous day.
b.
closing prices in Canada during the previous day.
c.
prevailing prices in locations where the foreign exchange markets are already open.
d.
officially set by central banks before the U.S. market opens.
36. The U.S. dollar is not accepted as a medium of exchange in:
a.
industrialized countries outside the United States.
b.
in any Latin American countries.
c.
in Eastern European countries where foreign exchange restrictions exist.
d.
none of the above
37. Which of the following is not true regarding the Bretton Woods Agreement?
a.
It called for fixed exchange rates between currencies.
b.
Governments intervened to prevent exchange rates from moving more than 1 percent above or below their
initially established levels.
c.
The agreement lasted from 1944 until 1971.
d.
Each country used gold to back its currency.
e.
All of the above are true regarding the Bretton Woods Agreement.
38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars
(i.e., how many Fijian dollars do you need to buy a yen)?
a.
73.75.
b.
125.
c.
1.69.
d.
0.014.
e.
none of the above
39. Global regulations prevent the internationalization of moeny markets.
a.
True
b.
False
40. Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between
two currencies was determined by their relative convertibility rates per ounce of gold.
a.
True
b.
False
41. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an
example of a spot market transaction.
a.
True
b.
False
42. The Single European Act prevented a trend toward increased globalization in the banking industry.
a.
True
b.
False
43. A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency.
a.
True
b.
False
44. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a
specific period of time.
a.
True
b.
False
45. The strike price is also known as the premium price.
a.
True
b.
False
46. The interest rate commonly charged for loans between banks is called the cross rate.
a.
True
b.
False
47. The Bretton Woods Agreement is an agreement to standardize banks’ capital requirements across countries; the
resulting capital ratios are computed using risk-weighted assets.
a.
True
b.
False
48. The Basel Accord is an agreement among the major European countries to make regulations on imports more uniform
across European countries and to reduce taxes on goods traded between these countries.
a.
True
b.
False
49. A currency futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a
specific settlement date.
a.
True
b.
False
50. Eurobonds are certificates representing bundles of stock.
a.
True
b.
False
51. A share of the ADR of a Dutch firm represents one share of that firm’s stock that is traded on a Dutch stock exchange.
The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth
$1.10. Thus, the price of the ADR should be ____.
a.
$13.64
b.
$15.00
c.
$16.50
d.
16.50 euros
e.
none of the above
52. The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the
British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____.