International Business: The Challenges of Globalization, 7e (Wild)
Chapter 9 International Financial Markets
1) Liquidity refers to the ease with which bondholders and shareholders may convert their
investments to cash.
2) An excess money supply creates a borrower’s market, forcing down interest rates and the cost
of borrowing.
3) Investors increase risk by holding international securities whose prices move independently.
4) With the help of microfinance, low-income entrepreneurs can borrow money at competitive
rates without having to put anything up as collateral.
5) Increased regulation of national capital markets has been instrumental in the expansion of the
international capital market.
6) Securitization is the unbundling and repackaging of hard-to-trade financial assets into liquid
financial instruments.
7) An offshore financial center is a territory whose financial sector features very few regulations
and few, if any, taxes.
8) Booking centers are usually located on small territories with favorable tax and/or secrecy
laws.
9) Major financial activities take place in booking centers.
10) The international bond market consists of all bonds sold by issuing companies outside their
own countries.
11) The spread of privatization encourages the growth of the international equity market.
12) All of Europe’s currencies combined are referred to as Eurocurrency.
13) The London Interbank Bid Rate (LIBID) is the interest rate that London banks charge other
large banks for borrowing Eurocurrency.
14) The forces of supply and demand determine currency prices.
15) The practice of insuring against potential losses that result from adverse changes in exchange
rates is called currency arbitrage.
16) Interest arbitrage is the profit-motivated purchase and sale of interest-paying securities
denominated in different currencies.
17) Currency speculation is the purchase or sale of a currency with the expectation that its value
will remain constant.
18) In any exchange rate, the quoted currency is always the numerator.
19) Exchange rate risk is the risk of adverse changes in exchange rates.
20) International transactions between two currencies other than the U.S. dollar often use the
dollar as a vehicle currency.
21) An exchange rate requiring delivery of the traded currency within two business days is called
a cross rate.
22) If an individual is traveling to another country and wants to exchange currencies at his bank
before departing, he will be quoted the spot rate since he is exchanging on the spot.
23) Forward rates represent the expectations of currency traders and bankers regarding a
currency’s future spot rate.
24) The process of aggregating the currencies that one bank owes another and then carrying out
the transaction is called clearing.
25) All foreign exchange transactions can be performed in the over-the-counter (OTC) market.
26) A convertible currency is traded freely in the foreign exchange market with its price
determined by London banks.
27) One goal of currency restriction is to preserve hard currencies to pay for imports and to
finance trade deficits.
28) A(n) ________ is a system that allocates financial resources in the form of debt and equity
according to their most efficient uses.
A) international equity market
B) forward market
C) capital market
D) eurocurrency market
29) Company debt normally takes the form of ________.
A) bonds
B) equity
C) stocks
D) bank loans
30) A loan in which the borrower promises to repay the borrowed amount plus a predetermined
rate of interest is called a(n) ________.
A) equity
B) exchange rate
C) stock
D) debt
31) Which of the following is a debt instrument that specifies the timing of principal and interest
payments?
A) stock
B) bond
C) share
D) equity
32) ________ refers to shares of ownership in a company’s assets that give shareholders a claim
on the company’s future cash flows.
A) Stock
B) A bond
C) Debt
D) A draft
33) The ease with which bondholders and shareholders may convert their investments into cash
is called ________.
A) barter
B) clearing
C) countertrade
D) liquidity
34) An expanded money supply ________.
A) reduces the cost of borrowing
B) increases interest rates
C) makes it difficult for financial institutions to lend money
D) diminishes entrepreneurial initiatives in a country
35) Which of the following is a major purpose of the international capital market?
A) to reduce entrepreneurial initiatives
B) to increase the cost of borrowing
C) to reduce risk for lenders
D) to reduce the money supply for borrowers
36) One of the major forces responsible for the rapid growth rate of the international capital
market is ________.
A) economic nationalism
B) information technology
C) currency control
D) extensive regulation
37) The unbundling and repackaging of hard-to-trade financial assets into more liquid,
negotiable, and marketable financial instruments is called ________.
A) currency hedging
B) commercialization
C) currency arbitrage
D) securitization
38) The world’s three most important financial centers are ________.
A) Zurich, Paris, and Washington
B) China, Brazil, and Mexico
C) Tokyo, London, and New York
D) Dubai, Beijing, and Germany
39) Which of the following represents a country or territory whose financial sector features very
few regulations and few, if any, taxes?
A) offshore financial center
B) interbank market
C) international financial services district
D) Eurocurrency market
40) An offshore financial center is usually characterized by ________.
A) extensive regulations
B) economic and political instability
C) excellent telecommunications
D) high taxes
41) ________ is a prominent operational center.
A) Dubai
B) London
C) Singapore
D) Mexico
42) ________ are usually located on small island nations or territories with favorable tax and/or
secrecy laws.
A) Cybermarkets
B) Over-the-counter markets
C) Booking centers
D) Operational centers
43) The international bond market consists of all bonds sold by issuing companies, governments,
or other organizations ________.
A) within their own countries
B) outside their own countries
C) within developing nations
D) within developed nations
44) A bond issued by a Venezuelan company, denominated in U.S. dollars, and sold in Britain,
France, and Germany is an example of a ________.
A) dragon bond
B) yankee bond
C) Eurobond
D) samurai bond
45) Eurobonds are popular because ________.
A) they are less risky than traditional bonds
B) they are always denominated in euros
C) governments of nations in which they are sold do not regulate them
D) European companies are considered very stable
46) The absence of government regulation in the Eurobond market ________.
A) substantially reduces the cost of issuing a bond
B) lowers the risk level of the bond
C) makes Eurobonds less popular than foreign bonds
D) exists because of the difficulty of regulating a multi-country market
47) Bonds sold outside the borrower’s country and denominated in the currency of the country in
which they are sold are called ________.
A) municipal bonds
B) foreign bonds
C) Eurobonds
D) domestic bonds
48) Foreign bonds issued in the U.S. are called ________.
A) bulldog bonds
B) yankee bonds
C) samurai bonds
D) dragon bonds
49) Foreign bonds issued and traded in Asia outside Japan and normally denominated in dollars
are called ________.
A) bulldog bonds
B) yankee bonds
C) samurai bonds
D) dragon bonds
50) Which of the following factors is responsible for growth in the international equity market?
A) advent of cybermarkets
B) spread of countertrade
C) centrally planned economies
D) government partnerships
51) Which of the following terms refers to a stock market with no central geographic location?
A) cybermarket
B) foreign exchange market
C) capital market
D) international bond market
52) The market consisting of all the world’s currencies that are banked outside their countries of
origin is called the ________.
A) foreign exchange market
B) interbank market
C) Eurocurrency market
D) offshore financial center
53) British pounds of a British trading company that are deposited in a bank are called
________.
A) Eurodollars
B) U.S. dollars
C) Europounds
D) Pounds
54) Rates that the world’s largest banks charge one another for loans are called ________.
A) interbank interest rates
B) London Interbank Bid Rates
C) exchange rates
D) official bank rates
55) ________ refers to the most commonly quoted interest rate that London banks charge other
large banks that borrow Eurocurrency.
A) London Interbank Offer Rate (LIBOR)
B) London Interbank Bid Rate (LIBID)
C) Spot rate
D) Cross rate
56) The market in which currencies are bought and sold and their prices determined is called the
________.
A) Eurocurrency market
B) international capital market
C) international bond market
D) foreign exchange market
57) The rate at which one currency is interchanged for another is called the ________.
A) exchange rate
B) interbank interest rate
C) official cash rate
D) prime rate
58) The bid-ask spread in the foreign exchange market is the ________.
A) price at which a bank will buy a currency
B) price of currency in the foreign exchange market
C) difference between the bid and ask quotes for a currency
D) the time lapsed between a bid quote and an ask quote
59) Investors use the foreign exchange market for ________.
A) stock dilution
B) currency speculation
C) market capitalization
D) mean reversion
60) The practice of insuring against potential losses that result from adverse changes in exchange
rates is called currency ________.
A) hedging
B) arbitrage
C) speculation
D) conversion
61) ________ is the instantaneous purchase and sale of a currency in different markets for profit.
A) Currency hedging
B) Currency arbitrage
C) Currency speculation
D) Currency conversion
62) The profit-motivated purchase and sale of interest-paying securities denominated in different
currencies is called ________.
A) currency conversion
B) currency hedging
C) interest arbitrage
D) interbank interest rates
63) The purchase or sale of a currency with the expectation that its value will change and
generate a profit is called ________.
A) currency hedging
B) currency arbitrage
C) currency speculation
D) currency conversion
64) In a quoted exchange rate of $1.69/British pound, the British pound is called the ________.
A) base currency
B) counter currency
C) cross currency
D) quoted currency
65) An exchange rate of ¥117.87/$ indicates ________.
A) that 117.87 yen buys one dollar
B) that 117.87 dollars buys one yen
C) a direct quote on the dollar
D) an indirect quote on the yen
66) While designating an exchange rate, the numerator indicates the ________.
A) base currency
B) transaction currency
C) quoted currency
D) cross currency
67) While designating an exchange rate, the ________ is always the denominator.
A) counter currency
B) base currency
C) cross currency
D) quoted currency
68) The exchange rate between the euro (€) and the dollar is €0.8461/$. Which of the following
is the correct direct quote on the dollar?
A) $2.20/€
B) $1.1819/€
C) $5.50/€
D) $0.8461/€
69) An exchange rate calculated using two other exchange rates is called a(n) ________.
A) interest arbitrage
B) forward contract
C) forward rate
D) cross rate
70) Which of the following is an exchange rate that requires delivery of the traded currency
within two business days?
A) forward rate
B) spot rate
C) cross rate
D) prime rate
71) The exchange rate at which a bank will purchase a currency is called a ________ rate.
A) prime
B) buy
C) ask
D) forward
72) The exchange rate at which two parties agree to exchange currencies on a specified future
date is called a ________ rate.
A) forward
B) prime
C) spot
D) cross
73) ________ is the simultaneous purchase and sale of foreign exchange for two different dates.
A) Currency hedging
B) Currency speculation
C) Currency swap
D) Currency arbitrage
74) A(n) ________ is a right to exchange a specific amount of a currency on a specific date at a
specific rate.
A) forward contract
B) currency option
C) currency hedging
D) interest arbitrage
75) A currency used as an intermediary to convert funds between two other currencies in the
foreign exchange market is called a ________.
A) local currency
B) vehicle currency
C) community currency
D) private currency
76) ________ dominates the foreign exchange market.
A) London
B) New York
C) Tokyo
D) Beijing