Deck 3: International Financial Markets

Question 1

9)If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:

A) obtain a 90-day forward purchase contract on Canadian dollars.
B) obtain a 90-day forward sale 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.

Answer 1

A

Question 2

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.

Answer 2

E

Question 3

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%.

Answer 3

C
Bid-ask percentage spread = ($.0043 - $.0041)/$.0043 = 4.65%

Question 4

6.The ask quote is the price for which a bank offers to sell a currency.

Question 5

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.

Question 6

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%.

Question 7

18)The international credit market primarily concentrates on:

A) short-term lending (less than one year).
B) medium-term lending.
C) long-term lending.
D) providing an exchange of foreign currencies for firms who need them.
E) placing newly issued stock in foreign markets.

Question 8

5.The forward rate is the exchange rate used for immediate exchange of currencies.

Question 9

13)A forward contract can be used to lock in the ____ of a specified currency for a future point in time.

A) purchase price
B) sale price
C) A or B
D) none of the above

Question 10

12)Forward markets for currencies of developing countries are:

A) prohibited.
B) less liquid than markets for developed countries.
C) more liquid than markets for developed countries.
D) only available for use by government agencies.

Question 11

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.

Question 12

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.

Question 13

7)According to the text, the forward rate is commonly used for:

A) hedging.
B) immediate transactions.
C) previous transactions.
D) bond transactions.

Question 14

8)If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90 days, it could:

A) obtain a 90-day forward purchase contract on euros.
B) obtain a 90-day forward sale 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.

Question 15

3)The bid/ask spread for small retail transactions is commonly in the range of ____ percent.

A) 3 to 7
B) .01 to .03
C) 10 to 15
D) .5 to 1

Question 16

14)The forward market:

A) for euros is very illiquid.
B) for Eastern European countries is very liquid.
C) does not exist for some currencies.
D) none of the above

Question 17

4)____ is not a factor that affects the bid/ask spread.

A) Order costs
B) Inventory costs
C) Volume
D) All of the above factors affect the bid/ask spread

Question 18

16)The Basel II accord is focused on eliminating inconsistencies in ____ across countries.

A) capital requirements
B) deposit rates
C) deposit insurance
D) bank failure policies

Question 19

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.
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.

Question 20

10)Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol 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.

Question 21

35)When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be based on the:

A) closing prices in the U.S. during the previous day.
B) closing prices in Canada during the previous day.
C) prevailing prices in locations where the foreign exchange markets have been open.
D) officially set by central banks before the U.S. market opens.

Question 22

32)Which of the following is true?

A) Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
B) U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
C) U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries.
D) A and B

Question 23

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.

Question 24

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.

Question 25

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

Question 26

30)Futures contracts are typically ____; forward contracts are typically ____.

A) sold on an exchange; sold on an exchange
B) offered by commercial banks; sold on an exchange
C) sold on an exchange; offered by commercial banks
D) offered by commercial banks; offered by commercial banks

Question 27

28)Assume a Japanese firm invoices exports to the U.S. 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

Question 28

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.

Question 29

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 $1 trillion

Question 30

23)International money market transactions normally represent:

A) the equivalent of $1 million or more.
B) the equivalent of $1,000 to $10,000.
C) the equivalent of between $10,000 and $100,000.
D) the equivalent of between $100,000 and $200,000.

Question 31

31)Eurobonds:

A) are usually issued in bearer form.
B) typically carry several protective covenants.
C) cannot contain call provisions.
D) A and B

Question 32

36)The U.S. dollar is not ever used as a medium of exchange in:

A) industrialized countries outside the U.S.
B) in any Latin American countries.
C) in Eastern European countries where foreign exchange restrictions exist.
D) none of the above

Question 33

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.

Question 34

39.The existence of imperfect markets has prevented the internationalization of financial markets.

Question 35

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.

Question 36

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 enhance 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.

Question 37

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

Question 38

24.A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.

Question 39

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

Question 40

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.

Question 41

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 $____.

A) 48.90
B) 146.70
C) 55.21
D) none of the above

Question 42

50.Eurobonds are certificates representing bundles of stock.

Question 43

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.

Question 44

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.

Question 45

58.The term "eurobor" is widely used to reflect the total amount of euros borrowed by the firms in Europe per month to finance their growth.

Question 46

42.The Single European Act prevented a trend toward increased globalization in the banking industry.

Question 47

45.The strike price is also known as the premium price.

Question 48

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.

Question 49

54.If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low.

Question 50

46.The interest rate commonly charged for loans between banks is called the cross rate.

Question 51

53.If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low.

Question 52

57.The term "eurobor" is widely used to reflect the interbank offer rate on euros.

Question 53

60.In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States.

Question 54

56.Large commercial banks play a major role in the international money market by accepting short-term deposits in large amounts (such as the equivalent of $1 million or more) and in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies.

Question 55

55.The preferences of corporations and governments to borrow in foreign currencies and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market.

Question 56

49.A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

Question 57

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

Question 58

48.The Basel Accord is an agreement among the major European countries to make regulations more uniform across European countries and to reduce taxes on goods traded between these countries.

Question 59

43.A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency.

Question 60

59.Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market.

Question 61

68.The degree of financial information that must be provided by public companies is the same among countries.

Question 62

69)In general, stock markets allow for more price efficiency and attract more investors when they have all of the following except:

A) more voting rights for shareholders.
B) more legal protection.
C) more enforcement of the laws.
D) less stringent accounting requirements.

Question 63

61.Global regulations require that shareholders in all countries have the same rights wherever there are stock markets.

Question 64

73)Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000?

A) 12,600
B) 775,194
C) 793,651
D) 12,900

Question 65

65.Shareholders in some countries may have more power to effectively sue publicly-traded firms if their executives or directors commit financial fraud.

Question 66

76)Which of the following is not a method that can be used to invest internationally?

A) Investment in MNC stocks
B) American depository receipts (ADRs)
C) World Equity benchmark Shares (WEBS)
D) International mutual funds
E) All of the above are methods that can be used to invest internationally.

Question 67

72.The strike price on a currency option is also known as an exercise price.

Question 68

67.The government enforcement of securities laws varies among countries.

Question 69

74.When receiving quotations on a currency's exchange rate, the bank's bid quote is the rate at which the bank is willing to sell currency.

Question 70

70.In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders.

Question 71

78)Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is

A) .01
B) 118
C) 1.18
D) .0087

Question 72

75)An obligation to purchase a specific amount of currency at a future point in time is called a:

A) call option
B) spot contract
C) put option
D) forward contract
E) both B and D

Question 73

79)When obtaining a loan, the risk premium paid above LIBOR depends on the:

A) risk-free interest rate of the borrower.
B) credit risk of the borrower.
C) borrower's stock price.
D) lender's stock price.

Question 74

71)If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds.

A) derivative
B) long-term credit
C) money
D) foreign exchange

Question 75

64.The legal protection of shareholders is the same among countries.

Question 76

63.Shareholders can have influence on a wider variety of management issues in some countries.

Question 77

77.The interest rate in developing countries is usually very low.

Question 78

80)The largest global exchange is:

A) NASDAQ
B) Tokyo Stock Exchange
C) NYSE Euronext
D) London Stock Exchange

Question 79

66.In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy.

Question 80

62.Shareholders have more voting power in some countries than others.