Deck 8: Foreign Exchange and International Financial Markets

Question 1

Carol, an American banker, received a quote between the U.S. dollar and the Japanese yen of $.00924/¥1. Carol most likely received a(n) ________ quote.

A) indirect
B) direct
C) dollar
D) yen

Answer 1

B

Question 2

Tyler, a U.S. citizen, received a quote on the dollar/yen relationship of ¥108.21/$1. Tyler most likely received a(n) ________ quote.

A) indirect
B) direct
C) yen
D) dollar

Answer 2

A

Question 3

Which term refers to the price of the foreign currency in terms of the home currency?

A) direct exchange rate
B) indirect quote
C) indirect exchange rate
D) direct spot price

Answer 3

A

Question 4

________ is a commodity that consists of currencies issued by countries other than one's own.

A) Eurozone
B) Foreign exchange
C) Floating exchange
D) International monetary fund

Question 5

Currencies that are freely tradable are called ________.

A) hard currencies
B) soft currencies
C) foreign currencies
D) inconvertible currencies

Question 6

The world's largest trading markets include all of the following except ________.

A) London
B) Frankfurt
C) Tokyo
D) Singapore

Question 7

What percentage of all foreign-exchange trading involves the U.S. dollar?

A) 25%
B) 47%
C) 70%
D) 85%

Question 8

Which of the following is NOT an example of a participant in the foreign exchange market?

A) Pakistani tourists exchanging rupees for British pounds at a bank in London
B) British retailer Marks and Spenser purchasing appliances from a British supplier
C) The U.S. government arranging a multimillion-dollar loan to Mexico
D) Toyota exporting cars to Canada from factories in Japan

Question 9

Worldwide volume of foreign exchange trading is about ________ per day.

A) $2 billion
B) $50 billion
C) $2 trillion
D) $4 trillion

Question 10

Which of the following is not a type of client of foreign-exchange departments of banks?

A) commercial customers
B) speculators
C) arbitrageurs
D) individuals

Question 11

________ attempt to exploit small differences in the price of a currency between markets by buying currencies in lower-priced markets and selling in higher-priced markets.

A) Commercial customers
B) Speculators
C) Arbitrageurs
D) Individuals

Question 12

A(n)________ shows the demand for a currency that is derived from foreigners' desire to acquire the country's goods, services, and assets.

A) direct quote
B) indirect quote
C) derived demand curve
D) upward sloping curve

Question 13

A(n) ________ is the price of the home currency in terms of the foreign currency.

A) direct exchange rate
B) direct quote
C) indirect exchange rate
D) indirect rate price

Question 14

The price of foreign exchange is set by ________.

A) the international monetary fund
B) the gold standard
C) demand and supply in the marketplace
D) administrators of the World Bank

Question 15

A call option ________.

A) is a privately traded currency vehicle available only through stockbrokers
B) grants the right to buy a specified amount of foreign currency at a set price
C) allows the holder to buy foreign exchange at the wholesale rate
D) is another term for currency future

Question 16

What most likely happens when the price of yen falls?

A) the quantity of yen demanded goes down
B) the demand curve slopes downward
C) the demand curve slopes upward
D) the value of yen fluctuates

Question 17

All of the following are common activities of a bank's commercial customers EXCEPT ________,

A) exporting goods
B) importing services
C) receiving dividends from foreign sources
D) conducting short-term sales of foreign currency

Question 18

The rising value of the Canadian dollar relative to the U.S. dollar has all of the following effects EXCEPT that ________ .

A) Canadian exports to the U.S. are down
B) Canadian vacationers pay higher costs for trips to the U.S.
C) Canadian consumers pay lower prices for U.S.-made goods
D) Canadian retailers in border towns lose customers to U.S. stores

Question 19

________ assume exchange rate risks by acquiring positions in a currency and hoping that they can correctly predict changes in the currency's market value.

A) Commercial customers
B) Speculators
C) Arbitrageurs
D) Individuals

Question 20

If the British pound is selling at $1.7775 spot on September 3, and at a 90-day forward rate of $1.7661, then ________.

A) the pound is selling at a forward premium
B) the pound is selling at a forward discount
C) an investor should buy a call option
D) speculators should buy put options

Question 21

What is a currency selling at if the forward price is higher than the spot price?

A) forward premium
B) forward discount
C) par value
D) swap value

Question 22

The ________ consists of foreign-exchange transactions that are to occur sometime in the future.

A) soft currency market
B) spot market
C) hard currency market
D) forward market

Question 23

Apex Enterprises wants the right to buy a foreign currency at a specified price at any time up to a specified date. Apex most likely needs a ________.

A) forward premium
B) forward discount
C) call option
D) put option

Question 24

Moffet Manufacturing wants the right to sell a foreign currency at a specified price at any time up to a specified date. Moffet most likely needs a ________.

A) forward premium
B) forward discount
C) call option
D) put option

Question 25

In the world of spot markets, what is the meaning of immediately?

A) two days after the trade date
B) four business days after the trade date
C) on the trade date
D) simultaneous due to electronic transfers

Question 26

What is a currency selling at if the forward price is less than the spot price?

A) forward premium
B) forward discount
C) par value
D) swap price

Question 27

The currencies of countries suffering from balance of payment trade deficits or high inflation rates are more likely to sell at a ________.

A) spot discount
B) spot premium
C) forward discount
D) forward premium

Question 28

The currencies of countries enjoying BOP trade surpluses or low inflation rates are more likely to sell at a ________.

A) spot discount
B) spot premium
C) forward discount
D) forward premium

Question 29

Which of the following is not considered a hard currency?

A) Swiss franc
B) Mexican peso
C) Canadian dollar
D) U.S. dollar

Question 30

A forward transaction ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradeable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 31

What percentage of all foreign exchange transactions take place in the spot market?

A) 10 percent
B) 24 percent
C) 33 percent
D) 47 percent

Question 32

If a currency is selling at a forward discount it means that the foreign-exchange market most likely believes that the ________.

A) currency will depreciate over time
B) country's economy is weak
C) currency will appreciate over time
D) country's economy is strong

Question 33

An inconvertible currency ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 34

The ________ consists of foreign-exchange transactions that are to be consummated immediately.

A) soft currency market
B) spot market
C) hard currency market
D) forward market

Question 35

A swap transaction ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradeable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 36

A ________ allows, but does not require, a firm to buy or sell a specified amount of foreign currency at a specified price at any time up to a specified date.

A) forward swap
B) currency option
C) call option
D) discount put

Question 37

A spot transaction ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradeable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 38

The ________ represents the marketplace's aggregate prediction of the spot price of the currency rate in the future.

A) forward price
B) spot price
C) exchange rate
D) par value

Question 39

If a currency is selling at a forward premium it most likely means that the foreign-exchange market believes that the ________.

A) currency will depreciate over time
B) country's economy is weak
C) currency will appreciate over time
D) country's economy is strong

Question 40

A ________ is a contract for a standard amount on a standard delivery date.

A) forward contract
B) currency future
C) currency option
D) call option

Question 41

When an overseas banking operation is separately incorporated from the parent bank, what is it called?

A) subsidiary bank
B) branch bank
C) affiliated bank
D) correspondent bank

Question 42

________ suggests that national differences in expected inflation rates yield differences in nominal interest rates among countries.

A) Two-point arbitrage
B) Three-point arbitrage
C) The international Fisher effect
D) The law of one market price

Question 43

What kind of arbitrage occurs when the difference between two countries' interest rates is not equal to the forward discount/premium on their currencies?

A) two-point arbitrage
B) three-point arbitrage
C) covered interest
D) geographic arbitrage

Question 44

Which form of arbitrage involves profiting from price differences in two distinct markets?

A) geographic arbitrage
B) three-point arbitrage
C) covered interest
D) arbitrage of goods

Question 45

Euroloans are quotes at which of the following rates?

A) LIBOR
B) the euro rate
C) prime plus 2 percent
D) prime plus .5 percent

Question 46

Which of the following is not a common form of financial arbitrage?

A) two-point arbitrage
B) three-point arbitrage
C) Internet arbitrage
D) geographic arbitrage

Question 47

Which of the following is not a method of establishing an overseas banking operation?

A) subsidiary bank
B) branch bank
C) affiliated bank
D) correspondent bank

Question 48

When an overseas banking operation is jointly owned by a parent bank and a local or foreign partner, what is it called?

A) subsidiary bank
B) branch bank
C) affiliated bank
D) correspondent bank

Question 49

________ is the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy.

A) Commercial exchange
B) Foreign exchange
C) Arbitrage
D) Parity

Question 50

When an overseas banking operation is not separately incorporated from the parent bank, what is it called?

A) subsidiary bank
B) branch bank
C) affiliated bank
D) correspondent bank

Question 51

The theory of ________ states that the prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changes.

A) supply and demand
B) purchasing power parity
C) arbitrage
D) competitive advantage

Question 52

The ________ is an exchange rate between two currencies calculated through the use of a third currency.

A) forward rate
B) call rate
C) cross rate
D) covered interest rate

Question 53

Which form of arbitrage is considered the most important in the foreign-exchange market?

A) two-point arbitrage
B) three-point arbitrage
C) covered interest
D) arbitrage of goods

Question 54

________ suggests that arbitrage activities will continue until the price of the good is identical in both markets.

A) Purchasing power parity
B) The law of one price
C) Equilibrium pricing
D) Two-point arbitrage

Question 55

Two-point arbitrage is also known as ________.

A) equilibrium arbitrage
B) forward arbitrage
C) discount arbitrage
D) geographic arbitrage

Question 56

________ is profitable whenever the cost of buying a currency directly differs from the cross rate of exchange.

A) Two-point arbitrage
B) Three-point arbitrage
C) Covered interest
D) Arbitrage of goods

Question 57

What is a Eurodollar?

A) a euro held by an American
B) a U.S. dollar deposited in a European bank
C) a euro deposited in a U.S. bank.
D) any currency deposited in a country other than the country of issue

Question 58

Suppose £1 is trading for $2.00 in New York City and $1.80 in London. A foreign exchange trader could take $1.80 and buy £1 in London's financial exchange market and then sell it for $2.00 in New York's financial exchange market. What is this an example of?

A) two-point arbitrage
B) three-point arbitrage
C) covered interest
D) arbitrage of goods

Question 59

According to the Big Mac Index, ________.

A) the euro is undervalued
B) Russia's rouble is overvalued
C) China's yuan is undervalued
D) the peso is overvalued

Question 60

The ________ is the primary third currency used in calculating cross rates.

A) euro
B) U.S. dollar
C) Japanese yen
D) Swiss franc

Question 61

The price of foreign exchange is set by demand and supply in the marketplace.

Question 62

Which of the following countries is not an important offshore financial center?

A) Switzerland
B) Singapore
C) South Korea
D) Bermuda

Question 63

Rowland Enterprises wants to hedge the foreign-exchange risks involved in international transactions. Which of the following would be LEAST appropriate for Rowland?

A) currency futures
B) forward market
C) currency options
D) spot market

Question 64

Which of the following is a characteristic of most offshore financial centers?

A) political instability
B) services for residents
C) accounting expertise
D) communication inefficiencies

Question 65

The equilibrium point between the quantity of a currency supplied and the quantity of the currency demanded is the exchange rate.

Question 66

What term refers to a currency on deposit outside its country of issue?

A) Eurocurrency
B) Eurodollar
C) Euroyen
D) Europound

Question 67

Which of the following is the LEAST likely reason that the Euroloan market is the low-cost source of loans for large, credit worthy borrowers?

A) Euroloans are free of government banking regulations.
B) The average cost of making Euroloans is lower.
C) Euroloans tend to involve only small transactions.
D) The risk premium charged on Euroloans is lower.

Question 68

A ________ is a mutual fund that specializes in investing in a given country's firms.

A) country fund
B) global equity fund
C) high-risk fund
D) localization fund

Question 69

The rising value of the Canadian dollar relative to the U.S. dollar makes American goods cheaper to consumers in Canada.

Question 70

A(n) ________ is a large, liquid financial asset that can be traded anywhere at any time.

A) international stock
B) global bond
C) global equity
D) Eurodollar

Question 71

A bond that is issued by Nestle, a Swiss company, that is denominated in yen and sold to residents of Japan is most likely a ________.

A) Eurobond
B) global bond
C) foreign bond
D) country fund

Question 72

________ focus on offering banking and other financial services to nonresident customers.

A) Subsidiary banks
B) Branch banks
C) Affiliated banks
D) Offshore financial centers

Question 73

The international bond market is a major source of debt financing for all of the following EXCEPT ________.

A) foreign governments
B) international firms
C) large corporations
D) small businesses

Question 74

In 2007, the Canadian dollar fell against the U.S. dollar.

Question 75

The foreign-exchange market is most likely shifting towards electronic trading for the purpose of ________.

A) discouraging speculators
B) lowering transaction costs
C) establishing more hard currencies
D) meeting international requirements

Question 76

Foreign exchange rates are usually published weekly in most major newspapers.

Question 77

The primary purpose of the foreign-exchange market is to ________.

A) encourage globalization
B) assist developing countries
C) facilitate currency conversions
D) stabilize the currency exchange rate

Question 78

Ross Manufacturing wants to sell foreign exchange on a spot basis and contracts with an international bank to handle the transaction. What is the most likely reason that Ross uses an international bank in this case?

A) The bank can customize the spot to meet Ross' needs.
B) Laws require that banks handle spot transactions.
C) The bank will not charge Ross a service fee.
D) Ross is a U.S. organization.

Question 79

Which of the following would most likely help international businesspeople to forecast future changes in exchange rates?

A) swap transaction
B) forward price
C) put option
D) spot price

Question 80

On the basis of which interest rate are Euroloans often quoted?

A) United States Prime Rate
B) European Central Bank Offer Rate
C) London Interbank Offer Rate
D) International Monetary Fund Interest Rate