Deck 6: International Finance and Trade

Question 1

A nation with a relatively lower inflation rate than other countries will have a relatively stronger currency holding other factors constant.

Answer 1

True

Question 2

A nation with relatively lower interest rate levels than other countries will have a relatively stronger currency.

Answer 2

False

Question 3

A sight draft is one that is not accompanied by any special documents and is generally used when the exporter has confidence in the importer's ability to meet the draft when presented.

Answer 3

False

Question 4

The bankers' acceptance and the documentary draft involve four principal parties: the importer, the importer's bank, the exporter, and the exporter's bank.

Question 5

The balance of payments is a summary of all economic transactions between one country and the rest of the world.

Question 6

Slow economic growth in investments in another country would be an example of political risk.

Question 7

Foreign exchange markets are electronic communication systems connecting the major financial centers of the world.

Question 8

Special Drawing Rights are international reserve assets created by the International Monetary Fund that can be drawn upon by member nations.

Question 9

The banker's sight draft provides an exchange rate that is lower than either the banker's time draft or cable rate.
Not in chapter

Question 10

A trust receipt is an instrument through which a bank retains title to goods until they are paid for.

Question 11

Arbitrage is the simultaneous buying of securities in one market and selling them in another to make a profit from price differences in the two markets.

Question 12

The Export-Import Bank is a corporation owned by the Federal Reserve Banks.

Question 13

If someone needs to make a payment in the currency of another country, they must have actual possession of that currency.
Tricky.Especially in the day of electronic funds transfer, credit cards, etc.

Question 14

The United Nations operates a world central bank that provides a world monetary unit to accommodate commerce across national boundaries.

Question 15

The capital account balance includes all foreign private and government investment in the United States netted against U.S.investments in foreign countries.

Question 16

Intervention by central banks in the flexible exchange rate system is called a dirty float.
Not in chapter

Question 17

The current account balance shows the flow of income into and out of the United States during a specified time period.

Question 18

The order bill of lading represents the written acceptance of goods for shipment by a transportation company and the terms under which the goods are to be transported to their destination.

Question 19

The bankers' acceptance is a draft drawn on and accepted by a bank rather than the importing firm.

Question 20

The Board of Governors of the Federal Reserve System authorizes member banks to accept drafts that arise in the course of certain types of international transactions.

Question 21

International financial markets strongly influence domestic interest rates.

Question 22

The international monetary system consists of institutions and mechanisms that foster oversees the World Bank, sets international trade policy, and determines the exchange rate regime for all participating countries.

Question 23

Economic Risk is the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners.

Question 24

The International Monetary Fund (IMF) was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payment problems.

Question 25

A clean draft is accompanied by an order bill of lading along with other papers such as insurance receipts, certificates of sanitation, and consular invoices.

Question 26

An expected decline in a country's currency may lead to an attempt to accelerate collection of accounts receivable from that country for transfer with funds transferred quickly to another country with a more stable currency.

Question 27

Interest rate parity states that a country with a relatively higher expected inflation rate will have its currency depreciate relative to a country with a relatively lower inflation rate.

Question 28

The international monetary system consists of institutions and mechanisms that foster international trade, manage the flow of financial capital, and determine currency exchange rates.

Question 29

The 1992 1991 Maastricht Treaty formally committed the countries of the European Union to economic and monetary union.
Book says 1991.

Question 30

A contract for the purchase or sale of a currency where delivery will take place at a future date is called a forward exchange rate.

Question 31

An instrument requiring immediate payment is classified as a time draft.

Question 32

The International Bank for Reconstruction and Development (World Bank) was created to provide banking services for U.S.firms operating overseas.

Question 33

Up until the start of the Vietnam War, the international monetary system operated mostly under a gold standard in which the currencies of major countries were convertible into gold at fixed exchange rates.
Not in the chapter

Question 34

A flexible exchange rate system in which currency exchange rates are determined by supply and demand has been in place since 1973.
Too similar to above.

Question 35

The ultimate effect of large-scale arbitrage activities on exchange rates is the elimination of the variation between the two markets.

Question 36

A traveler's letter of credit is issued by a bank in one country and addressed to a list of foreign banks which are usually correspondents of the issuing bank and have agreed to purchase sight drafts presented to them by persons with appropriate letters of credit.

Question 37

Under the system of flexible exchange rates that began in 1943, exchange rates are determined by the actual process of supply and demand in the foreign exchange market.

Question 38

A flexible exchange rate system in which currency exchange rates are determined by supply and demand has been in place since 1973.

Question 39

The direct quotation method indicates the amount of a foreign currency necessary to purchase one unit of the home country's currency.

Question 40

In foreign exchange, variations in quotations among countries at any time are quickly brought into alignment through arbitrage activities.

Question 41

The exchange rate is the rate at which a given unit of foreign currency is quoted in terms of:

A)commodity prices
B)barrels of oil
C)the foreign currency
D)gold
E)none of the above

Question 42

If the exchange rate in New York for British pounds sterling is quoted at 1 pound = $1.60, and in London the rate is quoted at 1 pound = $1.62, financial arbitragers might:

A)buy pounds in New York
B)sell dollars in London
C)simultaneously sell pounds in New York and buy dollars in London
D)simultaneously buy pounds in New York and sell dollars in London

Question 43

Political risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability.

Question 44

The traveler's letter of credit is usually used by:

A)travel agencies
B)individuals traveling abroad
C)importers' banks
D)correspondent banks, in order to reduce shipment of gold between countries
E)none of the above

Question 45

An indirect exchange rate quotation is simply the reciprocal of a direct exchange rate quotation.

Question 46

The Federal Reserve System:

A)permits member banks to accept drafts, but restricts the time period involved
B)actively encourages member banks to assist in financing international transactions
C)discourages its member banks from accepting foreign drafts
D)limits the type of international transactions for which member banks may accept drafts
E)all of the above

Question 47

If the exchange rate in New York for British pounds sterling is quoted at 1 pound = $1.60, and in London the rate is quoted at 1 pound = $1.62, financial arbitragers might:

A)buy pounds in New York
B)sell dollars in London
C)simultaneously sell pounds in New York and buy dollars in London
D)simultaneously sell pounds in New York and sell dollars in London
E)none of the above

Question 48

Purchasing power parity (PPP) states that the currency of a country with relatively higher inflation will depreciate relative to the currency of a country with a relatively lower inflation rate.

Question 49

The European Economic Organization (EEO) is an organization of twelve European countries that agreed to have a common overall monetary policy and the euro as their common currency.

Question 50

Holding demand constant, an increase in supply for one currency relative to another will cause its value to appreciate relative to that currency.

Question 51

The Federal Reserve System:

A)permits member banks to accept drafts, but restricts the time period involved only for exports. In chapter?
B)actively encourages member banks to assist in financing international transactions
C)discourages its member banks from accepting foreign drafts
D)limits the type of international transactions for which member banks may accept drafts

Question 52

The exchange rate is the rate at which a given unit of foreign currency is quoted in terms of:

A)commodity prices
B)the domestic currency
C)the foreign currency
D)gold

Question 53

Should a business fail after receiving shipping documents from its bank on the basis of a trust receipt, the bank:

A)becomes a preferred creditor to the extent of the amount due less cash deposits with the bank
B)repossesses the merchandise on the basis of a specific lien thereon
C)repossesses the merchandise on the basis of its holding of title to the merchandise
D)has a prior claim relative to other general creditors

Question 54

Economic risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability.

Question 55

A documentary draft is a draft that is accompanied by an order bill of lading and other documents.

Question 56

The exchange value of the U.S.dollar relative to other currencies does not impact international trade balances.

Question 57

43CNew.Holding demand constant, an decrease in supply for one currency relative to another will cause its value to depreciate relative to that currency.

Question 58

Should a business fail after receiving shipping documents from its bank on the basis of a trust receipt, the bank:

A)becomes a preferred creditor to the extent of the amount due less cash deposits with the bank
B)sells off the assets
C)auctions off the merchandise
D)has a prior claim relative to other general creditors
E)none of the above

Question 59

An order bill of lading is a document given by a transportation company that lists goods to be transported and terms of the shipping agreement.

Question 60

Interest rate parity (IRP) states that the currency of a country with relatively higher interest rate will appreciate relative to the currency of a country with a relatively lower interest rate.

Question 61

Foreign exporters are usually quite willing to accept U.S.dollars in payment for goods and services because:

A)of the importance of the dollar in international trade
B)the value of the dollar does not fluctuate
C)they have little alternative
D)it is customary to receive payment denominated in the currency of the importer's country

Question 62

The Export-Import Bank:

A)makes loans and offers guarantees to foreign exporters to the United States
B)may offer emergency credits to assist other countries to maintain their level of imports from the United States
C)makes loans or offers guarantees when the soundness of the transaction is in doubt
D)makes loans to domestic exporters to encourage foreign trade

Question 63

If balances in a bank's foreign accounts are substantially reduced due to an excess of demand relative to supply:

A)loans are usually sought from central banks and other institutions to replenish balances
B)they will buy currency from foreign exchange dealers price quotations are adjusted to affect a reduction in demand and an increase in supply
C)currency may be shipped abroad for deposit in such accounts
D)Export-Import Bank loans are sought to bolster balances

Question 64

Balances in foreign accounts are maintained for purposes of dealing in foreign exchange by:

A)central banks
B)correspondents of domestic banks
C)correspondents or foreign branches of domestic banks
D)most multinational corporations

Question 65

The lowest quotation on foreign exchange is given for: Not in chapter

A)cable rates
B)banker's time drafts
C)banker's sight drafts
D)banker's acceptance

Question 66

In the field of foreign trade, the most common form of credit instrument is the:

A)commercial loan
B)trust receipt
C)sight draft
D)time draft
E)none of the above

Question 67

The effect of arbitrage activities in foreign exchange markets is to:

A)create disparity among the rates of various currencies
B)maximize exchange rate quotation differentials
C)hinder the otherwise smooth functioning of the exchange markets
D)create wide swings in quotations from period to period
E)none of the above

Question 68

A purchasing agent for a domestic art gallery touring foreign countries for possible acquisitions might find it convenient to have:

A)travelers' checks
B)a commercial letter of credit
C)regular checkbook drafts
D)a traveler's letter of credit

Question 69

The effect of arbitrage activities in foreign exchange markets is to:

A)create disparity among the rates of various currencies
B)eliminate or reduce exchange rate quotation differentials
C)hinder the otherwise smooth functioning of the exchange markets
D)create wide swings in quotations from period to period

Question 70

Before arbitragers take action with respect to exchange rate differentials:

A)central bank approval must be obtained
B)loans to cover transactions must be obtained
C)a market differential of at least 1¢ must exist between two currencies
D)a differential of as little as 1/16 of 1¢ may trigger action

Question 71

The benefits of specialization of effort among nations depend primarily upon: Not in chapter

A)geographical locations
B)market research
C)the existence of adequate financial facilities
D)accommodating laws and regulations

Question 72

In purchasing a claim to foreign exchange:

A)it is necessary only to go to a local bank
B)a permit must first be received from a Federal Reserve Bank
C)a bank specializing in foreign exchange must be contacted
D)a cable, telephone call, or letter must be directed to a foreign bank

Question 73

A purchasing agent for a domestic art gallery touring foreign countries for possible acquisitions might find it convenient to have:

A)travelers' checks
B)a commercial letter of credit
C)regular checkbook drafts
D)a great deal of cash in various currencies
E)none of the above

Question 74

Foreign exporters are usually quite willing to accept Chinese Yuan in payment for goods and services because:

A)of the importance of the Chinese Yuan in international trade
B)the value of the dollar does not fluctuate
C)they have little alternative
D)it is customary to receive payment denominated in the currency of the importer's country
E)none of the above

Question 75

In recent years, the principal market for bankers' acceptances has been:

A)domestic banks
B)domestic and foreign business corporations
C)foreign banks
D)none of the above

Question 76

In the field of foreign trade, the most common form of credit instrument is the:

A)bankers' acceptance
B)trust receipt
C)sight draft
D)none of the above

Question 77

In recent years, the principal market for bankers' acceptances has been:

A)domestic banks
B)domestic business corporations
C)foreign business corporations
D)all of the above
E)none of the above

Question 78

The price that an individual must pay when purchasing claims to foreign exchange:

A)is always higher than the basic quotation rate
B)is readily available in financial publications
C)is relatively constant from day to day
D)varies widely among sources of foreign exchangeall of the above are true

Question 79

The Export-Import Bank:

A)makes loans and offers guarantees to foreign exporters to the United States
B)may offer emergency credits to assist other countries to maintain their level of exports to the United States
C)makes loans or offers guarantees when the soundness of the transaction is in doubt
D)makes loans to domestic exporters to encourage foreign trade
E)none of the above

Question 80

Balances in foreign accounts are maintained for purposes of dealing in foreign exchange by:

A)central banks
B)correspondents of domestic banks
C)correspondents or foreign branches of domestic banks
D)most multinational corporations
E)none of the above