Deck 3: International Financial Markets

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

The LIBOR varies among currencies because the market supply of and the demand for funds vary among currencies.

Question 5

Between 2014 and 2017, U.S.-based MNCs issued large quantities of Eurobonds to take advantage of low interest rates in the eurozone.

Question 6

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

Question 7

The interest rate in developing countries is usually very low.

Question 8

The international money market is frequently accessed by MNCs for short-term investment and financing needs, while longer-term financing needs are met in the international credit market or the international bond market and in international stock markets.

Question 9

As a result of the Sarbanes-Oxley Act, financial reporting costs were reduced, and many non-U.S. firms decided to place new issues of their stock in the United States.

Question 10

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

Question 11

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 12

The international credit crisis that began in 2008 originated in the credit markets in the eurozone when the governments of some of the eurozone countries were unable to make interest payments on their debt.

Question 13

Large commercial banks play a major role in the international money market by accepting short-term deposits 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 14

In general, investors are attracted to stock markets in countries that allow very limited voting rights for shareholders.

Question 15

Global regulations prevent the internationalization of money markets.

Question 16

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

Question 17

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 18

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 19

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

Question 20

The more intense the competition for a traded currency, the larger the bid/ask spread.

Question 21

The Greek crisis that began in 2010 occurred because Greece was unable to obtain loans from any banks or governments.

Question 22

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

Question 23

An MNC with receivables in Japanese yen purchases yen forward to hedge its exposure to exchange rate fluctuations.

Question 24

The strike price is also known as the premium price.

Question 25

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

Question 26

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

Question 27

Eurobonds are certificates representing bundles of stock.

Question 28

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 29

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

Question 30

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 31

The bid/ask spreads quoted on more liquid, heavily traded currencies are larger than the spreads on less liquid, less traded currencies.

Question 32

In general, common-law countries such as the United States, Canada, and the United Kingdom allow for more legal protection of shareholders than civil-law countries such as France and Italy.

Question 33

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

Question 34

The legal protection of shareholders is the same among countries.

Question 35

The government enforcement of securities laws varies among countries.

Question 36

Contagion effects represent a decline in a country's stock market and the effects are isolated in that market.

Question 37

At any given point in time, a bank's bid quote will be greater than its ask quote.

Question 38

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

Question 39

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

Question 40

The term LIBOR refers to international bonds that were issued in London.

Question 41

Which of the following is not true regarding electronic communications networks (ECNs)?

A) They have a visible trading floor.
B) Trades are executed by a computer network.
C) They have been created in many countries to match orders between buyers and sellers.
D) They allow investors to place orders on their computers.
E) All of these are true.

Question 42

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 43

Which of the following is not a factor that affects the bid/ask spread?

A) order costs
B) inventory costs
C) volume
D) All of these factors affect the bid/ask spread.

Question 44

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.

Question 45

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.

Question 46

​An MNC's short-term financing decisions are satisfied in the ____ market, while its medium-term debt financing decisions are satisfied in the ____ market.

A) ​international money; international credit
B) ​international money; international bond
C) ​international credit; international money
D) ​international bond; international credit
E) ​international money; international stock

Question 47

Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that the Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is most appropriate in this situation?​

A) ​Buy dollars forward.
B) ​Sell dollars forward.
C) ​Purchase call option.
D) ​Purchase put option.

Question 48

Eurobonds:

A) can be issued only by European firms.
B) can be sold only to European investors.
C) can be issued only by European firms AND can be sold only to European investors.
D) None of these are correct.

Question 49

The largest stock exchanges by market capitalization are located in China.

Question 50

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

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

Question 51

Eurodollar deposits are:

A) dollar-denominated revenues of oil-producing countries deposited in European banks.
B) deposits of euros in U.S. banks.
C) deposits of U.S. dollars in banks in Europe (and elsewhere).
D) deposits of euros in European banks that are readily convertible into dollars.

Question 52

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

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

Question 53

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

Question 54

Which of the following is not a possible bid/ask quotation for the Barbados dollar?

A) $.50/$.51
B) $.49/$.50
C) $.52/$.51
D) $.51/$.52
E) All of these are possible bid/ask quotations.

Question 55

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) purchase price or sale price
D) None of these are correct.

Question 56

Certificates representing bundles of the stock of a non-U.S. firm are called:​

A) ​Eurobonds.
B) ​ADRs.
C) ​FRNs.
D) ​LIBOR certificates.

Question 57

​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

Question 58

Which of the following is probably not an example of the use of forward contracts by an MNC?

A) Hedging pound payables by selling pounds forward
B) Hedging peso receivables by selling pesos forward
C) Hedging yen payables by purchasing yen forward
D) Hedging peso payables by purchasing pesos forward
E) All of these are examples of using forward contracts.

Question 59

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 60

Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars?​

A) ​10
B) ​13.28
C) ​30.12
D) ​39.84

Question 61

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 these are correct.

Question 62

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 63

Which of the following cannot be used to invest internationally?

A) investment in MNC stocks
B) American depository receipts (ADRs)
C) exchange-traded funds (ETFs)
D) international mutual funds
E) All of these can be used to invest internationally.

Question 64

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 these are correct.

Question 65

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

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

Question 66

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 these are true regarding the Bretton Woods Agreement.

Question 67

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.

Question 68

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.

Question 69

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 70

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward?​

A) ​$44,500
B) ​$45,000
C) ​$526 million
D) ​$47,500
E) ​$556 million

Question 71

If companies cannot 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) Bond
C) money
D) foreign exchange

Question 72

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.

Question 73

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 74

____ 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 these are important bank characteristics to customers in need of foreign exchange.

Question 75

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.

Question 76

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) Non-U.S. firms may desire to issue bonds in the United States due to less regulation there AND U.S. firms may desire to issue bonds in the United States due to less regulation there.

Question 77

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 $5 trillion

Question 78

Assume that $1 is equal to .85 euros and 98 yen. The value of the yen in euros is _______.

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

Question 79

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 80

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%.