Deck 18: International Finance

Question 1

If the forward rate for the British pound indicates that it is selling at a discount relative to the spot rate, foreign exchange brokers expect:

A)a decrease in the demand for British pounds.
B)no change in the demand for British pounds.
C)the British pound to weaken against the U.S. dollar.
D)the British pound to strengthen against the U.S. dollar.
E)None of the above is correct.

Answer 1

C

Question 2

Which of the following is unique to international investments?

A)Exchange rate risk
B)Political risk
C)Economic risk
D)a and b
E)All of the above

Answer 2

D

Question 3

Assume a recent quote showed a spot price for Canadian dollars of $.7376 and a six month forward rate of $.7373. The implication is that products made in Canada and sold in the U.S. will cost:

A)more in six months.
B)less in six months.
C)the same in six months.
D)either b or c.

Answer 3

B

Question 4

If the exchange rate from U.S. dollars to Canadian dollars is $.80/Canadian dollar, then the exchange rate from Canadian dollars to U.S. dollars is:

A).80 Canadian $/US dollar.
B)$1.25 Canadian $/US dollar.
C)$1.20 Canadian $/US dollar.
D)$8.00 Canadian $/US dollar.

Question 5

A spot exchange rate for two currencies:

A)is based on immediate (two day)delivery of currency.
B)is always constant over time.
C)cannot exceed the forward exchange rate for the currencies.
D)a and b
E)All of the above

Question 6

The foreign exchange market can be described best as:

A)a network of banks and brokers based in financial centers around the world.
B)one of several specific locations in major cities where bankers and brokers trade foreign currencies.
C)very similar to international stock exchanges except that currencies are traded.
D)All of the above

Question 7

If the direct quote, forward exchange rate is higher than the spot rate, the forward currency is trading at a:

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

Question 8

The rate at which a one currency may be exchanged for another immediately (= 2 day delivery)is the:

A)futures rate.
B)forward rate.
C)spot rate.
D)today rate.

Question 9

Assume you are an American BMW dealer and the most recent direct quote for euros is $.9099. If you were to import a BMW with a cost of €35,169 (euros), how many U.S. dollars would you pay:

A)$38,652
B)$32,000
C)$35,169
D)none of the above

Question 10

Buying the stock of a French company is generally called making a(n):

A)direct investment in a foreign company.
B)foreign investment in France.
C)portfolio investment in a French company.
D)international investment.

Question 11

If you can exchange one U.S. dollar for 100 Japanese yen, then 100 yen per dollar is the:

A)direct spot rate.
B)indirect quote.
C)direct forward rate.
D)direct quote.
E)None of the above

Question 12

The forward exchange rate between two currencies:

A)depends on the date of delivery of one of the currencies.
B)can fluctuate over time.
C)is always stated in terms of US dollars.
D)a and b
E)All of the above

Question 13

If the direct quote, forward exchange rate is lower than the spot rate, the forward currency is trading at a:

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

Question 14

The method of quoting foreign exchange rates that gives the number of foreign currency units received for one unit of domestic currency is referred to as the:

A)direct quote.
B)reverse quote.
C)inverse quote.
D)indirect quote.

Question 15

If the spot rate for Japanese Yen is $.00703 and the 6 month forward rate is $.00717, then the forward Yen is trading at a(n):

A)expected gain.
B)premium.
C)Reciprocal.
D)discount.

Question 16

If the spot rate for Swiss francs is $.6658/franc and the six month forward rate is $.6637/franc, the market is indicating that the Swiss franc is expected to:

A)strengthen relative to the dollar.
B)weaken relative to the European currency.
C)lose value relative to the dollar over the next 6 months.
D)gain value relative to the dollar over the next 6 months.

Question 17

The value of a foreign currency, such as the British pound, stated in American dollars is the:

A)indirect rate.
B)forward rate.
C)direct quote.
D)forward spot rate.

Question 18

If the forward (direct quote)exchange rate is lower than the spot rate, the forward currency is said to be trading at a:

A)premium.
B)gain.
C)discount.
D)loss.

Question 19

Which of the following creates a demand in the U.S. for a foreign country's currency?

A)Demand for that country's goods and services in the U.S.
B)US investors' demand for the stocks of companies in that country
C)US firms' interest in making direct investments in that country
D)Both a. and b. are correct.
E)All of the above are correct.

Question 20

An exchange rate quoted as $1.47 per British pound is known as a ____ quote.

A)hedge
B)direct
C)futures
D)indirect

Question 21

An agreement between a commercial bank and a corporate customer to exchange an exact amount of one currency for another on a specific future date is called a:

A)spot contract.
B)optional contract.
C)forward contract.
D)deferred contract.

Question 22

If the Canadian dollar strengthens against the British pound, which of the following will not happen?

A)Canadian tourism in England will increase.
B)British tourism in Canada will decrease.
C)Canadian imports of British goods will decrease.
D)Britain's Jaguar motorcar will cost Canadians less.

Question 23

The fixed exchange rate system put in place after World War II was abandoned in favor of the current floating rate system because:

A)the dollar's tie to gold at $35 per ounce became unrealistic.
B)it became impossible to keep certain exchange rates constant as the economic status of nations changed subsequent to World War II.
C)Neither of the above
D)Both of the above

Question 24

Governments, when they observe that their currency is either too strong or too weak, will:

A)intervene by buying their own currency if it is strengthening against other currencies.
B)intervene by buying their own currency if it is weakening against other currencies.
C)intervene by selling their own currency if it is weakening against other currencies.
D)sell their gold or foreign currency.

Question 25

To reduce or eliminate exchange rate risk, international buyers usually hedge future payments with:

A)spot rates.
B)forward rates.
C)forward contracts.
D)negotiations with the seller.

Question 26

Which of the following is not a cause of movement in the exchange rate between two currencies?

A)Shifting consumer preferences for the other country's goods
B)Government policies concerning imports, exports and foreign investment
C)The willingness or reluctance of local banks to deal in foreign currencies
D)Economic conditions in the two countries

Question 27

It is difficult to trade with a country that has a nonconvertible currency because:

A)it is impossible to either buy or sell its currency.
B)a foreign business operating in the country can't convert profits earned there into its own nation's currency at a reasonable rate.
C)governments with nonconvertible currencies discourage international trade.
D)All of the above

Question 28

Which of the following statements best addresses the role of government in the stabilization of exchange rates?

A)Government is not overly concerned with the movement of exchange rates because it does not have a significant impact on the local economy.
B)Governments prefer to see the local currency strengthen against foreign currencies because imports become cheaper.
C)Governments prefer to see the local currency weaken against foreign currencies because exports become cheaper and demand for local products increases.
D)Ultimately, governments can exercise very tight control over exchange rates by purchasing and selling their own currency.
E)None of the above accurately addresses the role of government in the stabilization of exchange rates.

Question 29

Motorola has a contract to buy cellular telephones in Japan in 6 months. Payment will be in Japanese yen. What type of exchange rate risk does Motorola face?

A)Economic
B)Operating
C)Transaction
D)Translation

Question 30

If the U.S. dollar weakens against the Japanese Yen, which of the following will occur.

A)Japanese imports will be more expensive in the U.S.
B)Japanese imports will be less expensive in the U.S.
C)American imports will be less expensive in Japan.
D)Both a. and c. are correct.
E)None of the above is correct.

Question 31

Foreign exchange rates are set by:

A)the International Monetary Fund.
B)ultimately, the demand within each country for the other country's goods and investments.
C)movements in the cross rate between the two countries.
D)government policy.

Question 32

The chance of making more or less money on an international business transaction because of exchange rate fluctuations is called:

A)international risk.
B)political risk.
C)exchange rate risk.
D)exchange rate profitability.

Question 33

Exchange rate risk in an international transaction represents uncertainty about:

A)the level of foreign currency cash flows to be generated by the transaction.
B)the level of U.S. dollar cash flows to be realized from a transaction requiring immediate cash settlement.
C)the level of U.S. dollar cash flows to be realized from a transaction involving deferred payment.
D)a and c
E)All of the above

Question 34

Which of the following can impact exchange rates?

A)Changes in consumer preferences
B)Government imposed tariffs.
C)Changing economic conditions
D)Differences in interest rates in the two countries
E)All of the above can impact exchange rates.

Question 35

Which of the following is included in the calculation of the balance of trade?

A)Payments between governments
B)Investing activities
C)Purchases of goods and services
D)All of the above are included.
E)None of the above is included.

Question 36

Hedging a purchase requiring settlement in a foreign currency:

A)will always result in a lower cost than just waiting to purchase the foreign currency on the settlement date.
B)will always result in a higher cost than just waiting to purchase the foreign currency on the settlement date.
C)increases the risk associated with international transactions.
D)decreases the risk associated with international transactions.
E)both a. and d. are correct.

Question 37

Under the current floating exchange rate system each foreign government:

A)is responsible for holding the exchange rate between its currency and the U.S. dollar nearly constant.
B)buys and sells its currency to support the value of the U.S. dollar.
C)buys and sells its currency to support a $35 per ounce international price of gold.
D)rarely intervenes in foreign exchange markets relying on market forces to set exchange rates.

Question 38

An American dollar deposit in a London bank is a:

A)Europound deposit.
B)Eurodollar deposit.
C)US funds deposit.
D)Liquid Assets deposit.

Question 39

If the U.S. dollar weakens against the British pound, which of the following will not be true?

A)British goods will be more expensive in the US.
B)U.S. production will diminish because of reduced demand for U.S. products in Britain.
C)U.S. goods will be less expensive in Britain.
D)All of the above are true.

Question 40

If the United States has a consistent trade deficit with another country (we import more from it than we export to it), the US dollar will ____ against that country's currency.

A)strengthen
B)weaken
C)either a or b can happen
D)neither a nor b is likely to happen

Question 41

If a German company opens a plant in the U.S. and finances it by issuing dollar denominated bonds in the United States, the bonds will be called:

A)international bonds.
B)foreign bonds.
C)Eurobonds.
D)Both a. and b. are correct.
E)All of the above are correct.

Question 42

Which of the following actions by a foreign government is expropriation?

A)Limiting the amount of profit that can be taken out of the country
B)Seizing property without compensation
C)Requiring that raw materials be purchased from local suppliers
D)Both a. and b. are correct.
E)All of the above are correct.

Question 43

The direct quote for British pounds is $1.50. If you tried to convert $3,000 into pounds, how many pounds would you obtain?

A)3,500 pounds
B)1,500 pounds
C)2,000 pounds
D)2,500 pounds

Question 44

Short of expropriation foreign governments may act to diminish the value of direct investments within their country by:

A)requiring part ownership at bargain prices by their own citizens.
B)arbitrarily imposing taxes on the business.
C)limiting the amount of profit that can be taken out of the country.
D)All of the above

Question 45

The chance of incurring losses in international business due to terrorist activity is:

A)political risk.
B)terrorist risk.
C)international business risk.
D)business risk.

Question 46

With respect to transaction and translation gains and losses:

A)transaction gains and losses have immediate cash flow and tax consequences, translation gains and losses have neither.
B)transaction and translation gains are taxable, but only transaction losses are tax deductible.
C)transaction gains and losses are taxable but have no immediate cash flow impact.
D)transaction gains and losses have an immediate cash flow impact, but taxation is deferred until the related assets are sold.

Question 47

The chance of incurring losses due to the intentional actions of foreign governments or terrorist groups is:

A)international risk.
B)business risk.
C)political risk.
D)war-related risk.

Question 48

The direct quotes for euros and British pounds are $.90 and $1.50, respectively. What is the cross-rate between euros and pounds expressed in units of pounds per euro?

A)13.50 pounds
B)0.60 pounds
C)1.35 pounds
D)1.66 pounds

Question 49

Economically, the worst case scenario for a firm that has made a direct investment in a less developed country is:

A)excessive taxation.
B)a nonconvertible currency that makes it impossible to get profits home.
C)expropriation.
D)forcing partial ownership by citizens of the country.

Question 50

Which of the following is a major argument against globalization?

A)It leads to higher domestic production.
B)It decreases standards of living worldwide.
C)It results in exploitation of labor in underdeveloped countries.
D)It reduces domestic profitability in the long term.

Question 51

The Eurodollar market is created by:

A)U.S. dollars on deposit in European banks.
B)Rich Europeans investing in U.S. assets.
C)Rich Americans investing in European assets.
D)Foreign banks lending their deposits of U.S. dollars.

Question 52

Which of the following is most correct?

A)Translation risk comes from exchange rate gains and losses on international transactions as they occur.
B)Translation gains and losses are reflected on consolidated income statements.
C)Translation gains and losses are only realized if foreign investments are sold.
D)Both a. and c. are correct.
E)All of the above are correct.

Question 53

Assume a U.S. law is passed that prohibits the importation of sugar from China. This protectionism law has been adopted because of which of the following reasons?

A)The U.S.'s sugar industry has been underpriced by Chinese sugar imports.
B)The sugar industry in China is deteriorating.
C)The price of sugar has increased in both countries.
D)There has been a reduction in the standard of living in the U.S.

Question 54

The indirect quote for British pounds is .60 pounds. If you tried to convert $3,000 into pounds, how many pounds would you obtain?

A)1,800 pounds
B)0.0002 pounds
C)5,000 pounds
D)None of the above

Question 55

Political risk can affect the cash flows realized by a U.S. firm on an international investment through:

A)expropriation of assets.
B)operating or ownership restrictions.
C)limitations on the repatriation of capital.
D)a and b
E)All of the above

Question 56

Which of the following best describes Eurodollars?

A)European investments in U.S. companies
B)U.S. investment in European companies
C)U.S. dollars deposited in foreign banks
D)Euros deposited in U.S. banks

Question 57

A recent direct quote for the British pound was $1.5547. The pound's indirect quote is:

A)£1.5547.
B)$0.6432.
C)£1.1979.
D)£0.6432.

Question 58

The Eurodollar Market consists of:

A)European businesses purchasing US dollars in foreign exchange markets located in Europe.
B)American banks lending US dollars to European businesses or governments.
C)US banks lending deposits of US dollars to international companies and foreign governments.
D)Foreign banks lending deposits of US dollars to international companies and foreign governments.

Question 59

Most Eurobonds are denominated in:

A)American dollars.
B)British pounds.
C)European euros.
D)Swiss francs.

Question 60

A Eurobond is one denominated in a currency other than that of the country in which it is sold. Which of the following is not a distinguishing feature of Eurobonds?

A)They are issued in bearer form so the owner doesn't have to be identified.
B)Very strict adherence to the regulatory and disclosure requirements of the country in which the bond is issued is generally required.
C)Income taxes are not generally withheld on interest payments.
D)a and b are not characteristic of Eurobonds

Question 61

Four units of Country A's currency (call it "a")can be exchanged for three units of Country B's currency (call it "b"). What would be the indirect quote in Country B?

A)4 a : 3 b
B)0.75 a : 1 b
C)1.33 a : 1 b
D)1 a : 0.75 b

Question 62

If a country's currency is expected to get stronger, one would expect the forward rate (expressed as a direct quote)to ____.

A)sell above the spot rate
B)sell below the spot rate
C)sell on the spot
D)remain steady at the current spot rate

Question 63

A recent direct quote for the British pound was $1.6750. How many British pounds can be purchased with $100?

A)165.70
B)59.70
C)0.5970
D)16.57

Question 64

A recent direct quote for the euro was $.8845. The euro's indirect equivalent is:

A)€0.8845.
B)$1.1306.
C)€1.1306.
D)€0.1155.

Question 65

A foreign currency quote of $1.00 : 0.85 British pounds is ____.

A)an indirect quote in Great Britain, but a direct quote in the U.S.
B)a direct quote in Great Britain, but an indirect quote in the U.S.
C)a direct quote in both great Britain and the U.S.
D)an indirect quote in both Great Britain and the U.S.

Question 66

If recent direct quotes in U.S. dollars are $1.65 for the British pound and $.50 for the Australian dollar, the exchange rate between British pounds and Australian dollars (pounds/Australian dollars)is:

A)3.30 Australian dollars to the British pound.
B)3.30 British pounds to the Australian dollar.
C).3030 Australian dollars to the British pound.
D).3030 British pounds to the Australian dollar.

Question 67

As an American businessperson, you plan to visit Germany to expand your business. You determine that you will need approximately $1000 American dollars to spend while in Germany. The euro is quoted as $.9099. How many euros will you be able to purchase with the $1000?

A)€1,099
B)€909.9
C)€90.99
D)€109.9

Question 68

Apollo Fashions, a clothing importer, signed a contract to buy tweed sports jackets from an English manufacturer for £100 each. At the time the contract was signed a British pound was worth $1.52. Apollo immediately entered contracts to sell 5,000 jackets to retailers at a price of $200 each. When Apollo paid for the jackets the exchange rate was $1.45 to the pound. What was Apollo's exchange rate gain or (loss)on the transaction?

A)$35,000
B)($35,000)
C)$70,000
D)($70,000)

Question 69

A product can be manufactured comparably in Germany, Japan or Canada. The cost is €49,400 in Germany, ¥5,610,000 in Japan, and $68,000 (Canadian)in Canada. Direct quotes for the euro (€), the Japanese yen (¥), and the Canadian dollar are $.9200, $.0080, and $.6500 respectively. If shipping and other costs are equal, it would be wiser to acquire the product from:

A)Germany.
B)Japan.
C)Canada.
D)Any of the above

Question 70

Crown Honda purchased a small motorcycle from the Japanese manufacturer for 965,600 yen. The exchange rate for the yen was 142 yen per U.S. dollar at the time of purchase but then rose to 171.8 yen by the time payment was made. What was the dealer's gain or loss on the change in rates?

A)Gain of $1,180
B)Loss of $1,427
C)Loss of $1,180
D)Gain of $1,427

Question 71

If a government is going to "support" its own currency, it will ____.

A)sell more of its currency on the foreign exchange market
B)try to import more foreign goods
C)try to export less to foreign nations
D)buy more of its currency on the foreign exchange market

Question 72

Prior to 1960, most overseas business was done in the form of ____.

A)direct investments in foreign countries
B)multinational corporations
C)portfolio investments in foreign stocks
D)import/export businesses

Question 73

If a country's currency is expected to get weaker, this will ____.

A)encourage exports
B)encourage imports
C)not affect trade
D)discourage both imports and exports

Question 74

If recent direct quotes in U.S. dollars are $1.5547 for the British pound and $.1150 for the Mexican peso, the exchange rate available to a British importer buying pesos with pounds is:

A)13.5191 pounds per peso.
B)13.5191 pesos per pound.
C)0.0740 pounds per peso.
D)0.0740 pesos per pound.

Question 75

Direct investment is:

A)building significant facilities in another country in order to do business there or in nearby countries.
B)purchasing the stocks of foreign companies directly from those companies.
C)setting up sales offices in foreign countries.
D)exporting product to other countries.

Question 76

The direct and indirect quotes on the Swiss franc are 0.75 and 1.33, respectively. The direct and indirect quotes on Poland's zloty are 0.25 and 3.94, respectively. How many zloty will it cost a Polish merchant to purchase a watch priced at 270 Swiss francs.

A)90 zloty
B)154 zloty
C)810 zloty
D)2400 zloty

Question 77

Five units of Country C's currency (call it "c")can be exchanged for four units of Country D's currency (call it "d"). What is the direct quote in Country C?

A)5 c : 4 d
B)1.25 c : 1 d
C)1 c : 0.80 d
D)1 c : 1.25 d

Question 78

HBA Limited purchased equipment manufactured in Australia. The contract was for 10,000,000 Australian dollars, due in 180 days. The present exchange rate in US dollars is $.51 per Australian dollar and the 180-day forward rate is $.514. If the rate actually goes to $.50 in 180 days, what is the US dollar gain or loss incurred if no hedge is taken relative to a hedged position?

A)$392,157 gain
B)$ 40,000 loss
C)$100,000 gain
D)None of the above

Question 79

Suppose General Motors built an assembly plant in Canada at a cost of fifty million Canadian dollars. At the time the plant was built, the direct quote for the Canadian dollar was $.7376. If one year later the Canadian dollar strengthened to $0.7388, what gain or loss would GM show on its financial books?

A)A translation loss of $81,213
B)A translation gain of $60,000
C)A translation gain of $81,213
D)A transaction gain of $60,000

Question 80

A recent direct quote for the Japanese yen was $.009622. How many Japanese yen can be purchased with 10 American dollars?

A)9.622
B)1,039.28
C)0.09622
D)10.39