Deck 9: International Financial Markets

Question 1

An excess money supply creates a borrower's market, forcing down interest rates and the cost of borrowing.

Answer 1

True

Question 2

If the money supply increases, its price in the form of interest rates also increases.

Answer 2

False

Question 3

An offshore financial center is a country or territory whose financial sector features very few regulations and few, if any, taxes.

Answer 3

True

Question 4

A capital market is a system that allocates financial resources in the form of debt and equity according to their most efficient uses.

Question 5

International financial markets allow companies to exchange one currency for another.

Question 6

The rapid growth of the international capital market can be traced to three main factors: deregulation, innovative financial instruments, and information technology.

Question 7

Offshore financial centers tend to be characterized by economic and political instability and poor telecommunications infrastructures.

Question 8

Through the international capital market, a company that is unable to obtain funds from investors in its own nation can seek financing from investors elsewhere.

Question 9

Booking centers are usually located on small island nations and territories with favorable tax and/or secrecy laws.

Question 10

The international capital market is a network of individuals, companies, financial institutions, and governments that invest and borrow across national boundaries.

Question 11

Deregulation of national capital markets has been instrumental in the expansion of the international capital market.

Question 12

Investors increase risk by holding international securities whose prices move independently.

Question 13

The international financial market is composed of two interrelated systems: the international capital market and the foreign goods market.

Question 14

The microcredit concept was pioneered in developed countries as a way for developing countries to create the foundation for a market economy.

Question 15

Given the globalization trend, the international capital market reduces the available set of investment opportunities.

Question 16

The world's three most important financial centers are New York, Chicago, and London.

Question 17

Well-functioning financial markets funnel money from organizations and economies with excess funds to those with shortages.

Question 18

Securitization is the unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments.

Question 19

When obtaining microcredit, small groups of low-income entrepreneurs can borrow money at competitive rates without having to put up collateral.

Question 20

Increased regulation of national capital markets has been instrumental in the expansion of the international capital market.

Question 21

The international bond market consists of all stocks bought and sold outside the issuer's home country.

Question 22

A rise in a country's currency forces borrowers to shell out more local currency to pay off the interest owed on bonds denominated in an unaffected currency.

Question 23

Typical buyers of international bonds include medium- and large-sized banks, pension funds, mutual funds, and governments with excess financial reserves.

Question 24

The most important factor fueling growth in the international bond market is high interest rates in developed nations.

Question 25

The London Interbank Bid Rate (LIBID) is the interest rate that London banks charge other large banks for borrowing Eurocurrency.

Question 26

Samurai bonds are bonds issued in Japan by non-Japanese entities.

Question 27

The spread of privatization is encouraging the growth of the international equity market.

Question 28

Although historically more devoted to equity as a means of financing, Europe has more recently discovered the value of debt.

Question 29

International transactions between two currencies other than the U.S. dollar often use the dollar as a vehicle currency.

Question 30

There are two components of every quoted exchange rate: the debt and the equity rates.

Question 31

Exchange rate risk is the risk of adverse changes in exchange rates.

Question 32

If an exchange rate quotes the number of Indian rupees needed to buy one U.S. dollar, the dollar is the quoted currency and the rupee is the base currency.

Question 33

High interest rates outside the developed nations have fueled increased activity in the international bond market.

Question 34

All of Europe's currencies combined are referred to as Eurocurrency.

Question 35

The rate at which one currency is exchanged for another depends on the size of the transaction, the trader conducting it, and general economic conditions.

Question 36

The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency arbitrage.

Question 37

In any exchange rate, the quoted currency is always the numerator and the base currency is always the denominator.

Question 38

Interest arbitrage is the profit-motivated purchase and sale of interest-paying securities denominated in different currencies.

Question 39

The main appeal of the Eurocurrency market is the complete absence of regulation.

Question 40

By issuing bonds in the international bond market, borrowers from newly industrialized and developing countries can borrow money from other nations where interest rates are lower.

Question 41

Which of the following participate in capital markets?

A) Governments
B) Mutual funds
C) Non-profit organizations
D) All of the above

Question 42

Cross rates between two currencies can be calculated using either currency's indirect or direct exchange rates with another currency.

Question 43

Which of the following is a system that allocates financial resources in the form of debt and equity according to their most efficient uses?

A) International equity market
B) Foreign currency market
C) Capital market
D) Eurocurrency market

Question 44

Shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows are called ________.

A) stocks
B) bonds
C) debt
D) eurocurrencies

Question 45

Company debt normally takes the form of ________.

A) bonds
B) equity
C) stocks
D) bank loans

Question 46

Forward contracts belong to a family of financial instruments called arbitrage.

Question 47

A convertible currency (or soft currency) is traded freely in the foreign exchange market with its price determined by the London banks.

Question 48

An exchange rate requiring delivery of the traded currency within two business days is called a cross rate.

Question 49

If you are traveling to another country and want to exchange currencies at your bank before departing, you will be quoted the spot rate since you are exchanging on the spot.

Question 50

If a currency's forward rate is higher than its spot rate, the currency is trading at a discount.

Question 51

A loan in which the borrower promises to repay the borrowed amount plus a predetermined rate of interest is called ________.

A) equity
B) exchange rate
C) stock
D) debt

Question 52

All foreign exchange transactions can be performed in the over-the-counter (OTC) market.

Question 53

Which of these is a debt instrument specifying the timing of principal and interest payments?

A) Stock
B) Bond
C) Eurocurrency
D) Equity

Question 54

The process of aggregating the currencies that one bank owes another and then carrying out the transaction is called clearing.

Question 55

A currency swap is the simultaneous purchase and sale of foreign exchange for two different dates.

Question 56

One goal of currency restriction is to preserve hard currencies to pay for imports and to finance trade deficits.

Question 57

A way to get around national restrictions on currency convertibility is to use barter.

Question 58

Forward rates represent the expectations of currency traders and bankers regarding a currency's future spot rate.

Question 59

The international financial market is composed of two interrelated systems called the ________ and the ________.

A) international capital market; foreign exchange market
B) international capital market; foreign goods market
C) foreign goods market; international services market
D) foreign goods market; foreign exchange market

Question 60

Although London has a better location and the preferred time zone, New York dominates the foreign exchange market because the majority of the trades involve the U.S. dollar.

Question 61

The international capital market ________.

A) limits the available set of lending opportunities
B) increases overall portfolio risk for investors
C) is easily accessible to everyone
D) allows investors to reduce risk by holding international securities whose prices move independently

Question 62

Which of these is a country or territory whose financial sector features very few regulations and few, if any, taxes?

A) Offshore financial center
B) Currency market center
C) Capital market center
D) World trade center

Question 63

Which of these is NOT a component of the international capital market?

A) Foreign exchange market
B) International equity market
C) Eurocurrency market
D) International bond market

Question 64

The world's three most important financial centers are ________.

A) Bonn, Zurich, and New York
B) London, Amsterdam, and Sydney
C) New York, Tokyo, and Bombay
D) Tokyo, London, and New York

Question 65

Which of the following is not a purpose of the international capital market?

A) Reduces risk for lenders
B) Expands the money supply for borrowers
C) Reduces the cost of money to borrowers
D) Preserves hard currencies to finance trade deficits

Question 66

Microcredit loans in developing countries typically average ________.

A) more than $100
B) about $350
C) more than $500
D) less than $500

Question 67

A small group of low-income entrepreneurs from less-developed countries borrowing money at competitive rates with little or no collateral is called ________.

A) microdebit
B) microcredit
C) capital loans
D) capital credit

Question 68

The international capital market's rapid growth rate is traced to all these EXCEPT ________.

A) innovative financial instruments
B) information technology
C) foreign exchange rates
D) deregulation

Question 69

The international bond market consists of all bonds sold by issuing companies, governments, or other organizations ________.

A) within their own countries
B) to London banks
C) outside their own countries
D) to developing nations only

Question 70

Which of these is a prominent operational center?

A) The Cayman Islands
B) Gibraltar
C) Switzerland
D) Singapore

Question 71

The ease with which bondholders and shareholders may convert their investments into cash is called ________.

A) barter
B) hedging
C) arbitrage
D) liquidity

Question 72

Which of the following is NOT true?

A) The international capital market expands the available set of lending opportunities.
B) Investors reduce their overall risk by spreading their money over a greater number of debt and equity instruments.
C) Investors increase risk by holding international securities whose prices move independently.
D) Investing in international securities benefits investors because some economies are growing while others are in decline.

Question 73

________ is a prominent operational center.

A) Phoenix
B) London
C) Beijing
D) Frankfurt

Question 74

________ centers are usually located on small island nations or territories with favorable tax and/or secrecy laws.

A) Liquidity
B) Booking
C) Capital
D) Operational

Question 75

Which of these is an important booking center?

A) Bahrain
B) Singapore
C) Monaco
D) All of the above

Question 76

An expanded money supply ________.

A) reduces the cost of borrowing
B) makes it difficult for financial institutions to lend money
C) increases the cost of borrowing
D) diminishes the entrepreneurial initiatives of a country

Question 77

The unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments is called ________.

A) market liquidity
B) securitization
C) bartering
D) arbitrage

Question 78

Deregulation of capital markets resulted in all of the following EXCEPT ________.

A) increased competition
B) lowered the cost of financial transactions
C) opened many national markets to global investing and borrowing
D) reduced the use of microcredit

Question 79

All of the following are true of booking centers EXCEPT that ________.

A) they are small island nations or territories with favorable tax and/or secrecy laws
B) they are home to offshore branches of domestic banks that use them as bookkeeping facilities
C) funds pass through booking centers on their way to large operational centers
D) important booking centers include New York, London, and Tokyo

Question 80

An offshore financial center ________.

A) is a country or territory whose financial sector features very few regulations and few, if any, taxes
B) tends to be characterized by economic and political stability
C) usually provides access to the international capital market through an excellent telecommunications structure
D) all of the above