Deck 22: Investing in Foreign Securities

Question 1

Foreign travel is recorded in the current account of the balance of payments.

Answer 1

True

Question 2

If a speculator expects the value of the pound to fall,then that individual may establish a long position in pounds or a short position in dollars.

Answer 2

False

Question 3

If a nation exports more goods than it imports,it has a surplus in the current account.

Answer 3

True

Question 4

An increase in the demand for dollars will tend to reduce the return on foreign investments.

Question 5

If the American dollar is devalued,American goods are cheaper to individuals holding dollars.

Question 6

If the demand for a currency exceeds the supply,the currency will be devalued under a system of freely fluctuating exchange rates.

Question 7

The devaluation (depreciation)of one currency implies the revaluation (appreciation)of other currencies.

Question 8

Returns on investments in foreign securities are unaffected by fluctuations in the value of foreign currencies.

Question 9

Foreign currencies are bought and sold in the foreign exchange market.

Question 10

If Americans buy British securities,they may hedge the foreign exchange risk by entering into futures contracts to sell pounds at a specified price.

Question 11

Under a system of fluctuating exchange rates,a currency will depreciate if supply exceeds the demand for the currency.

Question 12

The risk associated with fluctuations in exchange rates is increased through hedging with foreign currencies futures.

Question 13

Fluctuations in exchange rates are one source of risk that investors in domestic securities avoid.

Question 14

If a country's currency is devalued,its price relative to other currencies is reduced.

Question 15

If speculators anticipate the value of the Euro to rise,they enter into futures contracts requiring they deliver Euros in the future.

Question 16

If American investors buy German stocks,they may sustain losses if the Euro is devalued.

Question 17

American investors who own foreign securities may have dividend payments taxed by the local country.

Question 18

If a country exports more goods than it imports,it has a surplus in its balance of payments.

Question 19

If you own British pounds and the American dollar is devalued,that implies American goods will be cheaper.

Question 20

American investors seeking foreign investments are limited to foreign securities traded on the New York and American stock exchanges.

Question 21

Because of differences in the units of trading,investors may not be able to completely hedge their positions.

Question 22

If foreign securities markets are as efficient as U.S.securities markets,then foreign investments may offer the U.S.investor no advantages over investing in domestic securities.

Question 23

The futures price of a currency equals the spot price of the currency.

Question 24

From the viewpoint of international currency flows,foreign investments in plant and equipment are no different from investments in foreign securities.

Question 25

If foreign demand for a country's goods increases, 1.the value of its currency will rise
2)the value of its currency will decline
3)the value of other currencies relative to its currency will be revalued
4)the value of other currencies relative to its currency will be devalued

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 26

A revaluation of the British pound implies 1.an increase in the price of British goods to U.S.citizens
2)a decrease in the price of British goods to U.S.citizens
3)an increase in the price of American goods to citizens of Britain
4)a decrease in the price of American goods to citizens of Britain

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 27

The shares of closed-end investment companies that invest in foreign securities may sell for a premium over their net asset values.

Question 28

Exchange rates are

A) prices at which foreign securities are bought and sold
B) prices at which American stocks are sold abroad
C) prices at which foreign securities are bought and sold in the United States
D) prices of foreign currencies

Question 29

If an American investor buys a British stock,the individual will not sustain a loss if the value of the

A) security rises and the value of the pound falls
B) security falls and the value of the pound rises
C) security rises and the value of the pound rises
D) security falls and the value of the pound falls

Question 30

American investors may acquire shares in mutual funds that specialize in foreign investments.

Question 31

If a nation exports fewer goods than it imports,it 1.experiences an outflow of currency
2)experiences an inflow of currency
3)has a surplus in its current account
4)has a deficit in its current account

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 32

For diversification to be achieved by foreign investments,the returns on such investments must be positively correlated with the returns from U.S.securities.

Question 33

Foreign securities markets may be less efficient than American securities markets.

Question 34

Advantages associated with investing in foreign securities do not include

A) inefficient foreign security markets producing larger returns
B) global diversification
C) reduction in unsystematic risk
D) tax avoidance on dividend income

Question 35

A global fund invests solely in foreign securities.

Question 36

Which of the following causes a currency inflow?
1)foreign travel and foreign investments
2)domestic travel by foreigners
3)dividend payments from foreign corporations
4)dividend payments to foreign investors

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 37

One advantage offered by investments in foreign stocks is diversification of the portfolio.

Question 38

Anticipation that the value of a currency will rise results in the spot price exceeding the futures price.

Question 39

British mutual funds are called unit trusts,and their shares are registered with the Securities and Exchange Commission.

Question 40

Which of the following is recorded in the current account of the balance of payments?

A) a purchase of a foreign money market security
B) a foreign company's buying equipment in the U.S.
C) a foreign government spending in the U.S.
D) the statistical adjustment for differences in imports and exports

Question 41

The balance of payments excludes

A) the value of a country's assets
B) exports of securities
C) government purchases of foreign goods
D) a reserve account

Question 42

The EAFE is

A) an index of European stocks
B) a global index of stocks
C) an index of stocks traded in Europe, Australia, and the far east
D) an index of stocks trade in Europe, the Americas, and the far east

Question 43

If foreign securities markets are inefficient,

A) investors cannot expect to outperform the market
B) investors will outperform the market consistently
C) some individuals may consistently outperform the market
D) investors can expect to outperform the market

Question 44

The portfolios of international funds

A) stress European securities
B) exclude U.S. securities
C) are a diversified mix of securities from all countries with security markets
D) specialize in the securities of one country

Question 45

Eurodollars are

A) dollars spent abroad by tourists
B) foreign deposits in American banks
C) U.S. securities traded abroad
D) dollar-denominated deposits in foreign banks

Question 46

Systematic risk associated with investing in foreign securities excludes

A) how firms finance their assets
B) exchange rate risk
C) changes in interest rates
D) inflation

Question 47

If the price of the European euro is $1.36,how many euros are necessary to purchase $1.00?

Question 48

On means to hedge against an anticipated decline in the Euro would be to sell

A) currency put options
B) American denominated securities
C) Eurobonds
D) euro currency futures

Question 49

An American investor may take a position in foreign equities by acquiring

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 50

The European Economic Monetary Union created the euro which is
1)iShares
2)international mutual funds
3)country closed-end investment companies

A) a European equities market
B) a common European currency
C) a European bond traded outside of Europe
D) a currency for clearing security trades

Question 51

Correlation coefficients relating U.S.stock markets and foreign stock markets

A) tend to be negative
B) diminish over time
C) are equal to beta coefficients relating U.S. and foreign markets
D) suggest possible diversification

Question 52

What is a nation's cash inflow (outflow)on its current account and its capital account given the following information? Was there a net currency inflow or outflow?

Question 53

A deficit in a country's balance of trade suggests

A) excessive investment in that country by foreign firms
B) the balance of payments is in disequilibrium
C) imports of goods and services exceed exports
D) income paid foreign nationals exceeds domestic income

Question 54

If a nation has a surplus in its current account, 1.it exports fewer goods than it imports
2)it exports more goods than it imports
3)the value of its currency should fall
4)the value of its currency should rise

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4