Deck 7: Foreign Exchange and the Global Capital Markets

Question 1

Non-finance companies prefer currency arbitrage and speculation while making investments, as they are not a risk and there are high gain methods of earning profits.

Answer 1

False

Question 2

A currency swap helps a firm to reduce its foreign exchange rate risk by simultaneously locking into the price for two transactions of a currency.

Answer 2

True

Question 3

In an exchange rate quote, the base currency is typically the numerator.

Answer 3

False

Question 4

Futures contracts are identical to forward contracts.

Question 5

Companies are motivated to repay their bonds in a timely manner in order to maintain credibility in the financial market.

Question 6

Currency option is a right but not a requirement and therefore parties in a currency option do not have to actually exchange the currencies if they choose not to.

Question 7

In an indirect quote, the domestic currency is a variable amount and the foreign currency is fixed at one unit.

Question 8

The possibility of the trading of a currency in the forward market depends on the currency's demand in international financial markets.

Question 9

A company's primary purpose for wanting or needing to convert currencies is to pay or receive money for goods or services.

Question 10

An organization making use of the foreign exchange market can afford to ignore the rate at which a currency is bought or sold.

Question 11

In the forward markets, foreign exchange is always quoted against the U.S.dollar.

Question 12

A company operating globally must deal in foreign currencies, as it has to pay suppliers in other countries with a currency different from its home country's currency.

Question 13

One of the primary purposes of the capital markets is creating economies of scale.

Question 14

Typically, the sell or the ask is always cheaper than the bid or the buy.

Question 15

A company, when it expects to be paid in its own currency, must assess the risk that the buyer may not be able to pay the full amount due to currency fluctuations.

Question 16

The indirect quote method follows the American terms for noting the base and quoted currency.

Question 17

In a direct quote, the foreign currency is a variable amount and the domestic currency is fixed at one unit.

Question 18

The only reason a saver puts his cash at risk in the capital market is if the returns on the investment are greater than returns on holding risk-free assets.

Question 19

Companies use hedging as a way to protect themselves if there is a time lag between when they bill and receive payment from a customer.

Question 20

An organization makes use of the spot rate for making an immediate payment.The organization does not face the risk of the currency increasing or decreasing in value.

Question 21

The "ask" refers to:

A)any form of money in general circulation in a country.
B)money of one country denominated in the currency of another country or a group of countries.
C)the price at which a bank or a financial services firm is willing to sell that currency.
D)the rate at which the market converts one currency into another.
E)the price at which a bank or a financial services firm is willing to buy a specific currency.

Question 22

International equity markets consist of all the stock traded inside as well as outside the issuing company's home country.

Question 23

_____ refers to the money of one country denominated in the currency of another country or a group of countries.

A)Forward rate
B)Foreign exchange
C)Stock exchange
D)Equity swap
E)Loan

Question 24

The _____ is the exchange rate at which a buyer and a seller agree to transact a currency at some date in the future.

A)currency futures contract
B)currency swap
C)forward exchange rate
D)spot rate
E)cross rate

Question 25

Suppose a European tourist in the United States uses 1 euro to buy 1.27 U.S.dollars.However, when she leaves the United States, she pays 1.50 U.S.dollars to buy 1 euro.The difference of 0.23 U.S.dollars is the:

A)amount refunded to the tourist once she reaches her home country.
B)profit that the bank makes for each U.S.dollar bought and sold.
C)fee paid to the U.S.government for the stay in the country.
D)profit that the U.S.treasury department makes on each U.S.dollar bought and sold.
E)profit that the U.S.Home department makes on each U.S.dollar bought and sold.

Question 26

If an exchange rate between the U.S.dollar and the Chinese renminbi were quoted by a Japanese bank on Japanese soil, then the exchange rate would be termed as a:

A)currency futures contract.
B)currency swap.
C)forward exchange rate.
D)currency conversion.
E)cross rate.

Question 27

The _____ is the price at which a bank or financial services firm is willing to buy a specific currency.

A)exchange rate
B)foreign exchange
C)bid
D)ask
E)spread

Question 28

Which of the following is true for the term "spot exchange rate"?

A)It refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates.
B)It refers to the simultaneous and instantaneous purchase and sale of a currency for a profit.
C)It refers to the exchange rates that require immediate settlement with delivery of the traded currency.
D)It refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit.
E)It refers to the exchange rate between two currencies, neither of which is the official currency in the country in which the quote is provided.

Question 29

The Eurocurrency markets were a result of Eastern Europe's concern that any deposits of their dollars in U.S.banks might be confiscated or blocked for political reasons by the U.S.government.

Question 30

Suppose we quote the number of Indian rupees required to purchase 1 U.S.dollar as INR 45 / USD 1.In this case, USD is referred to as:

A)currency hedging.
B)base currency.
C)currency speculation.
D)currency arbitrage.
E)quoted currency.

Question 31

In the _____ approach, foreign exchange rates are expressed in terms of the number of U.S.dollars that can be exchanged for one unit of another currency.

A)bid
B)ask
C)indirect quote
D)direct quote
E)spot rate

Question 32

VCs are characterized primarily by their investments in smaller, high-growth firms that are considered riskier than traditional investments.

Question 33

Companies that do not want to issue more equity shares and dilute the ownership interests of existing shareholders prefer using bonds or debt to raise capital.

Question 34

The low appeal of the Eurocurrency market among borrowers is primarily because the market is highly regulatory, giving rise to prohibitive costs.

Question 35

Suppose we quote the number of Indian rupees required to purchase 1 U.S.dollar as INR 45 / USD 1.In this case, INR is referred to as:

A)currency hedging.
B)base currency.
C)currency speculation.
D)currency arbitrage.
E)quoted currency.

Question 36

Currency speculation refers to the:

A)conversion of one currency into another.
B)technique of protecting against the potential losses that result from adverse changes in exchange rates.
C)simultaneous and instantaneous purchase and sale of a currency for a profit.
D)exchange rates that require immediate settlement with delivery of the traded currency.
E)practice of buying and selling a currency with the expectation that the value will change and result in a profit.

Question 37

_____ refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates.

A)Currency hedging
B)Currency swap
C)Currency speculation
D)Currency conversion
E)Currency arbitrage

Question 38

Currency arbitrage refers to the:

A)conversion of one currency into another.
B)technique of protecting against the potential losses that result from adverse changes in exchange rates.
C)simultaneous and instantaneous purchase and sale of a currency for a profit.
D)price at which a bank or a financial services firm is willing to sell a currency.
E)practice of buying and selling a currency with the expectation that the value will change and result in a profit.

Question 39

In the _____ approach, foreign exchange rates are expressed in terms of the number of currency units that can be exchanged for a U.S.dollar.

A)bid
B)ask
C)indirect quote
D)direct quote
E)spot rate

Question 40

The _____ is still the reserve currency for the world's central banks despite the changes in the international monetary system and the expansion of the capital markets.

A)dollar
B)pound
C)euro
D)renminbi
E)yen

Question 41

Which of the following is true of debt securities?

A)It refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates.
B)It refers to the simultaneous and instantaneous purchase and sale of a currency for a profit.
C)It refers to a loan from the investor to a company or government entity.
D)It refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit.
E)It refers to the ownership of a part of a company.

Question 42

_____ is the option or the right but not the obligation to exchange a specific amount of currency on a specific future date and at a specific agreed-on rate.

A)Currency option
B)Currency swap
C)Currency conversion
D)Cross rate
E)Currency futures contract

Question 43

Which of the following is true of stocks?

A)It refers to a loan from the investor to a company or government entity.
B)It refers to the simultaneous and instantaneous purchase and sale of a currency for a profit.
C)It refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit.
D)It refers to a type of equity security that gives the holder an ownership of a company's assets and earnings.
E)It refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates.

Question 44

The _____ includes stock exchanges, bond markets, and futures and options markets, among others.

A)tertiary market
B)secondary market
C)forward market
D)primary market
E)main market

Question 45

Which of the following is true for futures contracts?

A)They do not have standardized terms.
B)They have clearinghouses that guarantee the transactions.
C)They are private contracts between two parties.
D)The parties have a higher risk of defaulting on a contract.
E)The settlement of a futures contract occurs at the end of the contract.

Question 46

A _____ is a simultaneous buy and sell of a currency for two different dates.

A)spot rate
B)currency conversion
C)currency futures contract
D)currency swap
E)currency option

Question 47

_____ refers to the money that is invested in return for a percentage of ownership but is not guaranteed in terms of repayment.

A)Bid
B)Ask
C)Currency swap
D)Currency conversion
E)Equity

Question 48

_____ refers to the capital market where new securities (stocks and bonds are the most common) are issued.

A)Tertiary market
B)Secondary market
C)Forward market
D)Primary market
E)Main market

Question 49

Which of the following is true of equity securities?

A)It refers to the technique of protecting against the potential losses that result from adverse changes in exchange rates.
B)It refers to a loan from the investor to a company or government entity.
C)It refers to the simultaneous and instantaneous purchase and sale of a currency for a profit.
D)It refers to the practice of buying and selling a currency with the expectation that the value will change and result in a profit.
E)It refers to the ownership of a part of a company.

Question 50

Companies, institutions, or hedgers employ _____ to eliminate the volatility of a currency's price in the future.

A)forward contracts
B)a bid
C)an ask
D)cross rates
E)currency futures contracts

Question 51

If a European company opts to buy shirts from India with payment due in 60 days, it would be able to access the forward market to enter into a contract to lock in a future price for its payment.This would enable the European firm to protect itself against depreciation of the euro, which would require more euros to buy one Indian rupee.This contract is referred to as a(n):

A)option contract.
B)forward contract.
C)implicit contract.
D)voidable contract.
E)quasi-contract.

Question 52

A _____ is a system in which people, companies, and governments with an excess of funds transfer those funds to people, companies, and governments that have a shortage of funds.

A)forward contract
B)currency swap
C)currency conversion
D)forward market
E)capital market

Question 53

_____ in capital markets refers to the ease by which shareholders and bondholders can buy and sell their securities or convert their investments into cash.

A)Liquidity
B)Direct finance
C)Indirect finance
D)Currency swap
E)Currency conversion

Question 54

Forward contracts, currency swaps, options, and futures all belong to a group of financial instruments called:

A)bonds.
B)derivatives.
C)loans.
D)deposits.
E)stocks.

Question 55

Which of the following is true for forward contracts?

A)They have standardized terms.
B)They have clearinghouses that guarantee the transactions.
C)They are private contracts between two parties.
D)The parties involved have a zero risk of defaulting on a contract.
E)They are marked-to-market daily.

Question 56

Speculators, who bet on the direction in which a currency's price will move, frequently employ:

A)forward contracts.
B)a bid.
C)an ask.
D)currency futures contracts.
E)a cross rate.

Question 57

A movie production house makes a gross profit of $10 million from a movie release.If the company spends $4 million, including taxes and all expenses, then it has $6 million in profits.The company can invest the $6 million in a mutual fund, investing in stocks and bonds all over the world.Making such an investment is riskier than keeping the $6 million in a savings account.The financial officer hopes that over the long term, the investment will yield greater returns than cash holdings or interest on a savings account.This is an example of a form of:

A)direct finance.
B)indirect finance.
C)currency swap.
D)currency conversion.
E)cross rate.

Question 58

When investors buy bonds, they receive interest payments:

A)usually if the organization makes profits.
B)usually at a fixed rate for the life of the bond.
C)usually at a varied rate for the life of the bond.
D)accumulated at the expiry of the life of the bond.
E)usually at the end of every two years.

Question 59

A foreign bond is a bond:

A)issued in the currency of the country in which it is being sold.
B)issued outside the country in whose currency it is denominated.
C)that is sold simultaneously in several global financial centers.
D)that is denominated in one currency, usually U.S.dollars or euros.
E)which is not regulated by the governments of the countries in which they are sold.

Question 60

_____ involves a financial intermediary between the borrower and the saver.

A)Direct finance
B)Indirect finance
C)Currency swap
D)Currency conversion
E)Cross rate

Question 61

Eurocurrency refers to:

A)a currency that is issued by the European Union to repay debts to American financial institutions.
B)a currency which serves as the world's primary reserve currency.
C)the U.S.dollars deposited in any bank outside the United States.
D)any currency on deposit outside its country of issue.
E)the international pricing currency for products traded on a global market.

Question 62

Which of the following is true for offshore financial centers?

A)They are developed countries who offer tax-free financial help to developing countries.
B)They are countries where there are few rules governing the financial sector as a whole and low overall taxes.
C)They are central points for business and finance and are usually home to major corporations and banks or at least regional headquarters for global firms.
D)They are countries which serve as the local headquarters for the International Monetary Fund and the World Bank.
E)They are islands which serve as the annual destinations for the financial meets of the G20 group.

Question 63

What is the primary source of appeal of the Eurocurrency market for the borrowers?

Question 64

Which of the following is true of LIBOR?

A)It is the interest rate that London banks charge each other for Eurocurrency loans.
B)It is the rate bid by banks on Eurocurrency deposits.
C)It is the rate at which banks offer to lend unsecured funds to other banks in the euro wholesale money market.
D)It refers to the overnight indexed swap rate.
E)It is the reference rate for overnight-unsecured transactions in the Sterling market.

Question 65

What do you understand by the term "world financial centers"?

Question 66

Venture capital refers to the:

A)way that an investor can liquidate an investment, usually for a liquid security or cash.
B)investments made by microfinance institutions in government projects.
C)investment made in an early- or growth-stage company.
D)investment made by financial institutions to turn around sick companies.
E)way that an investor can avail short-term tax-free loans for his organization.

Question 67

What do you understand by the term "spot rates"?

Question 68

Eurodollar refers to:

A)a currency that is issued by the European Union to repay debts to American financial institutions.
B)a currency which serves as the world's primary reserve currency.
C)U.S.dollars deposited in any bank outside the United States.
D)any currency on deposit outside its country of issue.
E)the international pricing currency for products traded on a global market.

Question 69

What is a bid and how does it differ from an offer?

Question 70

Which of the following is true for world financial centers?

A)They are developed countries who offer tax-free financial help to the developing countries.
B)They are countries or territories where there are few rules governing the financial sector as a whole and low overall taxes.
C)They are central points for business and finance and are usually home to major corporations and banks or at least regional headquarters for global firms.
D)They are countries which serve as the local headquarters for the International Monetary Fund and the World Bank.
E)They are islands which serve as the annual destinations for the financial meets of the G20 group.

Question 71

_____ focus primarily on the creation and sale of securities to help companies, governments, and large institutions achieve their financing objectives.

A)Corporate banks
B)Private banks
C)Retail banks
D)Investment banks
E)Business banks

Question 72

How would you differentiate between the direct currency quote and the indirect currency quote?

Question 73

How did the Eurocurrency markets come into existence?

Question 74

A _____ is a bond that is sold simultaneously in several global financial centers and is denominated in one currency, usually U.S.dollars or euros.

A)Yankee bond
B)samurai bond
C)Eurobond
D)global bond
E)dragon bond

Question 75

What was the Glass-Steagall Act?

Question 76

How do you differentiate between a futures contract and a forward contract?

Question 77

A _____ is a bond issued outside the country in whose currency it is denominated.

A)Yankee bond
B)samurai bond
C)Eurobond
D)global bond
E)dragon bond

Question 78

What are the benefits provided by the international capital markets in addition to the benefits provided by the domestic capital market?

Question 79

What are termed as "majors" in the financial market?

Question 80

In the United States, retail and investment banks were barred from being under the same corporate umbrella by the:

A)Gramm-Leach-Bliley Act.
B)Glass-Steagall Act.
C)Sarbanes-Oxley Act.
D)Case-Zablocki Act.
E)Hyde Act.