Question 1

A large U.S.company has £500,000 in excess cash from its foreign operations.The company would like to exchange these funds for U.S.dollars.In which of the following markets can this exchange be arranged?

Accepted Answer

The foreign exchange market is the most appropriate market for exchanging foreign currency into U.S. dollars. ADR, national registry, national discount window, and Eurobond market are not designed for such a purpose.

Question 2

Trader A has agreed to give 100,000 U.S.dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62.The traders agree to settle this trade within two business day.What is this exchange called?

Accepted Answer

This exchange is called a spot trade, which involves the immediate exchange of currencies at the current exchange rate, with settlement typically occurring within two business days.

Question 3

U.S.dollars deposited in a bank in Switzerland are called:

Accepted Answer

D

Question 4

George and Pat just made an agreement to exchange currencies based on today's exchange rate.Settlement will occur tomorrow.Which one of the following is the exchange rate that applies to this agreement?

Accepted Answer

The spot exchange rate is the current exchange rate at which currencies can be exchanged for immediate delivery. Since the settlement is scheduled for tomorrow, the exchange rate that applies to this agreement is the spot exchange rate.

Question 5

Which one of the following supports the idea that real interest rates are equal across countries?

Accepted Answer

The international Fisher effect states that the real interest rate is the same across countries, and only the nominal interest rate differs due to expected inflation rates. Therefore, choice (C) supports the idea that real interest rates are equal across countries.

Question 6

Assume that $1 is equal to ¥98 and also equal to C$1.21.Based on this,you could say that C$1 is equal to: C$1(¥98/C$1.21)= ¥80.99.The exchange rate of C$1 = ¥80.99 is referred to as the:

Accepted Answer

The exchange rate of C$1 = ¥80.99 is a cross-rate because it is derived from the exchange rate of $1 = ¥98 and $1 = C$1.21. A cross-rate is an exchange rate between two currencies that is derived from the exchange rates of those currencies in relation to a third currency.

Question 7

Party A has agreed to exchange $1 million U.S.dollars for $1.21 million Canadian dollars.What is this agreement called?

Accepted Answer

This agreement is called a currency swap, which involves the exchange of principal and interest payments in different currencies between two parties. In this case, Party A is exchanging U.S. dollars for Canadian dollars with the expectation of receiving more Canadian dollars in return.

Question 8

Assume that an item costs $100 in the U.S.and the exchange rate between the U.S.and Canada is: $1 = C$1.27.Which one of the following concepts supports the idea that the item that sells for $100 in the U.S.is currently selling in Canada for $127?

Accepted Answer

Purchasing power parity (PPP) supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127. PPP suggests that exchange rates should adjust to equalize the prices of identical goods in different countries, taking into account the exchange rate. Therefore, if an item costs $100 in the U.S. and the exchange rate is $1 = C$1.27, in order to achieve PPP, the item should cost C$127 in Canada.

Question 9

You would like to purchase a security that is issued by the British government.Which one of the following should you purchase?

Accepted Answer

Gilt is a type of British government security, also known as gilts or gilt-edged securities. It is the best choice among the given options for purchasing a security issued by the British government.

Question 10

International bonds issued in a single country and denominated in that country's currency are called:

Accepted Answer

Foreign bonds are issued in a single country and denominated in that country's currency, but are sold to investors outside of that country. This distinguishes them from domestic bonds, which are sold to investors within the country where they are issued.

Question 11

A trader has just agreed to exchange $2 million U.S.dollars for $1.55 million Euros six months from today.This exchange is an example of a:

Accepted Answer

This is a forward trade because the exchange rate is agreed upon now, but the actual exchange of currencies will occur six months from now. A spot trade would involve the immediate exchange of currencies at the current exchange rate. A currency swap would involve exchanging one currency for another, and then exchanging back at a later agreed-upon date. A floating swap would involve exchanging currencies periodically over a specified period of time depending on the floating exchange rate. Triangle arbitrage involves taking advantage of mispricing among three different currencies.

Question 12

The price of one Euro expressed in U.S.dollars is referred to as a(n):

Accepted Answer

The exchange rate is the price at which one currency can be exchanged for another. In this case, it is the price of Euro in U.S. dollars.

Question 13

Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

Accepted Answer

American Depository Receipts (ADRs) are commonly used by US investors to invest in foreign stocks that are not traded on US exchanges. The ADR represents a certain number of shares of the foreign stock and trades on US exchanges like any other security.

Question 14

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country,given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

Accepted Answer

Exchange rate risk refers to the risk that a firm faces due to fluctuations in the exchange rate between its home currency and the foreign currency where it has established a facility. Fluctuations in the exchange rate can impact the firm's profitability, cash flows, and overall financial performance. Therefore, D is the correct answer. A refers more broadly to the risks associated with doing business in foreign countries, B is a type of risk that can be diversified away, C refers to the risk that inflation will erode the purchasing power of a firm's cash flows, and E refers to risks associated with political instability and potential government actions such as expropriation.

Question 15

International bonds issued in multiple countries but denominated solely in the issuer's currency are called:

Accepted Answer

Eurobonds are issued in multiple countries but denominated solely in the issuer's currency, and they are named after the currency in which they are issued (e.g. Eurobond issued in US dollars). Treasury bonds are issued by governments, Bulldog bonds are issued by non-British companies in the UK, Yankee bonds are issued by foreign companies in the US, and Samurai bonds are yen-denominated bonds issued by foreign companies in Japan.

Question 16

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

Accepted Answer

The unbiased forward rates hypothesis posits that the current forward exchange rate is an unbiased predictor of the future spot exchange rate. This means that the forward rate should, on average, equal the future spot rate.

Question 17

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

Accepted Answer

Interest rate parity is a theory that suggests the difference in interest rates between two countries is equal to the difference between the forward exchange rate and the spot exchange rate. This condition helps in understanding how interest rates and exchange rates are related and ensures no arbitrage opportunities exist due to interest rate differentials.

Question 18

Mr.Black has agreed to a currency exchange with Mr.White.The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now.This agreed-upon exchange rate is called the:

Accepted Answer

The agreed-upon exchange rate occurring in the future (4 months from now) is known as the forward rate. The spot rate is the current exchange rate for immediate delivery, while the swap rate and triangle rate are not relevant to this scenario. The parity rate refers to the equality of value between two currencies, which is not relevant in this exchange transaction.

Question 19

On Friday evening,Bank A loans Bank B Eurodollars that must be repaid the following Monday morning.Which one of the following is most likely the interest rate that will be charged on this loan?

Accepted Answer

The London Interbank Offer Rate (LIBOR) is the most widely used interest rate in the Eurodollar market and is the rate at which banks lend to each other. Therefore, it is the most likely interest rate that will be charged on the loan. The Eurodollar Yield to Maturity is the rate of return anticipated on a Eurodollar deposit or certificate of deposit, which is not relevant in this scenario. The Paris Opening Interest Rate, United States Treasury bill rate, and the International Prime Rate are all not commonly used in the Eurodollar market.

Question 20

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?

Accepted Answer

Uncovered interest parity states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates.

Quiz 21: International Corporate Finance