Question 1

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

Accepted Answer

Different units of trading refer to the different denominations or quantities in which a financial asset is traded. For example, stocks may be traded in lots of 100 shares, while currencies may be traded in units of 1,000, 10,000, or 100,000. Due to these differences, it may be difficult or even impossible to completely hedge a position in one asset with another asset traded in a different unit.

Question 2

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.

Accepted Answer

Foreign investments can offer diversification benefits, currency exposure, and access to different economic cycles, even if markets are equally efficient.

Question 3

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

Accepted Answer

The futures price of a currency is influenced by a variety of factors including supply and demand, interest rates, geopolitical events, and market expectations, and can differ from the current spot price of the currency.

Question 4

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

Accepted Answer

This statement is true. Both foreign investments in plant and equipment and foreign investments in securities result in international currency flows.

Question 5

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

Accepted Answer

When foreign demand for a country's goods increases, the demand for that country's currency also increases, causing its value to rise. Consequently, the value of other currencies relative to it will be devalued.

Question 6

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

Accepted Answer

A revaluation of the British pound means that it has increased in value compared to other currencies, including the US dollar. This leads to a decrease in the price of American goods for British citizens (choice 4) as it becomes cheaper for them to import goods from the US. However, it also implies an increase in the price of British goods for US citizens (choice 1) as it becomes relatively more expensive for them to purchase British products.

Question 7

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

Accepted Answer

This is because the supply and demand in the market can create a premium or discount on the price of the shares, regardless of the underlying net asset value.

Question 8

Exchange rates are

Accepted Answer

Exchange rates refer to the prices of foreign currencies, such as the exchange rate between the US dollar and the euro. They represent the amount of one currency that can be exchanged for another currency.

Question 9

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

Accepted Answer

If the security rises and the value of the pound rises, the investor benefits from both the appreciation of the stock and the currency, reducing the likelihood of a loss.

Question 10

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

Accepted Answer

American investors have access to mutual funds that focus on foreign investments, allowing them to diversify their portfolios with international assets.

Question 11

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

Accepted Answer

If a nation exports fewer goods than it imports, it has a deficit in its current account. This means it is spending more on imports and paying out more currency than it is earning from exports. As a result, it will experience an outflow of currency, further contributing to the deficit.

Question 12

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

Accepted Answer

To achieve diversification, foreign investments should have a low or negative correlation with the returns of US securities. If the returns of foreign investments are positively correlated with US securities, it means they are moving in the same direction, and investing in both would not provide diversification benefits.

Question 13

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

Accepted Answer

This statement is true as some foreign securities markets may have less information available to investors, or may have less liquid markets, which can result in less efficient pricing of securities.

Question 14

Advantages associated with investing in foreign securities do not include

Accepted Answer

Tax avoidance on dividend income is not a valid advantage associated with investing in foreign securities since foreign dividend income is still subject to taxes in the investor's home country. The other choices, such as global diversification and reduction in unsystematic risk, are valid advantages of investing in foreign securities. The choice A is also incorrect because a more efficient market would produce smaller returns, not larger returns.

Question 15

A global fund invests solely in foreign securities.

Accepted Answer

The answer of A global fund invests solely in foreign...

Question 16

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

Accepted Answer

2) Domestic travel by foreigners and 3) Dividend payments from foreign corporations both result in money flowing into the country, thereby causing a currency inflow.

Question 17

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

Accepted Answer

Investing in foreign stocks can provide diversification to a portfolio by exposing it to different markets, currencies, and industries, reducing the overall risk in the portfolio.

Question 18

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

Accepted Answer

When the value of a currency is expected to rise, the futures price typically exceeds the spot price due to the anticipated appreciation.

Question 19

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

Accepted Answer

British mutual funds are called unit trusts, but their shares are not registered with the Securities and Exchange Commission as it is a US regulatory body. The equivalent regulatory body in the UK is the Financial Conduct Authority.

Question 20

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

Accepted Answer

The answer of Which of the following is recorded in...

Quiz 22: Investing in Foreign Securities