Deck 12: International Markets

Question 1

A "flight of capital" from a country would tend to reduce the value of the country's currency relative to other countries.

Answer 1

True

Question 2

A country's forward exchange rate will increase relative to its spot exchange rate when people expect it to have more inflation than other countries.

Answer 2

False

Question 3

Governments encourage long-term foreign investment in their countries because it helps their balance of payments.

Answer 3

True

Question 4

If a government buys its domestic currency from foreigners, its exchange rate will rise.

Question 5

When the foreign demand for a country's goods and services increases, the demand for the foreign country's currency also increases.

Question 6

In the balance of payments, the difference between current account flows and capital account flows is shown as statistical discrepancy.

Question 7

The demand for foreign exchange by an importer is a demand derived from a pending economic transaction.

Question 8

A foreign currency will, on average, appreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.

Question 9

Exports grow rapidly when foreign currencies depreciate relative to the dollar.

Question 10

A strong dollar would make imports cheaper, and force domestic producers of goods with import substitutes to lower prices.

Question 11

If a Canadian dollar costs $0.83 in U.S. dollars, a U.S. dollar costs a Canadian $1.17 in Canadian dollars.

Question 12

If interest rates are higher in Japan than in the United States, the cost of a yen per U.S. dollar in the spot market will be higher than in the forward market.

Question 13

In balance of payments accounting, a deficit in current accounts prompts an offsetting surplus in capital accounts.

Question 14

If an investor can obtain more of a Euro for a Dollar in the forward market than in the spot market, then Euro is said to be selling at a discount to the spot rate.

Question 15

A Canadian dollar cost $0.84 in U.S. dollars and later costs $0.86. The U.S. dollar has depreciated relative to the Canadian dollar.

Question 16

Eurobonds are bearer bonds and do not have to be registered, which makes them more marketable.

Question 17

A deficit in the trade balance of payments puts downward pressure on the exchange rate.

Question 18

A weak U. S. dollar will lead to increased foreign demand for U.S goods.

Question 19

If a U.S. exporter agrees to receive payment in 60 days in pounds, the British importer has assumed the exchange rate risk in the transaction.

Question 20

If merchandise imports exceed merchandise exports, the trade balance is in a surplus position.

Question 21

A Detroit bank pays 6% for a $100,000 six-month certificate of deposit, while a Windsor, Ontario bank advertises a rate of 7.5%. If it costs approximately $50 in travel and forward contract commissions to invest in Canada, which CD should the Detroit investor take? Refer to the foreign exchange rates below. U.S. Equiv. Rates
Canada (dollar) $0.8345
180 day Forward $0.8225

A) Make the U.S. CD investment.
B) Make the Canadian CD investment.
C) The investor is indifferent between the two because of interest parity.
D) One is unable to make this calculation with the data provided

Question 22

The current exchange rate between U.S. Dollar and Euro is $1.355/€. It means that

A) one Dollar can buy 1.355 Euros
B) one Euro can buy 0.738 Dollars
C) one Dollar can buy 0.738 Euros
D) one Euro can buy 1.355 Dollars
E) both c and d

Question 23

A Mexican importer of computer parts from Canada would take which action in the foreign exchange markets?

A) supply Canadian dollars
B) demand pesos
C) demand Canadian dollars
D) demand U.S. dollars
E) none of the above

Question 24

When a Balance of Payments trade balance is in a surplus position,

A) another trade or service account must balance it.
B) the entire balance of payments will be in a surplus position.
C) other accounts or capital movements offset the surplus to provide a balance.
D) a shift of capital must balance the trade surplus.

Question 25

Exchange rates are unlikely to change if

A) the U.S. inflation rate is twice that of other developed nations.
B) current account budget deficits/surpluses are offset by reverse capital flows.
C) the current account deficits in the U.S. are offset by capital flows much larger than the current account deficit.
D) central banks want them stable.

Question 26

A. U.S. importer of English china would participate in which of the following foreign exchange transactions?

A) supply U.S. Dollars
B) demand British Pounds
C) supply British Pounds
D) demand Chinese Yuan
E) both a and b

Question 27

A foreign exchange rate are best described as

A) the cost of a unit of foreign currency.
B) the current interest rates of varying countries.
C) the cost of a unit of one currency in terms of another currency.
D) the expected change in prices of international goods.

Question 28

The United States can import more goods that it exports without experiencing a decline in its exchange rate if

A) foreigners are buying more long-term investments in the United States than U.S. citizens are buying abroad.
B) foreigners wants to hold additional dollars to help them mediate their financial institutions.
C) foreign governments loan their excess dollars to the Unites States.
D) all of the above

Question 29

Which of the following is NOT a reason that foreign exchange markets exist?

A) to provide for efficient capital exchange between governments.
B) to exchange purchasing power between trading partners with different local currencies.
C) to provide a means for passing the risk associated with changes in foreign exchange rates to professional risk-takers.
D) to accommodate credit extension and delayed payments for goods and services between countries.

Question 30

If a Canadian dollar costs $0.84 in U.S. dollars today and traded for $0.86 last year, the U.S. dollar

A) has appreciated against the Canadian dollar.
B) has depreciated against the Canadian dollar.
C) has more buying power in England.
D) none of the above

Question 31

A U.S. investor purchased a $100,000 Canadian dollar CD 180 days ago at a rate of 7 percent. The Canadian spot rate was 1.367 C$/U.S.$ when the investment was made. The U.S. dollar cost of the investment was ________ and the total amount of Canadian investment was _________ C$ after 180 days?

A) 136,700; 107,000
B) $100,000; 107,000
C) $73,153; 103,500
D) $136,700; 103,500

Question 32

Exchange rates are influenced by

A) trade flows.
B) financial flows.
C) government intervention.
D) all of the above.

Question 33

With reference to international balance of payment accounting, if a country's merchandise imports exceed merchandise exports for a period,

A) the country has a surplus in the balance on current account.
B) the country has a deficit in the capital accounts for the period.
C) the country has a deficit in the merchandise trade account.
D) the country has a surplus in the merchandise trade account.

Question 34

French importers of U.S. merchandise may be involved in foreign exchange markets

A) by demanding Euros in return for U.S. dollars.
B) by supplying Euros in return for U.S. dollars.
C) by demanding Japanese yen in return for dollars.
D) by supplying U.S. dollars in return for Euros.
E) both a and d

Question 35

Speculative capital flows are investment in financial assets in money and capital market and the real assets based on prospects of real returns

Question 36

Exchange rate risk is best described as

A) the cost of a unit of currency in terms of another.
B) the variability in the current accounts balance of the balance of payments.
C) the variability of investment returns or prices of goods and services caused by changes in the value of one currency versus another.
D) the difference between domestic and international interest rates.

Question 37

Everything else equal, significant trade deficits, imports exceeding exports, should have what effect on a country's exchange rate?

A) Trade levels do not affect exchange rates.
B) The country's currency should appreciate in value relative to their major trading countries.
C) The country's currency should depreciate in value relative to their major trading countries.
D) None of the above is correct.

Question 38

If the cost of yen per dollar changes from 100 to 110 yen per dollar,

A) The yen has appreciated against the dollar.
B) The dollar has depreciated against the yen.
C) The dollar has appreciated against the yen.
D) the cost of a yen has increased in terms of dollars.

Question 39

From a trade basis, if U.S. trade deficit with Japan continues, and if U.S. inflation rates exceed those in Japan,

A) the yen is likely to appreciate moving from 110 yen per dollar to 120 yen per dollar.
B) the yen is likely to appreciate moving from 120 yen per dollar to 110 yen per dollar.
C) the yen is likely to depreciate moving from 120 yen per dollar to 110 yen per dollar.
D) the yen is likely to depreciate moving from 110 yen per dollar to 120 yen per dollar.

Question 40

Which of the following is NOT a factor associated with international trade not faced by domestic traders?

A) One party in the trade has to be concerned about foreign exchange risk.
B) No one legal authority has control over the transaction and legal remedies.
C) Credit information on opposite parties is often incomplete.
D) There is one currency involved.

Question 41

Investment flows from one country to another occur based on the investors'

A) nominal rate of return on the foreign investment
B) the expected real rate of return on the foreign investment.
C) spot exchange rate when making the investment.
D) the realized real rate of return on the foreign investment.

Question 42

International trade flows are likely not influenced by

A) barriers to trade
B) consumer tastes
C) productivity
D) relative costs of factors of production
E) activity of arbitrageurs in the foreign exchange markets

Question 43

A foreign exchange transaction may be motivated by

A) trade.
B) speculation.
C) flight of capital.
D) all of the above

Question 44

Differences in real interest rates between countries produce what type of capital flows?

A) investment capital flows.
B) political capital flows
C) speculative capital flows
D) capital flight
E) all of the above

Question 45

If an item costs 4 Euros in Germany, assuming purchasing power parity with current exchange rates of $1.3135/€, what is the price of the item in the U.S.?

A) $0.33
B) $5.25
C) $3.05
D) $4.00
E) €4.00

Question 46

If expected inflation in the United States is below that in Britain, one would expect

A) U.S. imports from Britain to increase significantly.
B) the United States to experience balance of payments problems in the future.
C) the dollar to appreciate against the pound in the future.
D) U.S. interest rates to be above British rates.

Question 47

A U.S. commercial bank must pay 20 million Canadian dollars (C$) in 90 days. It wishes to hedge the risk in the futures market. To do so the bank should

A) sell $20 million in Canadian dollar futures with two months maturity.
B) buy $20 million in Canadian dollar futures.
C) buy C$20 million in Canadian dollar futures.
D) sell C$20 million in Canadian dollar futures.

Question 48

An importer who must pay yen in 60 days may hedge the foreign exchange risk

A) in the forward market.
B) in the spot market today.
C) in the spot market 60 days from now.
D) all of the above

Question 49

If a government wanted to promote exports and a trade surplus, it might institute all of the following policies except:

A) Establish import trade barriers and quotas.
B) Buy domestic currency in the foreign exchange markets.
C) Provide low cost financing for export industries.
D) Buy foreign financial assets.

Question 50

Which of the following are largely responsible for keeping exchange rates the same in all world markets?

A) foreign exchange deals
B) forward markets
C) futures markets
D) arbitragers
E) none of the above

Question 51

An item costs $5.00 in the U.S. and 525 yen in Japan. If purchasing power parity holds, what is the yen/dollar exchange rate?

A) 105 yen/dollar
B) 525 yen/dollar
C) 100 yen/dollar
D) 125 yen/dollar
E) .0095 yen/dollar

Question 52

Foreign merchants often conduct transactions in U.S. dollars because

A) the dollar is a generally acceptable medium of exchange in international transactions.
B) they don't have enough money of their own.
C) interest rates on the dollar are higher than on their currency.
D) inflation is higher in the United States.

Question 53

A major reason that exchange rates do not adjust so purchasing power parity holds precisely is that

A) investors are using forward contracts when trading.
B) financial or capital flows may affect foreign exchange rates.
C) consumers and businesses of each country are not concerned about the cost of goods in other countries.
D) purchasing power parity is only a theory.
E) Exchange rates do, in fact, adjust to ensure that purchasing power parity holds.

Question 54

Which of the following is not a factor that is likely to influence exchange rates?

A) trade flows of goods and services
B) financial capital flows
C) governmental intervention
D) an expansion in the number of traders of foreign exchange

Question 55

A government that wants to promote domestic exports would take which action?

A) buy assets (securities) abroad
B) sell assets (securities) abroad
C) buy dollars in foreign exchange markets
D) impose severe import restrictions

Question 56

The foreign exchange market

A) is an auction market with a physical exchange floor, similar to NYSE
B) has restricted trading hours
C) is composed of a group of informal markets closely interlocked through international banking relationships
D) ensures that purchasing power parity holds
E) both a and b

Question 57

If the rate of inflation in the U.S. is twice the rate in Japan,

A) purchasing power parity will not be attained.
B) the yen/dollar exchange rate is likely to decrease.
C) the yen/dollar exchange rate is likely to increase.
D) the exchange rate will not change because inflation has no effect on exchange rates.

Question 58

If purchasing power parity existed in foreign exchange rates,

A) foreign exchange rates would remain constant.
B) goods and services would cost the same in terms of dollars everywhere in the world.
C) goods and services would cost the same in each local currency.
D) foreign exchange rates would be the same anywhere in the world markets.

Question 59

If a country experiences inflation, generally

A) its forward exchange rate will fall relative to countries with lower inflation
B) its forward exchange rate will fall relative to countries with higher inflation
C) its exports will increase significantly.
D) its interest rates will fall.
E) the forward exchange rate will fall relative to all other countries.

Question 60

The action of foreign exchange _______ tends to keep exchange rates among different currencies consistent with each other.

A) arbitragers
B) regulators
C) traders
D) brokers
E) bankers

Question 61

Eurodollars are associated with

A) the use of dollar currency ($100 bills) in less-developed countries in Europe.
B) the financing of Europeans by domestic U.S. banks.
C) the holding of a dollar-denominated bank deposit outside the U. S.
D) the development of a common currency in Europe.

Question 62

Explain how and why the U.S. forward exchange rates are related to short-term interest rates in the United States and Germany.

Question 63

One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of Nardasausau stock in a Japanese company at a price of 3,150 yen per share. The total
Purchasing cost was 315,000 yen. At the time of purchase, in the currency market 1
Yen equaled $0.00952. Today, Nardasausau stock is selling at a price of 3,465 yen
Per share, and in the currency market $1 equals 130 yen. The stock does not pay a
Dividend. If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from
Holding Nardasausau stock?

A) +10.00%
B) -11.12%
C) +12.48%
D) +11.12%
E) -12.48%

Question 64

A current account surplus of the U.S. implies that

A) More goods and services are exported than are imported
B) The U.S. borrowed from abroad more than it loaned, and/or sold off some of its assets
C) There is under consumption of foreign financial assets
D) The value of the dollar will drop
E) The country's credit rating is going to be downgraded
ESSAY QUESTIONS

Question 65

Which of the following instruments are not commonly used to facilitate international transactions?

A) letters of credit
B) bills of lading
C) sight drafts
D) repurchase agreements
E) All of the above instruments are used to facilitate international transactions.

Question 66

Which of the following is not the reason the Eurocurrency market is an attractive place to store excess liquidity for corporations, countries, and individuals?

A) Investors are allowed to hold debt securities in bearer form
B) Automatic withholding of tax on interest earned
C) Investments earn higher returns
D) High liquidity of Eurocurrency deposits

Question 67

An American firm sells farm equipment to a British company for ₤250,000 to be paid in 180 days. The current exchange rate is $1.98/₤. The exporter hedges its exchange rate risk by buying a put option on ₤250,000 with the strike exchange rate of $1.92/₤. The put expiring in 180 days cost the firm $5,000. What is the dollar amount the American firm will net on this transaction if the exchange rate is $1.96/₤ in 180 days?

A) $495,000
B) $490,000
C) $485,000
D) $480,000
E) $475,000

Question 68

If interest rate parity holds and the annual Taiwan nominal interest rate is 7% and the U.S. annual nominal rate is 5% and real interest rates are 2% in both countries, then inflation in Taiwan is about _____ than in the U.S.

A) 1% higher
B) 2% higher
C) 1% lower
D) 2% lower
E) 3% lower

Question 69

Which of the following conditions may lead to a decline in the value of a country's currency?

A) I only
B) I and II only
C) II, III, and IV only
D) II and IV only
E) I and III only

Question 70

A _______ draft is paid on demand; whereas a bank would pay a _______ draft at maturity as stated in the _______.

A) time; sight; bill of lading
B) sight; time; bill of lading
C) time; sight; letter of credit
D) sight; time; letter of credit

Question 71

An American firm sells farm equipment to a British company for ₤250,000 to be paid in 180 days. The current exchange rate is $1.98/₤. The exporter hedges its exchange rate risk by selling ₤250,000 forward 180 days at the prevailing 180-day forward exchange rate of $2.01/₤. What is the dollar amount the American firm is expected to receive in 180 days?

A) $495,000
B) $502,500
C) $201,000
D) $198,000
E) ₤250,000

Question 72

Increased U.S. inflation, relative to other trading partner nations, should have what impact on the value of the U.S. dollar? Explain thoroughly.

Question 73

Eurocurrency markets are a source of attractively priced working capital loans for multinational firms because:

A) Lower regulatory costs allow lenders to offer lower cost loans.
B) With transactions starting at $500,000, economies of scale provide better pricing.
C) Lower credit checking costs and other processing costs lowers lending rates.
D) all of the above

Question 74

With reference to the concepts and terms related to the International Payments Flow (balance of payments), under which conditions could a country have a sizable deficit in its trade balance and still have an appreciating currency?

Question 75

A payment guarantee issued by a commercial bank on behalf of an importer is a

A) sight draft.
B) time draft.
C) letter of credit.
D) documented transfer.
E) bill of lading.

Question 76

At the beginning of 2011, the exchange rate between the Australian dollar (AD) and the U.S. dollar (USD) is 2.2 AD per USD. Over the year, Australia's inflation is 12% and the U.S. inflation is 4%. If purchasing power parity holds, at the end of 2011, the exchange rate should be approximately _____ USDs per AD.

A) 2.3913
B) 0.4895
C) 2.8498
D) 0.4182
E) 0.3440

Question 77

Explain why a decline in a country's exchange rate will generally increase the demand for its goods and reduce its demand for foreign goods.

Question 78

Eurocurrency is

A) Any currency held in a time deposit account outside of its country of origin.
B) Any currency held in a time deposit account in Europe.
C) Any currency held in a time deposit account outside of the U.S.
D) Euros held in a time deposit account in Europe.

Question 79

Which of the following is true about Eurobonds?

A) They are underwritten by a multinational syndicate of investment banks.
B) Eurobonds are bearer bonds and do not have to be registered, which makes them more marketable.
C) Interest or coupon payments are annual and are calculated based on a 360-day year.
D) all of the above.

Question 80

Which of the following is not the difference between Eurobonds and bonds sold in the U.S.?

A) Eurobonds are usually issued in bearer form; bonds sold in the U.S. are usually registered bonds.
B) Eurobonds usually pay interest once a year; bonds sold in the U.S. usually pay interest semiannually.
C) Eurobonds are denominated in Euros; bonds sold in the U.S. are denominated in dollars.
D) Interest on Eurobonds is computed using a 360-day year vs. a 365-day year for bonds issued in the U.S.
E) All of the above are differences between Eurobonds and bonds sold in the U.S.