Deck 10: International Finance

Question 1

A direct quote is defined as the price of one unit of a foreign currency quoted in home currency, i.e., HC/FC where HC is home currency and FC is foreign currency

Answer 1

True

Question 2

If the direct quote for the British Pound for an American investor is $2.00/£, then the indirect quote is £0.50/$.

Answer 2

True

Question 3

A depreciating dollar against the Euro is the same as the Euro depreciating against the dollar.

Answer 3

False

Question 4

If the dollar appreciates against the Japanese Yen, imports from Japan to the United States should decrease.

Question 5

The Euro replaced the local currencies of the 12 European countries in 2005

Question 6

One reason for gold and silver to become the popular choice of coins was its relative abundance in Europe

Question 7

According to the classical theory of the price-specie-flow mechanism, the flow of gold determines the final equilibrium price

Question 8

In a gold standard, the government will set the price of its currency in gold.

Question 9

If a country wishes to waeken its currency, it will raise the price of gold.

Question 10

Under the Bretton Woods system, no country was required to guarantee the convertibility of dollars to gold.

Question 11

In a freely floating exchange rate system, the price of a currency is determined by the demand and supply of the currency.

Question 12

The higher the inflation rate, the more likely the currency will depreciate.

Question 13

President Nixon closed the gold window which guaranteed convertibility of dollars to gold in 1971.

Question 14

The United States is one of the few countries to rarely intervene in the foreign exchange market to influence the price of the dollar.

Question 15

Market makers of currencies are always willing to buy or sell currencies and make money on commissions.

Question 16

The average daily turnover in 2007 in the foreign exchange market was approximately US$3.2 trillion per day.

Question 17

When a company sells products overseas, it is important to forecast foreign exchange prices because it can impact profits in the future.

Question 18

An invoicing center allows a multinational to consolidate its receivables and payments and be able to make payments in multiple currencies.

Question 19

If a company has to make a payment of £100,000 every three months and the pound is expected to appreciate, it would be better for the company to lag the payments,

Question 20

Central banks will purchase and sell currencies in the foreign exchange market to curb excess volatility and discourage speculation from speculators.

Question 21

If the direct quote for the British pound for an American investor is $1.50/£, then the indirect quote is

A) £0.67/$
B) £0.50/$
C) $0.75/£
D) $0.50/£
E) £3.00/$

Question 22

If an American investor purchases British pounds for $2.00/£, and if the dollar depreciates by 10 percent, the new rate will be

A) $1.80/£
B) $2.20/£
C) £2.20/$
D) £1.80/$
E) none of the above

Question 23

If the dollar depreciates against the pound, then

A) exports to the United States will increase from the United Kingdom
B) exports to the United Kingdom will increase from the United States
C) exports to the United States will increase from all countries except the United Kingdom
D) exports to the United Kingdom will increase from all countries except the United States
E) None of the above

Question 24

If the dollar appreciates against the Japanese Yen, then

A) exports from Japan to the United States will decrease
B) exports from the United States to Japan will increase
C) exports from Japan to the United States will increase
D) imports from United States to Japan will increase
E) none of the above

Question 25

The Euro began circulating officially as a currency and replaced the local currency on January 1

A) 1988
B) 1995
C) 1999
D) 2002
E) 2005

Question 26

A problem with having coins serve as a medium of exchange is

A) it is difficult to duplicate coins
B) it is difficult to mint them
C) it is difficult to verify the purity of the coins
D) it is easy for coins to increase inflation
E) it is difficult to trade coins over long distances

Question 27

Gold and silver became the popular choice of commodity to serve as coins for the following reasons, except

A) indivisibility
B) scarcity
C) durability
D) consistency
E) transportability

Question 28

The Federal Reserve was set up in 1913

A) after one failed attempt
B) to be in charge of the U.S. monetary system
C) issue all bank notes
D) determine exchange rates
E) B and C

Question 29

The Bank of England was established in 1694 as a private bank to

A) to mint gold coins for the U.K government
B) to mint silver and gold coins for private use
C) to issue bank notes for circulation in the United Kingdom
D) to manage the accounts of the monarchy
E) none of the above

Question 30

Assume the U.K. government announces it is always willing to purchase gold at a price of £20 per ounce and the U.S. government announces the same at a price of $40 per ounce. The exchange rate will then be

A) $20/£
B) $2.00/£
C) £1.00/$
D) £40/$
E) $4.00/£

Question 31

During the interwar period

A) many countries kept decreasing the price of gold to depreciate their currency
B) the period was marked by tranquility as countries coordinated their exchange rates
C) many countries abandoned the gold standard and did not resume it till after World War II
D) many countries kept increasing the price of gold to depreciate their currency
E) the period was marked by trust by all countries in the exchange rates of all countries

Question 32

Under the Bretton Woods system, the following was agreed except the following:

A) the United States only would be required to guaranty convertibility of gold into dollars
B) all countries will fix the interest rates and will not change them without the permission of other countries
C) no country could devalue its currency without the permission from the other countries
D) the International Monetary Fund (IMF) would provide short term financing to countries to maintain currency stability
E) other countries would fix the price of gold but offer no guaranty of convertibility

Question 33

In a freely floating exchange rate system

A) exchange rates are determined by the supply of foreign exchange only
B) exchange rates are determined by the demand for foreign exchange only
C) exchange rates are more volatile compared to a fixed exchange rate system
D) exchange rates are more stable than a fixed exchange rate system
E) exchange rates are determined by each government based on their needs

Question 34

In the foreign market, the following hold true except

A) there is a centralized location for trading
B) the major players are international banks
C) the purchase and sale can be classified into two markets: retail and wholesale
D) in wholesale markets, the minimum denominations are usually $5 million
E) the majority of exchange takes place over the phone, fax or Internet

Question 35

A country that experiences high inflation rates

A) will see its currency depreciate in value and its interest rates increase
B) will see its currency appreciate in value and its interest rates decrease
C) will see its currency depreciate in value and its interest rates decrease
D) will see its currency appreciate in value and its interest rates increase
E) none of the above

Question 36

The following are major participants in the foreign exchange markets except

A) market makers
B) brokers
C) central banks
D) corporations and individuals
E) government agencies

Question 37

The following country rarely intervenes in the foreign exchange market to influence the price of the currency.

A) Japan
B) United Kingdom
C) United States
D) Germany
E) China

Question 38

A U.S. company exports goods to a Japanese company. If the Japanese Yen is expected to appreciate in the future

A) the Japanese company may be forced to raise prices to stay profitable
B) the Japanese company will find it expensive to buy from the U.S. company
C) the Japanese company has the luxury of reducing prices
D) the Japanese customer should consider switching to other suppliers
E) none of the above

Question 39

An invoicing center

A) is appropriate for a company with one office overseas
B) allows a multinational to invoice and receive payments in multiple currencies
C) is located in the headquarters of the multinational
D) allows a multinationals and it subsidiaries to invoice and receive payments in the currency of location
E) none of the above

Question 40

Assume a company in the United States expects to receive £100,000 in three months. It expects the pound to appreciate in the near future.

A) it should lead the payments
B) it should lag the payments
C) it should lead the receivables
D) it should lag the receivables
E) none of the above

Question 41

What is the indirect quote for a European investor who wishes to sell dollars if the direct quote is €0.80/$1? What is the relationship between an indirect and direct quote?

Question 42

What is the impact on a country's imports and exports when the dollar depreciates? Explain.

Question 43

How is the Euro different from other established currencies in the world?

Question 44

What precious metals were used historically in the minting of coins and why?

Question 45

What are some of the basic features of the Bretton Woods exchange rate system?

Question 46

What major factors play a role in determining exchange rates?

Question 47

What is the difference between fixed and floating exchange rate systems? Which system leads to higher volatility?

Question 48

How do foreign exchange rates play a role in business decisions? Explain that in relation to the pricing of products?