Deck 6: International Finance and Trade

Question 1

The direct quotation method expresses the number of foreign currency units needed to buy one U.S.dollar.

Answer 1

False

Question 2

The banker's sight draft provides an exchange rate that is lower than either the banker's time draft or cable rate.

Answer 2

False

Question 3

If someone needs to make a payment in the currency of another country,they must have actual possession of that currency.

Answer 3

False

Question 4

A nation with a relatively lower inflation rate than other countries will have a relatively stronger currency holding other factors constant.

Question 5

The Export-Import Bank is a corporation owned by the Federal Reserve Banks.

Question 6

Arbitrage is the simultaneous buying of securities in one market and selling them in another to make a profit from price differences in the two markets.

Question 7

The order bill of lading represents the written acceptance of goods for shipment by a transportation company and the terms under which the goods are to be transported to their destination.

Question 8

The bankers' acceptance is a draft drawn on and accepted by a bank rather than the importing firm.

Question 9

A trust receipt is an instrument through which a bank retains title to goods until they are paid for.

Question 10

The current account balance shows the flow of income into and out of the United States during a specified time period.

Question 11

Special Drawing Rights are international reserve assets created by the International Monetary Fund that can be drawn upon by member nations.

Question 12

The United Nations operates a world central bank that provides a world monetary unit to accommodate commerce across national boundaries.

Question 13

The bankers' acceptance and the documentary draft involve four principal parties: the importer,the importer's bank,the exporter,and the exporter's bank.

Question 14

The Board of Governors of the Federal Reserve System authorizes member banks to accept drafts that arise in the course of certain types of international transactions.

Question 15

The balance of payments is a summary of all economic transactions between one country and the rest of the world.

Question 16

Foreign exchange markets are electronic communication systems connecting the major financial centers of the world.

Question 17

A nation with relatively lower interest rate levels than other countries will have a relatively stronger currency.

Question 18

A sight draft is one that is not accompanied by any special documents and is generally used when the exporter has confidence in the importer's ability to meet the draft when presented.

Question 19

Slow economic growth in investments in another country would be an example of political risk.

Question 20

The traveler's letter of credit is issued by a bank to banks in other countries authorizing foreign banks to cash checks or purchase drafts presented by the bearer.

Question 21

Intervention by central banks in the flexible exchange rate system is called a dirty float.

Question 22

The international monetary system consists of institutions and mechanisms that foster international trade,manage the flow of financial capital,and determine currency exchange rates.

Question 23

Interest rate parity states that a country with a relatively higher expected inflation rate will have its currency depreciate relative to a country with a relatively lower inflation rate.

Question 24

The European Economic Organization (EEO)is an organization of twelve European countries that agreed to have a common overall monetary policy and the euro as their common currency.

Question 25

A flexible exchange rate system in which currency exchange rates are determined by supply and demand has been in place since 1973.

Question 26

Economic Risk is the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners.

Question 27

The ultimate effect of large-scale arbitrage activities on exchange rates is the elimination of the variation between the two markets.

Question 28

A traveler's letter of credit is issued by a bank in one country and addressed to a list of foreign banks which are usually correspondents of the issuing bank and have agreed to purchase sight drafts presented to them by persons with appropriate letters of credit.

Question 29

Under a floating exchange rate system,the value of one currency relative to another is determined by the forces of supply and demand.

Question 30

The international monetary system consists of institutions and mechanisms that foster oversees the World Bank,sets international trade policy,and determines the exchange rate regime for all participating countries.

Question 31

An expected decline in a currency may lead to an attempt to accelerate collection of accounts receivable with funds transferred quickly to another country.

Question 32

A clean draft is accompanied by an order bill of lading along with other papers such as insurance receipts,certificates of sanitation,and consular invoices.

Question 33

A contract for the purchase or sale of a currency where delivery will take place at a future date is called a forward exchange rate.

Question 34

The International Bank for Reconstruction and Development (World Bank)was created to provide banking services for U.S.firms operating overseas.

Question 35

The International Monetary Fund (IMF)was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payment problems.

Question 36

The 1992 Maastricht Treaty formally committed the countries of the European Union to economic and monetary union.

Question 37

An instrument requiring immediate payment is classified as a time draft.

Question 38

The direct quotation method indicates the amount of a foreign currency necessary to purchase one unit of the home country's currency.

Question 39

Up until the start of the Vietnam War,the international monetary system operated mostly under a gold standard in which the currencies of major countries were convertible into gold at fixed exchange rates.

Question 40

Under the system of flexible exchange rates that began in 1943,exchange rates are determined by the actual process of supply and demand in the foreign exchange market.

Question 41

Holding demand constant,an increase in supply for one currency relative to another will cause its value to appreciate relative to that currency.

Question 42

Should a business fail after receiving shipping documents from its bank on the basis of a trust receipt,the bank:

A)becomes a preferred creditor to the extent of the amount due less cash deposits with the bank
B)sells off the assets
C)auctions off the merchandise
D)has a prior claim relative to other general creditors
E)none of the above

Question 43

The Federal Reserve System:

A)permits member banks to accept drafts,but restricts the time period involved
B)actively encourages member banks to assist in financing international transactions
C)discourages its member banks from accepting foreign drafts
D)limits the type of international transactions for which member banks may accept drafts

Question 44

The exchange rate is the rate at which a given unit of foreign currency is quoted in terms of:

A)commodity prices
B)barrels of oil
C)the foreign currency
D)gold
E)none of the above

Question 45

Political risk is the risk associated with possible actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investors.

Question 46

If the exchange rate in New York for British pounds sterling is quoted at 1 pound = $1.60,and in London the rate is quoted at 1 pound = $1.62,financial arbitragers might:

A)buy pounds in New York
B)sell dollars in London
C)simultaneously sell pounds in New York and buy dollars in London
D)simultaneously buy pounds in New York and sell dollars in London

Question 47

If the exchange rate in New York for British pounds sterling is quoted at 1 pound = $1.60,and in London the rate is quoted at 1 pound = $1.62,financial arbitragers might:

A)buy pounds in New York
B)sell dollars in London
C)simultaneously sell pounds in New York and buy dollars in London
D)simultaneously sell pounds in New York and sell dollars in London
E)none of the above

Question 48

Purchasing power parity (PPP)states that the currency of a country with relatively higher inflation will depreciate relative to the currency of a country with a relatively lower inflation rate.

Question 49

Political risk is the risk associated with possible slow or negative economic growth,as well as with the likelihood of variability.

Question 50

Holding demand constant,an increase in supply for one currency relative to another will cause its value to depreciate relative to that currency.

Question 51

A documentary draft is a draft that is accompanied by an order bill of lading and other documents.

Question 52

An indirect exchange rate quotation is simply the reciprocal of a direct exchange rate quotation.

Question 53

Interest rate parity (IRP)states that the currency of a country with relatively higher interest rate will appreciate relative to the currency of a country with a relatively lower interest rate.

Question 54

Economic risk is the risk associated with possible slow or negative economic growth,as well as with the likelihood of variability.

Question 55

The Federal Reserve System:

A)permits member banks to accept drafts,but restricts the time period involved
B)actively encourages member banks to assist in financing international transactions
C)discourages its member banks from accepting foreign drafts
D)limits the type of international transactions for which member banks may accept drafts
E)all of the above

Question 56

The traveler's letter of credit is usually used by:

A)travel agencies
B)individuals traveling abroad
C)importers' banks
D)correspondent banks,in order to reduce shipment of gold between countries
E)none of the above

Question 57

An order bill of lading is a document given by a transportation company that lists goods to be transported and terms of the shipping agreement.

Question 58

The exchange rate is the rate at which a given unit of foreign currency is quoted in terms of:

A)commodity prices
B)the domestic currency
C)the foreign currency
D)gold

Question 59

Should a business fail after receiving shipping documents from its bank on the basis of a trust receipt,the bank:

A)becomes a preferred creditor to the extent of the amount due less cash deposits with the bank
B)repossesses the merchandise on the basis of a specific lien thereon
C)repossesses the merchandise on the basis of its holding of title to the merchandise
D)has a prior claim relative to other general creditors

Question 60

The traveler's letter of credit is usually used by:

A)purchasing agents making purchases in foreign countries
B)individuals traveling abroad
C)importers' banks
D)correspondent banks,in order to reduce shipment of gold between countries

Question 61

A purchasing agent for a domestic art gallery touring foreign countries for possible acquisitions might find it convenient to have:

A)travelers' checks
B)a commercial letter of credit
C)regular checkbook drafts
D)a traveler's letter of credit

Question 62

A purchasing agent for a domestic art gallery touring foreign countries for possible acquisitions might find it convenient to have:

A)travelers' checks
B)a commercial letter of credit
C)regular checkbook drafts
D)a great deal of cash in various currencies
E)none of the above

Question 63

The Export-Import Bank:

A)makes loans and offers guarantees to foreign exporters to the United States
B)may offer emergency credits to assist other countries to maintain their level of imports from the United States
C)makes loans or offers guarantees when the soundness of the transaction is in doubt
D)makes loans to domestic exporters to encourage foreign trade

Question 64

Foreign exporters are usually quite willing to accept U.S.dollars in payment for goods and services because:

A)of the importance of the dollar in international trade
B)the value of the dollar does not fluctuate
C)they have little alternative
D)it is customary to receive payment denominated in the currency of the importer's country

Question 65

Before arbitragers take action with respect to exchange rate differentials:

A)central bank approval must be obtained
B)loans to cover transactions must be obtained
C)a market differential of at least 1¢ must exist between two currencies
D)a differential of as little as 1/16 of 1¢ may trigger action

Question 66

In the field of foreign trade,the most common form of credit instrument is the:

A)commercial loan
B)trust receipt
C)sight draft
D)time draft
E)none of the above

Question 67

In the field of foreign trade,the most common form of credit instrument is the:

A)bankers' acceptance
B)trust receipt
C)sight draft
D)none of the above

Question 68

The Export-Import Bank:

A)makes loans and offers guarantees to foreign exporters to the United States
B)may offer emergency credits to assist other countries to maintain their level of exports to the United States
C)makes loans or offers guarantees when the soundness of the transaction is in doubt
D)makes loans to domestic exporters to encourage foreign trade
E)none of the above

Question 69

The effect of arbitrage activities in foreign exchange markets is to:

A)create disparity among the rates of various currencies
B)eliminate or reduce exchange rate quotation differentials
C)hinder the otherwise smooth functioning of the exchange markets
D)create wide swings in quotations from period to period

Question 70

In recent years,the principal market for bankers' acceptances has been:

A)domestic banks
B)domestic business corporations
C)foreign business corporations
D)all of the above
E)none of the above

Question 71

The lowest quotation on foreign exchange is given for:

A)cable rates
B)banker's time drafts
C)banker's sight drafts
D)banker's acceptance

Question 72

In purchasing a claim to foreign exchange:

A)it is necessary only to go to a local bank
B)a permit must first be received from a Federal Reserve Bank
C)a bank specializing in foreign exchange must be contacted
D)a cable,telephone call,or letter must be directed to a foreign bank

Question 73

In recent years,the principal market for bankers' acceptances has been:

A)domestic banks
B)domestic and foreign business corporations
C)foreign banks
D)none of the above

Question 74

Balances in foreign accounts are maintained for purposes of dealing in foreign exchange by:

A)central banks
B)correspondents of domestic banks
C)correspondents or foreign branches of domestic banks
D)most multinational corporations
E)none of the above

Question 75

The effect of arbitrage activities in foreign exchange markets is to:

A)create disparity among the rates of various currencies
B)maximize exchange rate quotation differentials
C)hinder the otherwise smooth functioning of the exchange markets
D)create wide swings in quotations from period to period
E)none of the above

Question 76

Foreign exporters are usually quite willing to accept Chinese Yuan in payment for goods and services because:

A)of the importance of the Chinese Yuan in international trade
B)the value of the dollar does not fluctuate
C)they have little alternative
D)it is customary to receive payment denominated in the currency of the importer's country
E)none of the above

Question 77

Balances in foreign accounts are maintained for purposes of dealing in foreign exchange by:

A)central banks
B)correspondents of domestic banks
C)correspondents or foreign branches of domestic banks
D)most multinational corporations

Question 78

The benefits of specialization of effort among nations depend primarily upon:

A)geographical locations
B)market research
C)the existence of adequate financial facilities
D)accommodating laws and regulations

Question 79

The price that an individual must pay when purchasing claims to foreign exchange:

A)is always higher than the basic quotation rate
B)is readily available in financial publications
C)is relatively constant from day to day
D)varies widely among sources of foreign exchange

Question 80

If balances in foreign accounts are substantially reduced due to an excess of demand relative to supply:

A)loans are usually sought from central banks and other institutions to replenish balances
B)price quotations are adjusted to affect a reduction in demand and an increase in supply
C)currency may be shipped abroad for deposit in such accounts
D)Export-Import Bank loans are sought to bolster balances