Deck 2: International Financial Markets: Structure and Innovation

Question 1

MNCs participate in foreign exchange markets since they:

A)seek to limit their exposure to the economic cycles in their home countries.
B)cannot borrow domestically and must seek foreign investments.
C)cannot find suitable domestic investment opportunities for excess funds.
D)they have transactions with foreign buyers and sellers and invest and borrow internationally.

Answer 1

they have transactions with foreign buyers and sellers and invest and borrow internationally.

Question 2

A market maker who is long in EUR will __________________ if the value of EUR increase.

A)not be affected
B)lose
C)profit or lose depending on the value of other currencies
D)profit

Answer 2

profit

Question 3

Foreign exchange transactions can be classified into three categories:

A)spot transactions,forward transactions,and forward exchange swap agreements.
B)foreign currency transactions,domestic currency transactions,and regional currency transactions.
C)hedge transactions,exchange transactions and investment transactions.
D)Interbank transactions,MNC transactions,and miscellaneous transactions.

Answer 3

spot transactions,forward transactions,and forward exchange swap agreements.

Question 4

Fedwire is a settlement system for foreign currency exchange transactions in the United States operated by the:

A)U.S.Treasury Department.
B)Federal Reserve Banks in the United States.
C)New York Stock Exchange.
D)National Association of Securities Dealers Automated Quotations (NASDAQ).

Question 5

Most foreign exchange transactions are conducted:

A)through established stock markets such as NASDAQ.
B)over electronic networks like those maintained by Reuters or Bloomberg.
C)as a result of face-to-face negotiations.
D)in established exchange markets in the Middle East.

Question 6

In foreign exchange markets,_________________ do not assume responsibilities for making a market in a foreign currency and buy and sell a foreign currency only when they think it will be profitable for them.

A)market makers
B)dealers
C)brokers
D)regulators

Question 7

Most foreign exchange transactions involve the sale or purchase of:

A)Euros (EUR).
B)British pounds (GBP).
C)Japanese yen (YPY).
D)U.S.dollars (USD).

Question 8

____________________ seek to exploit discrepancies in currency values in different markets by buying currencies at one value in one market and then selling them quickly at a higher value in another market.

A)Interbanks
B)MNCs
C)Governments
D)Hedge funds

Question 9

Mutual funds are involved in foreign exchange markets because:

A)they need to convert funds into other currencies so that they can buy investments denominated in those other currencies.
B)foreign currencies are used by mutual funds to hedge or protect their other investments against losses.
C)mutual fund regulations require that mutual funds diversify their investments by owning a variety of currencies.
D)they are the largest interbanks and seek to speculate in buying and selling foreign currencies.

Question 10

In foreign exchange markets,________________ is the price that market makers are willing to buy and ____________________ is the price at which market makers are willing to sell a foreign currency.

A)ask;bid
B)bid;ask
C)offer;acceptance
D)acceptance;offer

Question 11

The Clearing House Interbank Payment System (CHIPS)is operated by major banks in New York and facilitates foreign exchange transactions by:

A)requiring participating banks to maintain deposits in certain New York banks which process foreign exchange transactions through the deposit accounts maintained in the New York banks.
B)coordinating with and clearing foreign exchange transactions through SWIFT.
C)acting as market makers,dealers and brokers in foreign exchange transactions.
D)aggregating the transactions of banks and processing the net amount of transactions of individual banks through the Fedwire system.

Question 12

________________ in foreign exchange markets do not carry inventories of foreign currencies,but,instead,match buyers and sellers of foreign currencies and earn commissions when they arrange a transaction.

A)Brokers
B)Dealers
C)Market makers
D)Investors

Question 13

The way that Fedwire works is that:

A)the required reserves of banks held in the Federal Reserve System are debited and credited each day to reflect those banks' foreign exchange transactions.
B)at the end of each day,Fedwire sends a bill or a payment to each bank that represents that bank's net foreign exchange activity for that day.
C)Fedwire is simply an electronic messaging system that allows banks to communicate with each other concerning foreign exchange transactions.
D)Fedwire facilitates government approval of all foreign exchange transactions conducted by U.S.entities.

Question 14

The vehicle or intermediate currency in which most international exchange transactions are conducted is the:

A)USD.
B)EUR.
C)JYP.
D)GBP.

Question 15

Foreign exchange markets work most efficiently when:

A)they are closely regulated so that speculation is limited.
B)MNCs have difficulty borrowing money domestically.
C)there are market makers who are willing to buy or sell currencies and,therefore,provide liquidity in the market.
D)when the volume of international transactions is high and the demand for foreign currency is increasing.

Question 16

In _________________,parties agree to rates at which currencies will be exchanged immediately.

A)spot markets
B)forward markets
C)equity markets
D)currency markets

Question 17

A direct quote given in the United States as "USD 0.0109053 per JPY" means:

A)1 JPY is worth .0109053 USD.
B)1 USD is worth .0109053 JPY.
C)the value of JPY relative to USD is increasing.
D)the value of USD relative to JPY is increasing.

Question 18

Foreign exchange transactions are easy and inexpensive and even large transactions can be made without affecting market prices because:

A)of the government regulations that apply to foreign exchange markets.
B)speculators keep the foreign exchange markets very active.
C)the foreign exchange markets are so large.
D)the foreign exchange markets are so old and well-established.

Question 19

The most commonly used settlement system for foreign currency transactions is operated by:

A)the National Association of Securities Dealers Automated Quotations (NASDAQ).
B)the New York Stock Exchange ( NYSE).
C)the Society for Worldwide Interbank Financial Communications (SWIFT).
D)the British government.

Question 20

Governments are involved in the foreign currency markets for two primary reasons:

A)because foreign currency can be used as a store of value and to manipulate the value of their own currency.
B)to protect against inflation and to control domestic interest rates.
C)so that they can take advantage of discrepancies in currency values in different markets and to protect the value of their currency.
D)to monitor the value of their currency and to control their balance of trade.

Question 21

The principal feature of Euro markets is:

A)lack of regulation.
B)high interest rates that are available.
C)lower risks than are present in other markets.
D)lower rates on borrowed funds.

Question 22

Converting an indirect quote to a direct quote require:

A)taking the inverse (1/quote)of the indirect quote.
B)contacting a broker in foreign exchange transactions.
C)taking into consideration the trend (positive or negative)of the value of the two currencies.
D)changing the ratios of the two currencies.

Question 23

Eurocurrency markets developed in the 1950's primarily because:

A)the US limited foreign investments that could be made by US-based corporations.
B)banks in Europe joined together to compete with US banks for foreign deposits.
C)the US encouraged MNCs to invest in foreign assets.
D)regulations in the US limited interest rates that US banks could pay on deposits.

Question 24

The leading indicator for the Eurocurrency markets is the London Inter Bank Offered Rate (LIBOR),which:

A)is the prime rate that is then charged in the European Community.
B)is the average rate charged on loans by the central banks in all European nations.
C)reflects the rate at which Eurobanks are willing to loan money to other institutions.
D)indicate the liquidity that is currently found in the foreign exchange market.

Question 25

The bid-ask spread is computed using the following formula:

A)(Ask price - Bid price)/Bid price.
B)(Bid price - Ask price)/Bid price.
C)(Bid price - Ask price)/Ask price.
D)(Ask price - Bid price)/Ask price.

Question 26

Foreign currency transactions that are in the USD are called:

A)foreign currency transactions.
B)foreign exchange transactions.
C)Eurocurrency transactions.
D)Eurodollar transactions.

Question 27

Foreign currency quotes typically use _____________ decimal places,and for major currencies,the bid and ask quotes _________________.

A)four;will differ for all four decimal places
B)four;only the fourth decimal place will differ
C)two;only the second decimal place will differ
D)two;all decimal places will differ

Question 28

In a currency quote,the first three letters identify the __________________ and the last three letters identify the _____________________.

A)domestic currency;term currency
B)base currency;term currency
C)foreign currency;base currency
D)domestic currency;foreign currency

Question 29

Most transactions in Eurocurrency markets are:

A)transactions involving governmental entities.
B)secured transactions between sovereign wealth funds and MNCs.
C)secured transactions between Interbanks and MNCs.
D)unsecured transactions between private parties.

Question 30

The two key financial instruments used in the Eurocurrency markets are:

A)foreign exchange swap agreements and Euro commercial paper.
B)Euro commercial paper and Euro certificate of deposit.
C)Euro certificate of deposit and Euro negotiable instruments.
D)Euro negotiable instruments and foreign exchange swap agreements.

Question 31

The volume of transactions in foreign exchange markets is ________________ due in part to ___________________________

A)increasing gradually;reduced risks in the foreign exchange markets.
B)holding steady;new regulations that make the transactions more difficult.
C)decreasing;the development of new financing instruments that do not depend on foreign exchange.
D)increasing rapidly;the participation of non-bank institutions in the foreign exchange markets.

Question 32

Every currency quote contains two components:

A)the price and the time during which that price is valid.
B)the price and the maximum value that will be available at that price.
C)the currency pair and the time during which the quoted price will be valid.
D)the currency pair and the numerical quote.

Question 33

An indirect quote expresses the value of the domestic currency in terms of the:

A)the average exchange rate between two currencies over the last week.
B)domestic currency.
C)foreign currency.
D)a market basket of foreign currencies.

Question 34

The currency quote "JPYUSD = 0.0109053" means:

A)0.0109053 USD can be used to buy 1 JPY.
B)0.0109053 JPY can be used to buy 1 USD.
C)0.0109053 JPY can be used to buy 1 of any currency traded in the foreign exchange market where the quote is given.
D)0.0109053 USD can be used to buy 1 of any currency traded in the foreign exchange market where the quote is given.

Question 35

The London Inter Bank Offered Rate (LIBOR):

A)is the interest rate set by the central bank in Great Britain.
B)reflects a set of interest rates based on a variety of currencies and maturities at which Eurobanks are willing to lend to each other.
C)the interest rate set by the European Investment Bank.
D)reflects an average of the prime interests rates prevailing in a variety of developed nations.

Question 36

__________________________ are agreements to pay a specific sum of money at a specified interest rate in a specified period of time,often six months.

A)Euro certificates of deposit
B)Euro promissory notes
C)Euro commercial paper
D)Euro loan agreements

Question 37

__________________________ are markets where medium term and long term international debt instruments are issued and traded.

A)International debt markets
B)Global exchange markets
C)MNC debt markets
D)Foreign debt markets

Question 38

If a currency quote is given in EUR to USD and USD to JPY,and those quotes can be used to determine EUR to JPY,the quotes are known as:

A)parallel rates.
B)complex rates.
C)cumulative rates.
D)cross rates.

Question 39

Banks that are involved in borrowing and lending transactions in currencies other than their domestic currencies are called:

A)Eurobanks.
B)foreign banks.
C)market makers.
D)foreign exchange dealers.

Question 40

When lending or borrowing occurs in a currency that is not the domestic currency of the country where the transaction takes place,the transaction is said to have taken place in the:

A)eurocurrency market.
B)foreign market.
C)domestic market.
D)foreign exchange market.

Question 41

Why is there a difference between LIBOR rates and U.S.Treasury rates?

Question 42

Why does London play such a prominent role in the foreign exchange market?

Question 43

Floating rate notes are financial instruments with interest rates linked to _____________ that are traded on the _________________________.

A)US Treasury bill rates;foreign exchange markets
B)LIBOR;Eurocredit market
C)LIBOR;foreign debt markets
D)US Treasury bill rates;Eurocurrency markets

Question 44

What is a foreign bond and what relevance does it have to international finance?

Question 45

____________________ are Eurobonds that are issued simultaneously in multiple regions or countries.

A)Global bonds
B)Foreign bonds
C)Eurocurrencies
D)Samurai bonds

Question 46

Collateralized debt obligations are:

A)essentially the same thing as Eurobonds.
B)bonds issued by MNCs payable in the domestic currency of the MNC.
C)equity instruments issued by MNCs that are convertible into Eurobonds.
D)backed by risky assets and are sold in classes having different levels of risk.

Question 47

Two characteristics that distinguish Eurobonds from bonds typically issued in the United States are:

A)interest on Eurobonds is paid annually and Eurobonds are bearer bonds.
B)interest on Eurobonds is paid when the principal of the bonds are paid and Eurobonds are bearer bonds.
C)interest on Eurobonds is paid in Euros and Eurobonds are payable in demand.
D)interest on Eurobonds is paid in Euros and Eurobonds are bearer bonds.

Question 48

What role do interbanks play in the foreign exchange markets?

Question 49

What is the "bid-ask spread" and how does it affect the costs that MNCs incur in the foreign exchange market?

Question 50

Eurobonds are bonds that are:

A)the same as foreign bonds.
B)issued in European countries.
C)issued in a country but are denominated in a currency other than the currency of the country where they are issued.
D)issued in a European currency.