Deck 9: International Financial Markets and Foreign Exchange

Question 1

An offshore financial centre is a country or territory whose financial sector features very few regulations and few,if any,taxes.

Answer 1

True

Question 2

Changes in currency values,and thus in exchange rates,affect the profitability of a company's international business activities.

Answer 2

True

Question 3

All of Europe's currencies combined are referred to as Eurocurrency.

Answer 3

False

Question 4

Increased regulation of national capital markets has been instrumental in the expansion of the international capital market.

Question 5

Equity normally takes the form of stock,shares of ownership in a company.

Question 6

The spread of privatization is encouraging the growth of the international equity market.

Question 7

A bond is a debt instrument that specifies the timing of principal and interest payments.

Question 8

When obtaining microcredit,small groups of low-income entrepreneurs can borrow money at competitive rates without having to put up collateral.

Question 9

The international bond market consists of all stocks bought and sold outside the issuer's home country.

Question 10

Securitization is the unbundling and repackaging of hard-to-trade financial assets into more liquid,negotiable,and marketable financial instruments.

Question 11

There are two components of every quoted exchange rate: the debt and the equity rates.

Question 12

A rise in a country's currency forces borrowers to shell out more local currency to pay off the interest owed on bonds denominated in an unaffected currency.

Question 13

The rate at which one currency is exchanged for another depends on the size of the transaction,the trader conducting it,and general economic conditions.

Question 14

Eurocurrency transactions are risky because the banks involved are not dealing globally.

Question 15

Investors increase risk by holding international securities whose prices move independently.

Question 16

A capital market is a system that allocates financial resources in the form of cash and shares.

Question 17

Deregulation of national capital markets has been instrumental in the expansion of the international capital market.

Question 18

Interest arbitrage is the profit-motivated purchase and sale of interest-paying securities denominated in different currencies.

Question 19

The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency arbitrage.

Question 20

Booking centres are usually located on small island nations and territories with favourable tax and/or secrecy laws.

Question 21

In any exchange rate,the quoted currency is always the numerator and the base currency is always the denominator.

Question 22

If you are travelling to another country and want to exchange currencies at your bank before departing,you will be quoted the spot rate since you are exchanging on the spot.

Question 23

Predictable exchange rates increase the need for currency hedging.

Question 24

Devaluation lowers the price of a country's exports on world markets and increases the price of imports.

Question 25

Forward exchange rates are perfect predictors of future exchange rates.

Question 26

In order to capture the gains from currency translation,managers prefer that exchange rates be volatile and unpredictable.

Question 27

The intentional raising of the value of a currency by a nation's government is called devaluation.

Question 28

Forward contracts belong to a family of financial instruments called arbitrage.

Question 29

Proponents of the efficient market view of exchange rates believe that companies can search for new pieces of information to improve forecasting.

Question 30

Currency devaluation increases consumers' buying power.

Question 31

One goal of currency restriction is to preserve hard currencies to pay for imports and to finance trade deficits.

Question 32

A company selling in a country with a strong currency while sourcing from a country with a weak currency improves its profits.

Question 33

A market is efficient if prices of financial instruments quickly reflect new public information made available to traders.

Question 34

Currency revaluation increases the prices of exports and reduces the prices of imports.

Question 35

Exchange rates affect the translation of earnings into the home country currencies.

Question 36

If a currency's forward rate is higher than its spot rate,the currency is trading at a discount.

Question 37

Stable exchange rates improve the accuracy of financial planning.

Question 38

Forward exchange rates represent the expectations of currency traders and bankers regarding a currency's future spot rate.

Question 39

As the unpredictability of exchange rates increases,so too does the cost of insuring against the accompanying risk.

Question 40

A convertible currency (or soft currency)is traded freely in the foreign exchange market with its price determined by the London banks.

Question 41

The international capital market's rapid growth rate is traced to all these EXCEPT ________.

A)innovative financial instruments
B)information technology
C)foreign exchange rates
D)deregulation

Question 42

Which of the following is a system that allocates financial resources in the form of debt and equity according to their most efficient uses?

A)International equity market
B)Foreign currency market
C)Capital market
D)Eurocurrency market

Question 43

Which of these is NOT a component of the international capital market?

A)Foreign exchange market
B)International equity market
C)Eurocurrency market
D)International bond market

Question 44

Each of the following is an important booking centre EXCEPT ________.

A)Bahrain
B)Singapore
C)Monaco
D)Iceland

Question 45

The international financial market is composed of two interrelated systems called the ________ and the ________.

A)international capital market;foreign exchange market
B)international capital market;foreign goods market
C)foreign goods market;international services market
D)foreign goods market;foreign exchange market

Question 46

The world's three most important financial centres are ________.

A)Bonn,Zurich,and New York
B)London,Amsterdam,and Sydney
C)New York,Tokyo,and Bombay
D)Tokyo,London,and New York

Question 47

Which of these is a debt instrument specifying the timing of principal and interest payments?

A)Stock
B)Bond
C)Eurocurrency
D)Equity

Question 48

Which of the following is NOT a purpose of the international capital market?

A)Reduces risk for lenders.
B)Expands the money supply for borrowers.
C)Reduces the cost of money to borrowers.
D)Preserves hard currencies to finance trade deficits.

Question 49

The unbundling and repackaging of hard-to-trade financial assets into more liquid,negotiable,and marketable financial instruments is called ________.

A)market liquidity
B)securitization
C)bartering
D)arbitrage

Question 50

A loan in which the borrower promises to repay the borrowed amount plus a predetermined rate of interest is called ________.

A)equity
B)exchange rate
C)stock
D)debt

Question 51

The ease with which bondholders and shareholders may convert their investments into cash is called ________.

A)barter
B)hedging
C)arbitrage
D)liquidity

Question 52

Which of these is a country or territory whose financial sector features very few regulations and few,if any,taxes?

A)Offshore financial centre
B)Currency market centre
C)Capital market centre
D)World trade centre

Question 53

________ centres are usually located on small island nations or territories with favourable tax and/or secrecy laws.

A)Liquidity
B)Booking
C)Capital
D)Operational

Question 54

Shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows are called ________.

A)stocks
B)bonds
C)debt
D)Eurocurrencies

Question 55

Which of these is a prominent operational centre?

A)The Cayman Islands
B)Gibraltar
C)Switzerland
D)Singapore

Question 56

Company debt normally takes the form of ________.

A)bonds
B)equity
C)stocks
D)bank loans

Question 57

Microcredit loans in developing countries typically average ________.

A)more than $100
B)about $350
C)more than $500
D)less than $500

Question 58

________ is a prominent operational centre.

A)Singapore
B)London
C)Beijing
D)Frankfurt

Question 59

An offshore financial centre is usually characterized by each of the following EXCEPT ________.

A)very few regulations
B)economic and political stability
C)excellent telecommunications
D)high taxes

Question 60

An expanded money supply ________.

A)reduces the cost of borrowing
B)makes it difficult for financial institutions to lend money
C)increases the cost of borrowing
D)diminishes the entrepreneurial initiatives of a country

Question 61

Eurobonds are popular because ________.

A)they are less risky than traditional bonds
B)they are always denominated in euros
C)of the absence of government regulation
D)European companies are considered very stable

Question 62

The market in which currencies are bought and sold and their prices determined is called the ________.

A)Eurocurrency market
B)international capital market
C)international bond market
D)foreign exchange market

Question 63

Investors use the foreign exchange market for each of the following EXCEPT ________.

A)currency hedging
B)currency speculation
C)currency arbitrage
D)currency prospecting

Question 64

A bond issued by a Venezuelan company,denominated in US dollars,and sold in Britain,France,and Germany is an example of a(n)________.

A)Ameribond
B)Bulldog bond
C)Eurobond
D)Latinobond

Question 65

The most commonly quoted rate in the Eurocurrency market is the ________.

A)London Interbank Offer Rate (LIBOR)
B)London Interbank Bid Rate (LIBID)
C)spot rate
D)interbank rate

Question 66

________ is the instantaneous purchase and sale of a currency in different markets for profit.

A)Currency hedging
B)Currency arbitrage
C)Currency speculation
D)Currency conversion

Question 67

Bonds sold outside the borrower's country and denominated in the currency of the country in which they are sold are called ________.

A)international bonds
B)foreign bonds
C)Eurobonds
D)dragon bonds

Question 68

The bid-ask spread in the foreign exchange market is the ________.

A)price at which a bank will buy a currency
B)price of currency in the foreign exchange market
C)difference between the bid and ask quotes for a currency
D)price a bank will pay for a currency

Question 69

Eurobonds account for ________ percent of all international bonds.

A)20 to 25
B)30 to 40
C)50 to 65
D)75 to 80

Question 70

The market consisting of all the world's currencies that are banked outside their countries of origin is called the ________.

A)foreign exchange market
B)interbank trading market
C)Eurocurrency market
D)offshore financial centre

Question 71

Foreign bonds account for ________ percent of all international bonds.

A)about 20 to 25
B)about 25 to 40
C)about 50 to 70
D)more than 90

Question 72

The British pounds of a British trading company that are deposited in a Japanese bank are called ________.

A)Poundyens
B)Euroyen
C)Europounds
D)Yen-pounds

Question 73

Which of the following is LEAST likely to affect the exchange rate between two currencies?

A)The size of the transaction
B)The trader conducting the transaction
C)General economic conditions
D)The recipient of the converted currency

Question 74

Rates that the world's largest banks charge one another for loans are called ________.

A)interbank interest rates
B)standardized interest rates
C)exchange rates
D)inflation hedge rates

Question 75

Deposits to the Eurocurrency market originate from all of these EXCEPT ________.

A)governments with excess funds generated by a prolonged trade surplus
B)commercial banks with large deposits of excess currency
C)international companies with large amounts of excess cash
D)nongovernmental organizations seeking to avoid taxes

Question 76

Which of the following denotes a stock market with no central geographic location?

A)Cybermarket
B)Foreign exchange market
C)Capital market
D)Bond market

Question 77

The absence of government regulation in the Eurobond market ________.

A)substantially reduces the cost of issuing a bond
B)lowers the risk level of the bond
C)makes Eurobonds less popular than foreign bonds
D)exists because of the difficulty of regulating a multi-country market

Question 78

The international bond market consists of all bonds sold by issuing companies,governments,or other organizations ________.

A)within their own countries
B)to London banks
C)outside their own countries
D)to developing nations only

Question 79

Typical buyers of bonds include all of the following EXCEPT ________.

A)medium-sized to large banks
B)pension funds
C)mutual funds
D)governments in need of funds

Question 80

The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency ________.

A)hedging
B)arbitrage
C)speculation
D)conversion