Deck 13: International Transactions and Financial Markets

Question 1

Which of the following is not a reason to purchase foreign currency?

A) FDI
B) the purchase of foreign bonds
C) the purchase of foreign stocks
D) exports

Answer 1

exports

Question 2

The foreign exchange retail and wholesale markets are physically centered in:

A) London.
B) Paris.
C) Berlin.
D) None of these.

Answer 2

None of these.

Question 3

The foreign exchange market is composed of:

A) the retail market.
B) the inter-bank market.
C) the futures and options markets.
D) all of the above

Answer 3

all of the above

Question 4

A currency that can move between countries without the impediments associated with trade in goods and services is known as a(n) _____.

A) unstable currency
B) flight currency
C) freely convertible currency
D) unrestricted currency

Question 5

The price of one currency in terms of another is called:

A) the foreign exchange market.
B) the foreign exchange.
C) the exchange rate.
D) the spot rate.

Question 6

The volume of trading in the foreign exchange market is approximately _____ per day.

A) $500 billion
B) $750 billion
C) $1 trillion
D) $2 trillion

Question 7

The most common means of payment in international trade is:

A) cash.
B) open account.
C) cable transfer.
D) credit cards.

Question 8

A guaranty from the importers bank that the imports will be paid for is known as:

A) a direct quote.
B) a credit report.
C) a letter of credit.
D) a signature of guaranty.

Question 9

A bill of exchange that is payable to the exporter is called a:

A) commercial bill of exchange.
B) time bill.
C) sight bill.
D) cable transfer.

Question 10

The _____ exchange rate is the exchange rate relevant to current foreign exchange transactions.

A) forward
B) future
C) spot
D) current

Question 11

If an importer wants to protect a transaction against exchange rate fluctuations he/she can use the:

A) spot rate.
B) forward rate.
C) strike price.
D) future spot rate.

Question 12

Using direct quotes, if the forward rate is less than the spot rate the forward rate is selling at a(n):

A) premium.
B) discount.
C) asked price.
D) bid price.

Question 13

A _____ is a commitment to purchase or deliver a specified quantity of foreign currency on a designated date in the future.

A) long-term contract
B) short-term contract
C) NASDAQ contract
D) futures contract

Question 14

A _____ is when two parties agree to exchange different currencies over a specified period of time.

A) futures contract
B) option
C) currency swap
D) XR contract

Question 15

The purpose of any financial market is to perform:

A) arbitration.
B) mediation.
C) sales and bids.
D) intermediation.

Question 16

The principle of _____ states that if the returns on various assets do not move together identically, then holding a portfolio of assets will be less risky than holding a single asset.

A) risk diversification
B) asset allocation
C) stock/bond split
D) time horizon symmetry

Question 17

If the returns on various assets are not perfectly correlated then:

A) a portfolio of assets will be more risky than holding a single asset.
B) risk reduction is not possible within a portfolio of assets.
C) a portfolio of assets will be less risky than holding a single asset.
D) one should hold bonds only.

Question 18

Ninety-day Treasury bills, commercial paper, and certificates of deposit are examples of:

A) capital market instruments.
B) money market instruments.
C) equity instruments.
D) government debt.

Question 19

If the real interest rate is 4% in Japan and 6% in the U.S., why would some capital move from the U.S. to Japan?

A) Some investors are irrational.
B) The Japanese are better financial planners.
C) Investors are diversifying their risk.
D) Investors are seeking a higher rate of return.

Question 20

Equities, 30-year Treasury Bonds, and municipal bonds are examples of:

A) capital market instruments.
B) money market instruments.
C) equity instruments.
D) government debt.

Question 21

In the short run, large amounts of capital flow between countries in the form of:

A) currency.
B) direct foreign investment.
C) portfolio capital.
D) equity flows.

Question 22

One of the most important interest rates in the world economy is:

A) the Lombard rate
B) the prime rate.
C) RR rate.
D) LIBOR.

Question 23

The primary trader in the foreign exchange market on a daily basis is:

A) investors.
B) brokerage firms.
C) commercial banks.
D) individuals.

Question 24

Domestic financial markets are segmented into the:

A) money market and the product market.
B) capital market and the foreign exchange market.
C) money market and the foreign exchange market
D) money market and the capital market.

Question 25

A domestic bank can choose to engage in foreign banking using all of the following except:

A) setting up a branch facility in a foreign country.
B) setting up an agency office in a foreign country.
C) setting up a subsidiary office in a foreign country.
D) selling ADRs in a foreign capital market.

Question 26

The total size of the Eurocurrency market is:

A) $2 trillion.
B) $4 trillion.
C) $8 trillion.
D) $15 trillion.

Question 27

Eurodollars are:

A) the new currency of the EU.
B) Euros held by Europeans in European bank accounts.
C) U.S. dollar deposits located outside the U.S.
D) an ADR of a foreign firm traded on the NYSE.

Question 28

The foreign exchange market is located on the NYSE.

Question 29

The foreign exchange market is a three-tiered market consisting of financial institutions, corporations, and brokers.

Question 30

In the 1990s, 25 of the largest currency traders accounted for 75% of the foreign currency exchanged worldwide.

Question 31

Foreign exchange transactions do not usually involve a commercial bank.

Question 32

A direct exchange rate is expressed as units of domestic currency per unit of foreign currency.

Question 33

In Japan the number of yen per dollar is an indirect foreign exchange quote.

Question 34

Foreign exchange generally refers to foreign currency bank deposits.

Question 35

A direct quote on foreign exchange is expressed as foreign currency per unit of domestic currency.

Question 36

Foreign exchange generally refers to foreign currency bank deposits.

Question 37

Through arbitrage a direct currency quote is always equal to the reciprocal of the forward quote.

Question 38

Liquidity is the property associated with the ability to buy or sell something easily.

Question 39

A bill of exchange payable at a future date is called a future bill.

Question 40

A cash payment for imports is uncommon because of the burden it places on the exporter

Question 41

The spot exchange rate is the exchange rate relevant to future foreign exchange transactions.

Question 42

The forward exchange rate is the price of foreign exchange to be delivered at some point in the future.

Question 43

If the forward rate is less than the spot rate, the forward rate is said to be at a premium to the spot rate.

Question 44

If the forward rate is higher than the spot rate, the forward rate is said to be at a premium to the spot rate.

Question 45

An option contract gives the holder the option to buy or sell foreign exchange at a future point in time.

Question 46

The price of foreign exchange futures contracts is set by the government.

Question 47

Forward rates are always equal to current spot rates.

Question 48

In the spot exchange market, foreign exchange is delivered in 1 to 3 business days.

Question 49

A foreign exchange futures contract is an agreement to buy or sell a certain amount of foreign exchange at a specified price at a predetermined future time.

Question 50

The U.S. dollar is the world's most widely traded currency.

Question 51

The rate of growth in foreign financial and real assets has been less than the growth in world trade

Question 52

The rate of growth in foreign financial and real assets has been less than the growth in world trade

Question 53

Risk diversification only works when returns on various assets are perfectly correlated.

Question 54

Modern portfolio theory illustrates that by diversifying, an investor can achieve a higher rate of return for slightly higher level of risk.

Question 55

Risk diversification would explain bilateral capital flow between two countries where the rates of return on financial assets is equal.

Question 56

LIBOR has no influence on U.S. interest rates.

Question 57

Assets in a money market have maturities of more than one year.

Question 58

Stocks are money market instruments.

Question 59

Corporate bonds are capital market instruments.

Question 60

The capital market is defined as a market where financial assets are traded that have a maturity of less than one year.

Question 61

Commercial banks are the primary traders in the foreign exchange market.

Question 62

Differences in the national regulation of commercial banks create incentives for banks to have branches in more than one country.

Question 63

An agency office of a bank can make loans and transfer funds but it cannot accept deposits.

Question 64

If a bank has a branch or a subsidiary in a foreign country it can perform all of the usual functions of a commercial bank.

Question 65

The typical customer for foreign exchange is a multinational corporation.

Question 66

Corporations other than banks do not issue financial assets such as stocks and bonds in foreign countries.

Question 67

Insurance companies and investment companies participate in international capital markets.

Question 68

Since speculators are a small part of foreign exchange trading they are irrelevant in terms of providing liquidity to the foreign exchange market.

Question 69

Liquidity is the property associated with the ability to buy or sell something easily.

Question 70

The creation of the Euro creates the possibility of a EU wide bond market.

Question 71

A Eurodollar is a dollar-denominated asset that exists outside the U.S.

Question 72

Suppose that the dollar is at a forward premium to the Japanese yen. Explain what this means.

Question 73

Assume that the Euro is at a forward discount to the British pound. What does this mean?

Question 74

Describe how an importer may pay the exporter for goods received.

Question 75

Discuss how the free flow of capital from developed to developing countries makes both types of countries better off.

Question 76

Why do multinational corporations move money from one country to another for short periods of time?

Question 77

Discuss the reasons for long-run movements of portfolio capital.

Question 78

Explain how diversifying assets across a number of countries can reduce risk and/or increase the rate of return.

Question 79

What are the various ways a commercial bank can do business in a foreign country?

Question 80

Explain why a Eurodollar account might be advantageous to a non-U.S. company.