Deck 3: International Financial Markets

Question 1

Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043.  Its bidask percentage spread is:

A) about 4.99%.
B) about 4.88%.
C) about 4.65%.
D) about 4.43%.

Answer 1

C

Question 2

If a U.S.firm desires to avoid the risk from exchange rate fluctuations,and it will need C$200,000 in 90 days to make payment on imports from Canada,it could:

A) obtain a 90 day forward purchase contract on Canadian dollars.
B) obtain a 90 day forward sale contract on Canadian dollars.
C) purchase Canadian dollars 90 days from now at the spot rate.
D) sell Canadian dollars 90 days from now at the spot rate.

Answer 2

A

Question 3

According to the text,the forward rate is commonly used for:

A) hedging.
B) Eurocurrency transactions.
C) Eurocredit transactions.
D) Eurobond transactions.

Answer 3

A

Question 4

The international credit market primarily concentrates on:

A) short term lending (less than one year).
B) medium term lending.
C) long term lending.
D) providing an exchange of foreign currencies for firms who need them.
E) placing newly issued stock in foreign markets.

Question 5

Forward markets for currencies of developing countries are:

A) prohibited.
B) less liquid than markets for developed countries.
C) more liquid than markets for developed countries.
D) only available for use by government agencies.

Question 6

Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47.  Its bidask percentage spread is:

A) about 4.44%.
B) about 4.26%.
C) about 4.03%.
D) about 4.17%.

Question 7

_______is not a factor that affects the bid/ask spread.

A) Order costs
B) Inventory costs
C) Volume
D) All of the above factors affect the bid/ask spread

Question 8

Which of the following is not true with respect to spot market liquidity

A) The more willing buyers and sellers there are, the more liquid a market is.
B) The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
C) A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.
D) If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

Question 9

The international money market primarily concentrates on:

A) short term lending (one year or less).
B) medium term lending.
C) long term lending.
D) placing bonds with investors.
E) placing newly issued stock in foreign markets.

Question 10

The bid/ask spread for small retail transactions is commonly in the range of ______ percent;the bid/ask spread for wholesale transactions is commonly in the range of ______ percent.

A) 3 to 7;.01 to .03
B) 2 to 5;.05 to .10
C) 10 to 15;.01 to .03
D) 1 to 2;.05 to .07

Question 11

Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35.  The value of the Peruvian Sol in Canadian dollars is:

A) about .3621 Canadian dollars.
B) about .3977 Canadian dollars.
C) about 2.36 Canadian dollars.
D) about 2.51 Canadian dollars.

Question 12

If a U.S.firm desires to avoid the risk from exchange rate fluctuations,and it is receiving 100,000 in 90 days,it could:

A) obtain a 90 day forward purchase contract on euros.
B) obtain a 90 day forward sale contract on euros.
C) purchase euros 90 days from now at the spot rate.
D) sell euros 90 days from now at the spot rate.

Question 13

The ask quote is the price for which a bank offers to sell a currency.

Question 14

LIBOR is:

A) the interest rate commonly charged for loans between banks.
B) the average inflation rate in European countries.
C) the maximum loan rate ceiling on loans in the international money market.
D) the maximum deposit rate ceiling on deposits in the international money market.
E) the maximum interest rate offered on bonds that are issued in London.

Question 15

The forward market:

A) for euros is very illiquid.
B) for Eastern European countries is very liquid.
C) does not exist for some currencies.
D) none of the above

Question 16

The Basel II accord would:

A) replace the Basel Accord.
B) reduce the amount of capital banks are required to hold.
C) require banks to take more risks and to document their risk.
D) correct some inconsistencies that still exist.

Question 17

The main participants in the international money market are:

A) consumers.
B) small firms.
C) large corporations.
D) small European firms needing European currencies for international trade.

Question 18

A forward contract can be used to lock in the __________ of a specified currency for a future point in time.

A) purchase price
B) sale price
C) A or B
D) none of the above

Question 19

The forward rate is the exchange rate used for immediate exchange of currencies.

Question 20

_______ is not a bank characteristic important to customers in need of foreign exchange.

A) Quote competitiveness
B) Speed of execution
C) Forecasting advice
D) Advice about current market conditions
E) All of the above are important bank characteristics to customers in need of foreign exchange.

Question 21

Assume a Japanese firm invoices exports to the U.S.in U.S.dollars.  Assume that the forward rate and spot rate of the Japanese yen are equal.  If the Japanese firm expects the U.S.dollar to _______ against the yen,it would likely wish to hedge.  It could hedge by _______ dollars forward.

A) depreciate;buying
B) depreciate;selling
C) appreciate;selling
D) appreciate;buying

Question 22

International money market transactions normally represent:

A) the equivalent of $1 million or more.
B) the equivalent of $1,000 to $10,000.
C) the equivalent of between $10,000 and $100,000.
D) the equivalent of between $100,000 and $200,000.

Question 23

Eurobonds:

A) are usually issued in bearer form.
B) typically carry several protective covenants.
C) cannot contain call provisions.
D) A and B

Question 24

A Japanese yen is worth $.0080,and a Fijian dollar (F$)is worth $.5900.What is the value of the yen in Fijian dollars (i.e.,how many Fijian dollars do you need to buy a yen)

A) 73.75.
B) 125.
C) 1.69.
D) 0.014.
E) none of the above

Question 25

Which currency is used the most to denominate Eurobonds

A) the British pound.
B) the Japanese yen.
C) the U.S. dollar.
D) the Swiss franc.

Question 26

Futures contracts are typically _______;forward contracts are typically _______.

A) sold on an exchange;sold on an exchange
B) offered by commercial banks;sold on an exchange
C) sold on an exchange;offered by commercial banks
D) offered by commercial banks;offered by commercial banks

Question 27

The existence of imperfect markets has prevented the internationalization of financial markets.

Question 28

Under the gold standard,each currency was convertible into gold at a specified rate,and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.

Question 29

A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.

Question 30

Which of the following is not true regarding the Bretton Woods Agreement

A) It called for fixed exchange rates between currencies.
B) Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels.
C) The agreement lasted from 1944 until 1971.
D) Each country used gold to back its currency.
E) All of the above are true regarding the Bretton Woods Agreement.

Question 31

A syndicated Eurocredit loan:

A) represents a loan by a single bank to a syndicate of corporations.
B) represents a loan by a single bank to a syndicate of country governments.
C) represents a direct loan by a syndicate of oil producing exporters to a less developed country.
D) represents a loan by a group of banks to a borrower.
E) A and B

Question 32

Loans of one year or longer extended by banks in Europe are called:

A) Eurocurrency loans.
B) Eurocredit loans.
C) Eurobond loans.
D) Parallel loans.

Question 33

From 1944 to 1971,the exchange rate between any two currencies was typically:

A) fixed within narrow boundaries.
B) floating, but subject to central bank intervention.
C) floating, and not subject to central bank intervention.
D) nonexistent;that is currencies were not exchanged, but gold was used to pay for all foreign transactions.

Question 34

Eurobonds:

A) can be issued only by European firms.
B) can be sold only to European investors.
C) A and B
D) none of the above

Question 35

Which of the following is true

A) Non U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
B) U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
C) U.S. firms may desire to issue bonds in the non U.S. markets due to less regulations in non U.S. countries.
D) A and B

Question 36

When the foreign exchange market opens in the U.S.each morning,the opening exchange rate quotations will be based on the:

A) closing prices in the U.S. during the previous day.
B) closing prices in Canada during the previous day.
C) prevailing prices in locations where the foreign exchange markets have been open.
D) officially set by central banks before the U.S. market opens.

Question 37

As a result of the Smithsonian Agreement,the U.S.dollar was:

A) the currency to be used by all countries as a medium of exchange for international trade.
B) forced to be freely floating relative to all currencies without any boundaries.
C) devalued relative to major currencies.
D) revalued (upward) relative to major currencies.

Question 38

The U.S.dollar is not ever used as a medium of exchange in:

A) industrialized countries outside the U.S.
B) in any Latin American countries.
C) in Eastern European countries where foreign exchange restrictions exist.
D) none of the above

Question 39

The international money market is primarily served by:

A) the governments of European countries, which directly intervene in foreign currency markets.
B) government agencies such as the International Monetary Fund that enhance development of countries.
C) several large banks that accept deposits and provide loans in various currencies.
D) small banks that convert foreign currency for tourists and business visitors.

Question 40

According to the text,the average foreign exchange trading around the world ________ per day.

A) equals about $200 billion
B) equals about $400 billion
C) equals about $700 billion
D) exceeds $1 trillion

Question 41

Eurobonds are certificates representing bundles of stock.

Question 42

The Single European Act and the Basel Accord prevented a trend toward increased globalization in the banking industry.

Question 43

A currency put option provides the right,but not the obligation,to buy a specific currency at a specific price within a specific period of time.

Question 44

The Basel Accord is a 1987 agreement among the major European countries to make regulations more uniform across European countries and to reduce taxes on goods traded between these countries.

Question 45

An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.

Question 46

The ADR of a British firm is convertible into 3 shares of stock.The share price of the firm was 30 pounds when the British market closed.When the U.S.market opens,the pound is worth $1.63.The price of this ADR should be $_______.

A) 48.90
B) 146.70
C) 55.21
D) none of the above

Question 47

The Bretton Woods Agreement is a 1988 accord between 12 countries to standardize banks' capital requirements across countries;the resulting capital ratios are computed using risk-weighted assets.

Question 48

A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency.

Question 49

A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

Question 50

The interest rate commonly charged for loans between banks is called the cross rate.

Question 51

The strike price is also known as the premium price.

Question 52

A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange.The share price of the firm was 15 euros when the Dutch market closed.As the U.S.market opens,the euro is worth $1.10.Thus,the price of the ADR should be _____.

A) $13.64
B) $15.00
C) $16.50
D) 16.50 euros
E) none of the above