FIN 320 Chapter 18 SB

if US dollars are deposited in banks outside the US banking system, they are referred to as:

Eruodollars

What is the acronym for the interest rate most international banks charge one another for overnight eurodollar loans?

LIBOR

an agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called

a forward trade

the condition that a commodity costs the same regardless of the currency used or where it is purchased is called

absolute purchasing power parity

the implicit exchange rate between two currencies when both are quoted in a third currency is called the _______

cross rate

if the Japanese Yen is less expensive in the forward market than it is today, it is said to be selling at a

discount

interest rate parity

eliminates covered interest arbitrage opportunities

t/f an interest rate swap occurs when two parties exchange a sub-par loan for a market rate loan

false

an interest rate swap involves swapping a ______ payment for a _________ payment

fixed rate; floating rate or floating rate; fixed rate

the world's largest financial market is the:

foreign exchange market

short term exposure to exchange rate risk can be reduced by importing raw materials and using _______ contracts

forward

British and ________ governments issue gilts

irish

which of the following are true concerning triangle arbitrage?

it helps keep the currency market in equilibrium, it is a profitable situation involving three separate currency exchange transactions

what are some strategies for hedging long term exchange rate risk?

matching foreign currency inflows and outflows

the foreign exchange market is where ________

one country's currency is traded for another country's currency

the different types of exchange rate risk include which of the following?

short term exposure, long term exposure, translation exposure

a cross rate between two foreign currencies is usually quoted in what currency?

the US dollar

currently, the spot exchange rate for the Swiss franc is SF 1 = $1.10 or SF = $1.12 90 days forward. Which of the following is true?

the dollar is selling at a discount to the Swiss franc, the Swiss franc is at a forward premium

when a us company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to _____ exposure to exchange rate risk

translation

relative purchasing power parity tells us that the exchange rate will rise if the US inflation rate is lower than that of a foreign country. The foreign currency will ______ in value relative to the US dollar

depreciate

money deposited in a financial center outside the country whose currency is involved is called _______

eurocurrency

in covered interest arbitrage, investors protect themselves against changes in exchange rates by locking in the

forward exchange rate

relative PPP implies that the change in an exchange rate is driven by the difference in the __________ of the two countries involved

inflation rates

an agreement to trade currencies within two business days at today's exchange rate is called a

spot trade

conditions that must be present for absolute purchasing power to exist include which of the following?

there must be no trade barriers, the goods must be identical

the _________ rate is the exchange rate for a non-U.S. currency expressed in terms of another non-U.S. currency

cross

protecting oneself from a change in the exchange rate by locking in the forward exchange rate today is called

covered interest arbitrage

users of the foreign exchange market include

foreign exchange brokers who match buy and sell orders, importers who pay for goods using foreign currencies, speculators who try to profit from changes in exchange rates

a foreign bond refers to a bond

that is issued in a single country, denominated in the currency of that country

t/f if the purchasing power parity did not hold, it would be possible to engage in arbitrage simply by transporting product to other countries

true

a eurobond refers to a bond

the is issued in the multiple countries, usually denominated in the currency of the issuer's country

why is it more challenging to manage long term exchange rate risk exposure than to hedge short term risks?

organized forward markets do not exist for long term needs of corporations

the exchange rate in an agreement to exchange currency at some time in the future is called the _________ rate

forward

the concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as

purchasing power parity

a security issued in the United States representing shares of a foreign stock is call a

American depository receipt

the interest rate most international banks charge one another for overnight eurodollar loans is the ________ interbank offer rate

London