FIN4604 (ch. 1, 2, 3, 5)

c. €0.6623 and €0.6667.

If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and ask prices are a. €0.6667 and €0.6623. b. $1.51 and $1.50. c. €0.6623 and €0.6667. d. cannot be determined with the information given.

d. all of the options.

Statistical discrepancy, which, by definition, represents errors and omissions, a. cannot be calculated directly. b. is calculated by taking into account the balance-of-payments identity. c. probably has some elements that are honest mistakes, it can't all be money laundering and drugs. d. all of the options.

b. $30.00

Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What would an ounce of gold be worth in U.S. dollars? a. $29.40 b. $30.00 c. $0.83 d. $1.20

a. the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold.

Under the Bretton Woods system, a. the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold. b. all currencies of member states were fully convertible to gold. c. all currencies of member states were fully convertible to gold or silver. d. none of the options

a. supply and demand set the exchange rates.

Under a purely flexible exchange rate system a. supply and demand set the exchange rates. b. governments can set the exchange rate by buying or selling reserves. c. governments can set exchange rates with fiscal policy. d. governments can set the exchange rate by buying or selling reserves and with fiscal policy.

c. £0.50 = $1.00.

Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from the U.S. perspective is a. £1.00 = $2.00. b. £1.00 = $0.50. c. £0.50 = $1.00. d. none of the options

a. bad money drives good money out of circulation.

Gresham's Law states that a. bad money drives good money out of circulation. b. good money drives bad money out of circulation. c. if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. d. none of the options.

b. one can infer that the yen would be likely to appreciate against other currencies.

If Japan exports more than it imports, then a. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. b. one can infer that the yen would be likely to appreciate against other currencies. c. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one can infer that the yen would be likely to appreciate against other currencies. d. none of the options.

Ask price

The price at which a dealer will sell.

Balance of Payments Accounts

1. Current Account 2. Capital Account 3. Official Reserve Account

a. importing goodwill from the latter.

A country that gives foreign aid to another country can be viewed as a. importing goodwill from the latter. b. exporting goodwill to the latter.

a. acquires IOUs from foreigners, thereby increasing its net foreign wealth.

A country with a current account surplus a. acquires IOUs from foreigners, thereby increasing its net foreign wealth. b. must borrow from foreigners or draw down on its previously accumulated foreign wealth. c. will experience a reduction in the country's net foreign wealth. d. must borrow from foreigners or draw down on its previously accumulated foreign wealth and will experience a reduction in the country's net foreign wealth.

c. current account, capital account, and official reserve account.

A country's international transactions can be grouped into the following three main types: a. current account, medium term account, and long term capital account. b. current account, long term capital account, and official reserve account. c. current account, capital account, and official reserve account. d. capital account, official reserve account, trade account.

b. if the demand for imports and exports are elastic.

A currency depreciation will begin to improve the trade balance immediately a. if the demand for imports and exports are inelastic. b. if the demand for imports and exports are elastic. c. if imports decrease and exports decrease. d. none of the options.

Capital Account

Account that includes all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, & businesses.

Official Reserve Account

Account that includes foreign currencies, gold, and SDR's

Current Account

Account that includes imports and exports of goods and services, factor income, and unilateral transfers.

d. all of the options.

An "international" gold standard can be said to exist when a. gold alone is assured of unrestricted coinage. b. there is two-way convertibility between gold and national currencies at stable ratios. c. gold may be freely exported or imported. d. all of the options.

Bretton Woods System

An international monetary system created in 1944 to promote postwar exchange rate stability and coordinate international monetary policies.

d. all of the options.

Benefits from adopting a common European currency include a. reduced transaction costs. b. elimination of exchange rate risk. c. increased price transparency, which promotes Europe-wide competition. d. all of the options.

e. result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars.

Credit entries in the U.S. balance of payments a. result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets. b. result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets. c. give rise to the demand for dollars. d. give rise to the supply of dollars. e. result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars.

d. all of the options.

Deregulation of world financial markets a. provided a natural environment for financial innovations, like currency futures and options. b. has promoted competition among market participants. c. has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly invest in their financial markets. d. all of the options.

Interwar period

During this period, countries widely used "predatory" depreciations of their currencies as a means of gaining advantages in the export market.

a. consists largely of interest, dividends, and other income on foreign investments.

Factor income a. consists largely of interest, dividends, and other income on foreign investments. b. is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability. c. is generally a very minor part of national income accounting, smaller than the statistical discrepancy. d. none of the options

a. €1.25/£1.00

Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. a. €1.25/£1.00 b. $1.25/£1.00 c. £1.25/€1.00 d. €0.80/£1.00

c. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one can infer that the U.S. dollar would be under pressure to depreciate against other currencies.

If the United States imports more than it exports, then a. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. b. one can infer that the U.S. dollar would be under pressure to depreciate against other currencies. c. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one can infer that the U.S. dollar would be under pressure to depreciate against other currencies. d. none of the options.

a. you would be well served to produce that good and trade for other goods.

If you can make a good product at a low opportunity cost, a. you would be well served to produce that good and trade for other goods. b. you should make something else that has a higher value. c. you should make something else that has a higher opportunity cost. d. none of the options

b. the multinational corporations (MNCs).

In modern times, it is not a country per se but rather a controller of capital and know-how that gives the country in which it is domiciled a comparative advantage over another country. These controllers of capital and technology are a. the state. b. the multinational corporations (MNCs). c. portfolio managers of international mutual funds. d. none of the options

d. all of the options.

MNCs can use their global presence to a. take advantage of underpriced labor services available in certain developing countries. b. gain access to special R&D capabilities residing in advanced foreign counties. c. boost profit margins and create shareholder value. d. all of the options.

a. speculative or arbitrage transactions.

Most interbank trades are a. speculative or arbitrage transactions. b. simple order processing for the retail client. c. overnight loans from one bank to another. d. brokered by dealers.

Statistical Discrepancy

Omissions and misreadings in transactions. We use a "plug" figure to get things to balance.

c. 1 German mark = $3

Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system? a. 1 German mark = $2 b. 1 German mark = $0.50 c. 1 German mark = $3 d. 1 German mark = $1

c. $1 U.S. = $3.75 Australian

Suppose that both gold and silver are used as international means of payment and the exchange rates among currencies are determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $20 per ounce, the Japanese yen is pegged to gold at 120,000 yen per ounce and to silver at 8,000 yen per ounce of silver, and the Australian dollar is pegged to silver at $5 per ounce of silver. What would the exchange rate between the U.S. dollar and Australian dollar be under this system? a. $1 U.S. = $1 Australian b. $1 U.S. = $2 Australian c. $1 U.S. = $3.75 Australian d. none of the options.

a. only the silver currency will circulate.

Suppose that the United States is on a bimetallic standard at $30 to one ounce of gold and $2 for one ounce of silver. If new silver mines open and flood the market with silver, a. only the silver currency will circulate. b. only the gold currency will circulate. c. no change will take place since citizens could exchange their gold currency for silver currency at any time. d. none of the options.

a. €1.00 = $1.25.

Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is a. €1.00 = $1.25. b. €0.80 = $1.00. c. £1.00 = $1.80. d. none of the options

b. €0.6250 = $1.00.

Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from the U.S. perspective is a. €1.00 = $1.60. b. €0.6250 = $1.00. c. €1.60 = $1.00. d. none of the options

a. Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.

Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment. a. Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360. b. Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce. c. both of the options d. none of the options

a. Payment by McDonalds will be recorded as a debit.

Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian beef producer. a. Payment by McDonalds will be recorded as a debit. b. The deposit of the funds by the seller will be recorded as a debit. c. Payment by McDonalds will be recorded as a credit. d. The deposit of the funds by the buyer will be credit.

a. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85.

Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00 = £1.00. Starting with $1,000,000, how can you make money? a. Exchange $1m for £625,000 at £1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85. b. Start with dollars, exchange for euros at €1 = $.85; exchange for pounds at €2.00 = £1.00; exchange for dollars at £1 = $1.60. c. Start with euros; exchange for pounds; exchange for dollars; exchange for euros. d. No arbitrage profit is possible.

a. €1.3333 = £1.00

Suppose you observe the following exchange rates: €1 = $1.50; £1 = $2.00. Calculate the euro-pound exchange rate. a. €1.3333 = £1.00 b. £1.3333 = €1.00 c. €3.00 = £1 d. €1.25 = £1.00

b. an unexpected announcement by the Mexican government to devalue the peso against the dollar by 14 percent.

The Mexican Peso Crisis was touched off by a. an unsurprising announcement by the Mexican government to devalue the peso against the dollar by 14 percent. b. an unexpected announcement by the Mexican government to devalue the peso against the dollar by 14 percent. c. an announcement by the Mexican government to enact a currency board arrangement with the U.S. dollar. d. contagion from other Latin American and Asian financial markets.

c. not only international trade, (exports and imports) but also cross-border investments.

The balance of payments records a. only international trade, (exports and imports). b. only cross-border investments (FDI and portfolio investment). c. not only international trade, (exports and imports) but also cross-border investments. d. none of the options.

b. is the price that a dealer stands ready to pay.

The bid price a. is the price that the dealer has just paid for something, his historical cost of the most recent trade. b. is the price that a dealer stands ready to pay. c. refers only to auctions like eBay, not over-the-counter transactions with dealers. d. is the price that a dealer stands ready to sell at.

b. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.

The capital account includes a. the export and import of goods and services. b. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. c. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). d. none of the options

d. the European Central Bank.

The common monetary policy for the euro zone is now formulated by a. the Bundesbank in Germany. b. the Federal Reserve Bank. c. the World Bank. d. the European Central Bank.

a. the export and import of goods and services.

The current account includes a. the export and import of goods and services. b. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. c. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). d. none of the options.

b. merchandise trade, services, factor income, and unilateral transfers.

The current account is divided into four finer categories: a. merchandise trade, services, factor income, and statistical discrepancy. b. merchandise trade, services, factor income, and unilateral transfers. c. merchandise trade, services, portfolio investment, and unilateral transfers. d. merchandise trade, services, factor income, and direct investment.

a. Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.

The difference between Foreign Direct Investment and Portfolio Investment is that a. Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control. b. Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds. c. Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds. d. all of the options.

b. €1.00 = ¥125

The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 = $1.00. What is the euro-yen cross rate? a. €125 = ¥1.00 b. €1.00 = ¥125 c. €1.00 = ¥0.80 d. none of the options

a. never.

The foreign exchange market closes a. never. b. 4:00 p.m. EST (New York time). c. 4:00 p.m. GMT (London time). d. 4:00 p.m. (Tokyo time).

b. (i), (iii), (v), (ii), and (iv)

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i) Bimetallism (ii) Bretton Woods system (iii) Classical gold standard (iv) Flexible exchange rate regime (v) Interwar period The chronological order that they actually occurred is: a. (iii), (i), (iv), (ii), and (v) b. (i), (iii), (v), (ii), and (iv) c. (vi), (i), (iii), (ii), and (v) d. (v), (ii), (i), (iii), and (iv)

c. the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law).

The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals, a. the metal with a commercial value lower than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). b. the metal with a commercial value higher than the currency value tends to be used as money (Gresham's Law). c. the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). d. none of the options

Flexible Exchange Rate Regime

The monetary system where IMF members met in Jamaica and agreed to a new set of rules.

c. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

The official reserve account includes a. the export and import of goods and services. b. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. c. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). d. none of the options.

Bid price

The price at which dealers will buy.

a. $10 million USD.

The standard size foreign exchange transactions are for a. $10 million USD. b. $1 million USD. c. €1 million. d. none of the options.

d. all of the options.

The statistical discrepancy in the balance-of-payments accounts a. arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods. b. arise because some transactions (illegal transactions) occur "off the books." c. represents omitted and misreported transactions. d. all of the options.

c. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production.

The theory of comparative advantage a. claims that economic well-being is enhanced if each country's citizens produce only a single product. b. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries. c. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production. d. claims that no country has an absolute advantage over another country in the production of any good or service.

a. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves.

Under the fixed exchange rate regime, a. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves. b. the balance on the current and capital accounts will be equal in size, but opposite in sign. c. a current account surplus or deficit must be matched by an official reserves deficit or surplus. d. a capital account surplus or deficit must be matched by an official reserves deficit or surplus.

b. the balance on the current and capital accounts will be equal in size, but opposite in sign.

Under the pure flexible exchange rate regime, a. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves. b. the balance on the current and capital accounts will be equal in size, but opposite in sign. c. a current account surplus or deficit must be matched by an official reserves deficit or surplus. d. a capital account surplus or deficit must be matched by an official reserves deficit or surplus.

Classical Gold Standard

Under which monetary system was the exchange rate between two currencies was determined by their gold content?

1. Foreign Exchange Risk 2. Political Risk 3. Market Imperfections 4. Expanded Opportunity Set

What is special about International Finance?

a. it was engaged in foreign direct investment.

When Honda, a Japanese auto maker, built a factory in Ohio, a. it was engaged in foreign direct investment. b. it was engaged in portfolio investment. c. it was engaged in a cross-border acquisition. d. none of the options.

a. Nestlé would have been engaged in portfolio investment.

When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in foreign direct investment. If Nestlé had only bought a non-controlling number of shares of the firm, a. Nestlé would have been engaged in portfolio investment. b. Nestlé would have been engaged in a cross-border acquisition. c. it would depend if they bought the shares from an American or a Canadian. d. none of the options.

a. the country's exports tend to rise and imports fall.

When a country's currency depreciates against the currencies of major trading partners, a. the country's exports tend to rise and imports fall. b. the country's exports tend to fall and imports rise. c. the country's exports tend to rise and imports rise. d. the country's exports tend to fall and imports fall.

b. imports < exports

When supply of $ < demand of $ $ expected to appreciate a. imports > exports b. imports < exports

a. imports > exports

When supply of $ > demand of $ $ expected to depreciate a. imports > exports b. imports < exports

Bimetallism

Which monetary system had a "double standard" where both gold and silver were used as money?

d. The official settlement balance

Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation? a. The current account b. The capital account c. The statistical discrepancies d. The official settlement balance

b. Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£.

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money? a. No arbitrage is possible. b. Buy euro at $1.50/€, buy £ at €1.25/£, sell £ at $2/£. c. Buy £ $2/£, buy € at €1.25/£, sell € at $1.50/€. d. none of the options

b. Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£

You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money? a. No arbitrage is possible b. Buy euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£ c. Buy £ $2/£, buy € at €1.20/£, sell € at $1.60/€ d. none of the options

Direct Quote

the US dollar equivalent to one foreign currency. Ex: how many US dollars will one pound cost? $1.4402/£

Indirect Quote

the foreign equivalent to one US dollar. Ex: how many pounds will one dollar cost? £.6944/$