Exam 4 IB

____ limits the ability of the government to print money and, thereby, create inflationary pressures

A currency board system

____ requires a corporation to repay a predetermined portion of the loan amount at regular internals regardless of how much profit it is making

A debt loan

____ is made when a corporation sells stock to investors

An equity loan

A _____ brings together those who want to invest money and those who want to borrow money

Capital market

Which of the following statements is true of debt loans?

Debt loans should be repaid at regular intervals

Which of the following is against the use of fixed exchange rates?

Each country has the freedom to choose its own inflation rate

Economist Martin Feldstein has coined the term "hot money" to pertain to long-term capital flows

False

Fixed exchange rates lead to speculation and uncertainty in the value of currencies

False

Gold was declared as the formal reserve asset in the Jamaica agreement of 1976

False

Gold was declared as the formal reserve asset in the Jamaica agreement of 1979

False

If the international capital market continues to grow, financial intermediaries likely will provide less quality information about foreign investment opportunities

False

If the sport exchange rate is 1 euro=$1.50 when the markey opens, and I euro=$1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated

False

Implementing a fixed exchange rate regime increases the price inflation in countries

False

The cost of capital is the difference between cost of inputs and outputs

False

The cost of recording, transmitting, and processing information has doubled with advancements in technology since 1964

False

The globalization of capital has been universally seen as a positive development

False

The impact of a currency exchange rates on the reported financial statements of a company is called economic exposure

False

The purchasing power parity (PPP theory) is a strong predictor of short-run movements in exchange rates covering time spans of five years or less

False

The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates.

False

Using floating exchange rates will help countries reduce the risk of investing in foreign assets

False

market forces have produced a stable dollar exchange rate under a floating exchange rate regime

False

The gold standard called for fixed exchange rates against the U.S. dollar

False Pegging currencies to gold and guaranteeing convertibiltiy is known as the gold standard

The IMF does not expect governments to meet any obligations except to pay back the money they borrow

False They expect governments to enact certain macroeconomic policies

____ arises from volatile exchanges in exchange rates

Foreign exchange risk

_____ are the exchange rates governing some specific future date foreign exchange transaction

Forward exchange rates

which of the following changes were made to the international monetary fund's articles of agreement in the Jamaica agreement

IMF memebers were permitted to sell their gold reserves at the market price

The agreement reaches at Bretton Woods established the

International Monetary Fund

____ perform a direct connection function in capital markets

Investment banks

The____ is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day

Spot exchange rate

An American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment

The dollar appreciates against the Hungarian forint

A pair of shoes cost 40 euros in Britain. An identical pair costs $50 in the United States when the exchange rate is 1 euro= $1.50. Which of the following is correct?

The united states offers a better a deal

A capital market brings together those who want to invest money and those who want to borrow money

True

A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate

True

A currency swap deal enables companies to insure themesleves against foreign exchange risks

True

After the agreement reached at Bretton Wood, the dollar was the only currency that could be convertible into gold

True

Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency

True

By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market

True

Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors

True

Depositors are not protected against bank failures in the Eurocurrency market

True

Financial services has historically been the most tightly regulated of all industries

True

Financial services is an information-intensive industry

True

The International Monetary Fund's original function was to provide a pool of money from which members could borrow in the short term

True

The agreement reaches at Bretton Woods established the International Monetary Fund and the World Bank

True

The current system of foreign exchange is a mixed system of government intervention and speculative activity

True

The eurocurrency market has been one cause of the decrease in global financial regulations

True

The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar

True

The fixed exchange rate system established at Bretton Woods failed due to the speculative pressures on the U.S. dollar

True

The international monetary system refers to the institutional arrangements that govern exchange rates

True

The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions

True

The value of a currency is determined by the interaction between the demand and supply of that currecy relative to the demand and supply of the other currencies.

True

the global capital market often lacks information about the fundamental quality of foreign investment

True

World Bank offers low-interest loans to risky customers whose credit rating is often poor

True Such as the governments of underdeveloped nations

Which of the following is a factor that initiated the collapse of the fixed exchange rate system?

Worsening of the U.S. foreign trade postition

An equity loan is made when

a corporation sells stock to investors

A currency crisis occurs due to

a speculative attack on the exchange value

Gold par value refers to the

amount of a currency needed to purchase one ouce of gold

Systematic risk refers to the movement in a stock portfolio's value that are

attributable to macroeconomic forces affecting an economy

Assume that the interest rate on borrowing in Japan is 1 percent, while the interest rate on deposits in Australian bank is 5 percent. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. Which type of trade is this?

carry trade The carry trade involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high

What are the two main functions of the foreign exchange market?

converting currency and providing some insurance againsr foreign exchange risk

An important drawback of a purely domestic capital market is that the

cost of capital tends to be higher than it is in a global market

The relatively low correlation between the movement of stock markets in different countries indicated that

countries pursure different macroeconomic policies

The short-term movement of fund from one currecy to another in the hopes of profiting from shifts in exchange rates is known as

currency speculation

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as

currency speculation

As investors increase the number of stocks in their portfolio, the portfolio's risk

declines rapidly in the beginning

The risk associated with a portfolio

decrease as the investor increases the number of stocks in her portfolio

Exchange rates are ____ under a pure "free float" system

determined by market forces

The monetary autonomy argument holds that

each country should be allowed to choose its own inflation rate

The world bank was established at the Bretton Woods conference to

establish an international monetary system

The ____ helps consumers compare the relative prices of goods and services in different countries

exchange rate

The international monetary system refers to the institutional arrangements that govern

exchange rates

Governments give banks less freedom when they deal in foreign currencies

false

the element of risk investing in foreign assets is greater with ___ exchange rates

floating

The monetary autonomy argument is supported by the advocates of

floating exchange rates

A ____ is a situation in which a country cannot service its foreign debt obligations

foreign debt crisis

which of the following is an exchange rate policy where the exchange rate is determined completely by market forces?

free float

Market makers are the financial service companies that connect investors and borrowers. Those who want to borrow money typically include

governments

the cost of capital is

higher in a purely domestic capital market than in a global market

The ____ refers to the institutional arrangements that govern exchange rates

international monetary system

A country's trade balance is in surplus when

its exports are more than its imports

The systematic risk of the stock market is the

level of nondiversifiable risk in an economy

the liquidity of the market is ___ in a purely domestic capital market

limited

A purely domestic capital market faces the problem of

limited liquidity

The rise in the value of the dollar between 1985 and 1988

made imports relatively cheap

Which of the following statements is true of market makers

market makers connect investors and borrowers in a capital market

An exchange rate of 1 Euro= $1.30 indicates that

one euro buys 1.30 dollars

International monetary fund members were _____ in the Jamaica agreement

permittd to sell their own gold reserves at the market price

Assuming the 30-day forward exchange rate was $1 = 130 and the spot exchange rate was $1= x120, the dollar is selling at a ____ on the 30-day forward market

premium

What was the World Bank's initial mission?

providing low-interest loans to help finance the building of Europe's economy

When an investor purchases a corporate bond, he purchases the right to receive a

specified fixed stream of income from the corporation

Currency _____ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

speculation

when two parties agree to exchange currecncy and execute the deal immediately, the transaction is

spot exchange

_____ are reported on a real-time basis on many financial websites and are continually changing their value being determined by supply and demand for that currency relative to others

spot exchange rates

Moral hazard arises when people behave recklessly because

they know they will be saved if things go wrong

International businesses use foreign exchange markets for many reasons. Which of the following is one of these reason?

to cover themselves from all risks involved in currency speculation

International businesses use foreign exchange markets for many reasons. Which of the following is one of these reasons?

to invest for short terms in money markets when they have spare cash

Investors can reduce the level of risk by diversifying a portfolio internationally

true

The International Fisher Effect states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite directions to the difference in nominal interest rates between the two countries

true

Interest rates adjust automatically under a strict currency board

true A currency board maintains a fixed exchange rate