Chapter 21 FRL common final review

Which one of the following states that the current forward rate is an unbiased predictor of the future spot exchange rate?

. unbiased forward rates

U.S. dollars deposited in a bank in Switzerland are called

Eurocurrency

Assume the euro is selling in the spot market for $1.33. Simultaneously, in the 3-month forward market the euro is selling for $1.35. What describes this situation?

The euro is selling at a premium relative to the dollar.

Which one of the following is the risk that a firm faces when it opens a facility in a foreign country, given that the exchange rate between the firm's home country and this foreign country fluctuates over time?

exchange rate risk

A basic interest rate swap generally involves trading a:

fixed rate for a variable rate.

International bonds issued in a single country and denominated in that country's currency are called:

foreign bonds.

A large U.S. company has £500,000 in excess cash from its foreign operations. The company would like to exchange these funds for U.S. dollars. In one of the following markets can this exchange be arranged?

foreign exchange market

The forward rate market is dependent upon:

forward rates equaling the actual future spot rates on average over time.

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called:

interest rate parity.

Which one of the following supports the idea that real interest rates are equal across countries?

international Fisher effect

The market value of the Blackwell Corporation just declined by 5 percent. Analysts believe this decrease in value was caused by recent legislation passed by Congress. Which type of risk does this illustrate?

political risk

Relative purchasing power parity:

relates differences in inflation rates to differences in exchange rates.

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?

uncovered interest parity

Spot trades must be settled:

within two business days

Interest rate parity: A. eliminates covered interest arbitrage opportunities. B. exists when spot rates are equal for multiple countries. C. means the nominal risk-free rate of return must be the same across countries. D. exists when the spot rate is equal to the futures rate. E. eliminates exchange rate fluctuations.

eliminates covered interest arbitrage opportunities.

What is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?

American Depository Receipt

Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S. dollar and the British pound

PUK = S0 × PUS

George and Pat just made an agreement to exchange currencies based on today's exchange rate. Settlement will occur tomorrow. Which one of the following is the exchange rate that applies to this agreement?

Spot exchange rate

The price of one Euro expressed in U.S. dollars is referred to as a(n):

exchange rate

Triangle arbitrage: I. is a profitable situation involving three separate currency exchange transactions. II. helps keep the currency market in equilibrium. III. opportunities can exist in either the spot or the forward market. IV. is based solely on differences in exchange ratios between spot and futures markets.

. I, II, and III only

A trader has just agreed to exchange $2 million U.S. dollars for $1.55 million Euros six months from today. This exchange is an example of a:

B. forward trade

Absolute purchasing power parity is most apt to exist for which one of the following items?

A. lumber B. computer C. silver D. automobile E. cell phone

Assume that $1 is equal to ¥98 and also equal to C$1.21. Based on this, you could say that C$1 is equal to: C$1(¥98/C$1.21) = ¥80.99. The exchange rate of C$1 = ¥80.99 is referred to as the:

Cross Rate

International bonds issued in multiple countries but denominated solely in the issuer's currency are called:

Eurobonds

The LIBOR is primarily used as the basis for the rate charged on:

Eurodollar loans in the London market.

Mr. Black has agreed to a currency exchange with Mr. White. The parties have agreed to exchange C$12,500 for $10,000 with the exchange occurring 4 months from now. This agreed-upon exchange rate is called the:

Forward Rate

You would like to purchase a security that is issued by the British government. Which one of the following should you purchase?

Gilt

Which one of the following statements is correct concerning the foreign exchange market? A. The trading floor of the foreign exchange market is located in London, England. B. The foreign exchange market is the world's second largest financial market. C. The four primary currencies that are traded in the foreign exchange market are the U.S. dollar, the British pound, the French franc, and the euro. D. Importers, exporters, and speculators are key players in the foreign exchange market. E. The U.S. created a communications network called SWIFT to facilitate currency trading.

Importers, exporters, and speculators are key players in the foreign exchange market.

Where does most of the trading in Eurobonds occur?

London

On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. Which one of the following is most likely the interest rate that will be charged on this loan? A. Eurodollar yield to maturity B. London Interbank Offer Rate C. Paris Opening Interest Rate D. United States Treasury bill rate E. international prime rate

London Interbank Offer Rate

. Which one of the following names matches the country where the bond is issued? A. Empire: United Kingdom B. Western: United States C. Samurai: China D. Bulldog: France E. Rembrandt: Netherlands

Rembrandt: Netherlands

Trader A has agreed to give 100,000 U.S. dollars to Trader B in exchange for British pounds based on today's exchange rate of $1 = £0.62. The traders agree to settle this trade within two business day. What is this exchange called?

Spot trade

Party A has agreed to exchange $1 million U.S. dollars for $1.21 million Canadian dollars. What is this agreement called

Swap

. The unbiased forward rate is a:

predictor of the future spot rate at the equivalent point in time.

Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

purchasing power parity