Chapter 3

In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders. a. True b. False

F

In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States. a. True b. False

F

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

F

The Bretton Woods Agreement is an agreement to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets. a. True b. False

F

The Single European Act prevented a trend toward increased globalization in the banking industry. a. True b. False

F

The interest rate commonly charged for loans between banks is called the cross rate. a. True b. False

F

Which of the following is probably not an example of the use of forward contracts by an MNC? a. Hedging pound payables by selling pounds forward b. Hedging peso receivables by selling pesos forward c. Hedging yen payables by purchasing yen forward d. Hedging peso payables by purchasing pesos forward e. All of the above are examples of using forward contracts.

a. Hedging pound payables by selling pounds forward

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

b. depreciate; selling

You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$. a. direct; 142.86 b. indirect; 142.86 c. indirect; 150 d. direct; 150 e. indirect; 0

b. indirect; 142.86

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.

b. less liquid than markets for developed countries.

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.

c. large corporations.

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

c. sold on an exchange; offered by commercial banks

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.

d. Each country used gold to back its currency.

A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. a. True b. False

T

*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.

B $.35/$.88 = .3977

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

B 3 x 30 x $1.63 = $146.70

*Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is: a. about 4.44%. b. about 4.26%. c. about 4.03%. d. about 4.17%.

B Bid-ask percentage spread = ($.47 - $.45)/$.47 = 4.26%

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

C 15 x $1.10 = $16.50

*Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is: a. about 4.99%. b. about 4.88%. c. about 4.65%. d. about 4.43%.

C Bid-ask percentage spread = ($.0043 - $.0041)/$.0043 = 4.65%

*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

D ($.008/$.59) = F$.014/¥

Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is a. .01 b. 118 c. 1.18 d. .0087

D .85/98 = .0087

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. a. True b. False

F

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

F

An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations. a. True b. False

F

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. a. True b. False

F

At any given point in time, a bank's bid quote will be greater than its ask quote. a. True b. False

F

Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies. a. True b. False

F

Global regulations require that shareholders in all countries have the same rights wherever there are stock markets. a. True b. False

F

If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low. a. True b. False

F

The degree of financial information that must be provided by public companies is the same among countries. a. True b. False

F

The existence of imperfect markets has prevented the internationalization of financial markets. a. True b. False

F

The forward rate is the exchange rate used for immediate exchange of currencies. a. True b. False

F

The interest rate in developing countries is usually very low. a. True b. False

F

The legal protection of shareholders is the same among countries. a. True b. False

F

The more intense the competition for the traded currency, the larger the bid/ask spread. a. True b. False

F

The preferences of corporations and governments to borrow in foreign currencies and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market. a. True b. False

F

When receiving quotations on a currency's exchange rate, the bank's bid quote is the rate at which the bank is willing to sell currency. a. True b. False

F

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

T

If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low. a. True b. False

T

In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy. a. True b. False

T

Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market. a. True b. False

T

Large commercial banks play a major role in the international money market by accepting short-term deposits in large amounts (such as the equivalent of $1 million or more) and in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies. a. True b. False

T

Shareholders can have influence on a wider variety of management issues in some countries. a. True b. False

T

Shareholders have more voting power in some countries than others. a. True b. False

T

Shareholders in some countries may have more power to effectively sue publicly-traded firms if their executives or directors commit financial fraud. a. True b. False

T

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

T

The government enforcement of securities laws varies among countries. a. True b. False

T

The international money market is frequently accessed by MNCs for short-term investment and financing decisions, while longer term financing decisions are made in the international credit market or the international bond market and in international stock markets. a. True b. False

T

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. a. True b. False

T

Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars? a. 10 b. 13.28 c. 30.12 d. 39.84

a. 10 $20/$.664 = $30/3 = $10

The bid/ask spread for small retail transactions is commonly in the range of ____ percent. a. 3 to 7 b. .01 to .03 c. 10 to 15 d. .5 to 1

a. 3 to 7

Which of the following is not true regarding ADRs? a. ADRs are denominated in the currency of the stock's home country. b. ADRs enable U.S. investors to avoid cross-border transactions c. ADRs allow non-U.S. firms to tap into U.S. market for funds. d. ADRs sometimes allow for arbitrage opportunities.

a. ADRs are denominated in the currency of the stock's home country.

The Basel II accord is focused on eliminating inconsistencies in ____ across countries. a. capital requirements b. deposit rates c. deposit insurance d. bank failure policies

a. capital requirements

A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation. a. direct; indirect b. indirect; direct c. direct; direct d. indirect; indirect e. cannot be answered without more information

a. direct; indirect

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.

a. fixed within narrow boundaries.

According to the text, the forward rate is commonly used for: a. hedging. b. immediate transactions. c. previous transactions. d. bond transactions.

a. hedging.

An MNC's short-term financing decisions are satisfied in the ____ market, while its medium debt financing decisions are satisfied in the ____ market. a. international money; international credit b. international money; international bond c. international credit; international money d. international bond; international credit e. international money; international stock

a. international money; international credit

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.

a. obtain a 90-day forward purchase contract on Canadian dollars.

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.

a. short-term lending (one year or less).

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.

a. the equivalent of $1 million or more.

Certificates representing bundles of stock of non-U.S. firms are called: a. Eurobonds b. ADRs c. FRNs d. Eurobor

b. ADRs

Which of the following is not true about syndicated loans? a. A borrower that receives a syndicated loan incurs various fees besides the interest rate. b. The loans are only denominated in U.S. dollars. c. The loans are provided by a group of banks to a borrower. d. The loans are usually formed in 6 weeks or less.

b. The loans are only denominated in U.S. dollars.

If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds. a. derivative b. long-term credit c. money d. foreign exchange

b. long-term credit

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.

b. medium-term lending.

Futures contracts are sold on exchanges and are consequently ____ than forward contracts, which can be ____ to satisfy an MNC's needs. a. more standardized; standardized b. more standardized; custom-tailored c. more custom-tailored; standardized d. more custom-tailored; custom-tailored e. less standardized; custom-tailored

b. more standardized; custom-tailored

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.

b. obtain a 90-day forward sale contract on euros.

The bid-ask spread on an exchange rate can be used to directly determine: a. how an exchange rate will change. b. the transaction cost of foreign exchange. c. the forward premium. d. the currency option premium.

b. the transaction cost of foreign exchange.

Which of the following is not a possible bid/ask quotation for the Barbados dollar? a. $.50/$.51 b. $.49/$.50 c. $.52/$.51 d. $.51/$.52 e. All of the above are possible bid/ask quotations.

c. $.52/$.51

Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000? a. 12,600 b. 775,194 c. 793,651 d. 12,900

c. 793,651 Solve: 100,000/.126 = 793,650.79

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

c. A or B

Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables? a. Purchase pounds forward b. Buy a pound futures contract c. Buy a pound put option d. Buy a pound call option

c. Buy a pound put option

Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this situation: a. Buy dollars forward b. Sell dollars forward c. Purchase call option d. Purchase put option

c. Purchase call option

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

c. U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries.

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.

c. devalued relative to major currencies.

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

c. does not exist for some currencies.

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.

c. prevailing prices in locations where the foreign exchange markets have been open.

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.

c. several large banks that accept deposits and provide loans in various currencies.

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? a. $44,500 b. $45,000 c. $526 million d. $47,500 e. $556 million

d. $47,500 5,000,000 yen * $.0095 = $47,500

____ 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

d. All of the above factors affect the bid/ask spread

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.

d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

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

d. exceeds $1 trillion

An obligation to purchase a specific amount of currency at a future point in time is called a: a. call option b. spot contract c. put option d. forward contract e. both B and D

d. forward contract

In general, stock markets allow for more price efficiency and attract more investors when they have all of the following except: a. more voting rights for shareholders. b. more legal protection. c. more enforcement of the laws. d. less stringent accounting requirements.

d. less stringent accounting requirements.

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

d. none of the above

A syndicated 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

d. represents a loan by a group of banks to a borrower.

____ 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.

e. All of the above are important bank characteristics to customers in need of foreign exchange.

Which of the following is not a method that can be used to invest internationally? a. Investment in MNC stocks b. American depository receipts (ADRs) c. World Equity benchmark Shares (WEBS) d. International mutual funds e. All of the above are methods that can be used to invest internationally.

e. All of the above are methods that can be used to invest internationally.

The interest rate on the syndicated loan depends on the: a. currency denominating the loan. b. maturity of the loan. c. creditworthiness of the borrower. d. interbank lending rate. e. all of the above.

e. all of the above.