Chapters 8 and 9
The depletion of the United Kingdom's gold reserves during the Second World War rendered the gold standard impractical . This led to the creation of the _________ in 1944 .
Bretton Woods Agreement
A firm that is net long in a currency will profit if that currency ______ against the dollar , and will lose if that currency ______ against the dollar.
appreciates ; depreciates
The ________ of a country's currency means that the country's goods are more expensive for foreign buyers , though foreign goods are cheaper for domestic buyers .
appreciation or revaluation
A ( n ) ______ in futures contracts seeks to take advantage of inefficiencies in the pricing of an asset between two markets by taking a long position in one market and a short position in the other market .
arbitrageur
Empirical research has confirmed that stock markets _____ weak form efficient .
are
With a forward contract , cash payments between buyer and seller occur ________ while futures contracts are _______.
at contract maturity ; marked to market daily
In _______ underwriting , the investment bank does not guarantee the firm a price for newly issued stock and acts as a distribution agent , selling the stock for a fee .
best efforts
Before common stock can be issued by a corporation , shares must be authorized by a majority vote of the _______ and the ________.
board of directors ; existing common shareholders
Prior to 1995 , most foreign exchange trading was executed _________ while after that most trading was executed _________.
by direct dealing ; by electronic brokerage
Options are classified as either ____ options or ____ options .
call ; put
A _____ is like a call option on interest rates , and is used to hedge against increases in interest rates .
cap
One difference between a stock option and a stock index option is that at expiration , the stock index option is always settled in
cash .
Trading curbs implemented by stock exchanges that are triggered by extreme price movements such as those caused by program trading are called
circuit breakers .
The exchange _______ breaks up every trade into a buy and sell transaction and takes the opposite side of each transaction , separating buyers from sellers and guaranteeing that the trades will be completed .
clearinghouse
Spot transactions can be conducted through ________ or ________.
commercial banks ; non - bank currency dealers
Preferred shareholders receive their payments before the _________ but after the _______.
common shareholders ; bondholders
The additional diversification effect of investing in stocks issued by foreign corporations occurs because global economies and stock markets are not highly
correlated .
A total return swap provides some protection from both _______ and _______.
credit risk ; interest rate risk .
The process by which all board of director seats are up for election and voted for at the same time is called
cumulative voting .
The NASDAQ is primarily a ______ market , in which multiple _______ stand ready to make a market for each listed stock .
dealer ; dealers
Futures contracts are not subject to ______ risk .
default
During the period 2003-2007 , the U.S. dollar ________ against the euro and most other major currencies as well .
depreciated
A financial security whose payoff is linked to another , previously issued security is called a ( n )
derivative security .
The _______ of a country's currency means that the country's goods are less expensive for foreign buyers , though foreign goods are more expensive for domestic buyers .
devaluation or depreciation
An exchange rate quote that gives the cost of one unit of foreign currency in U.S. dollars is called a [ n )
direct quote .
International stock markets are attractive to investors because of the additional _________ due to holding stocks issued by foreign corporations .
diversification effect
Common shareholders have a right to a share in the company's _______ and have a ________ on the firm's assets if the company fails , after all debt and tax liabilities have been paid .
dividends : residual claim
Minimum margin levels are set by
each exchange .
A key assumption underlying purchasing power parity is that real risk - free interest rates are ______ across countries .
equal
The CFTC has exclusive jurisdiction over all
exchange - traded derivative securities .
Futures contracts are _________ contracts with _______ terms and conditions .
exchange traded ; standardized
If a call option is " in the money " , the buyer of the call can _______ buying the stock at the _______ and selling it at the market price .
exercise the option ; strike price " X "
To the extent that stock prices today reflect investors ' current expectations about _________ stock market indexes today might be useful to forecast __________.
expected future dividends ; future economic activity
The weak form of market efficiency predicts that investors cannot make more than the ________ when using historical information to make investment decisions .
fair ( required ) return
The counterparty to a forward contract is often a ( n )
financial institution .
In _______ underwriting , the investment bank guarantees the firm a price for newly issued stock by purchasing the entire issue from the firm at a fixed price .
firm commitment
A direct quote for a particular exchange rate is the _____ of the indirect quote for that exchange rate , and vice - versa .
inverse
A direct quote for a particular exchange rate is the ______ of the indirect quote for that exchange rate , and vice - versa .
inverse
Unlike cumulative voting , straight voting gives the advantage to _______ in controlling seats on the board of directors .
large shareholders
An order for the broker and designated market maker to transact only at a specific price is called a
limit order .
When an investor buys a futures contract , they are taking a
long position .
Common stockholders have the ______ claim on the assets of the firm in the event of bankruptcy , referred to as a _________.
lowest , residual claim
If at the end of the trading day , the level of funds in a margin account drops below the _______ the customer receives a margin call requesting they add funds to their account to bring it back up to the _______ level .
maintenance margin ; initial margin
Clearinghouses are able to perform their function as guarantor of an exchange's futures contracts by requiring all member firms to deposit sufficient funds from customer's _________ to ensure that the firm's customers will meet the terms of any futures contract entered into on the exchange .
margin accounts
An order for the broker and designated market maker to transact at the best price available when the order reaches the trading post is called a
market order .
An order for the broker and designated market maker to transact at the best price available when the order reaches the trading post is called at
market order .
Similar to trading in the stock market , futures trades may be placed as _______ or _______.
market orders ; limit orders
The advantage of cumulative voting is that it allows _________ to have a real effect on the outcome of the election of the board .
minority shareholders
Households invest in corporate stock primarily through _______ and _______.
mutual funds ; pension funds
A firm's overall exposure to foreign exchange risk in any currency can be measured by its ________ in that currency .
net exposure
A firm's net exposure to a foreign currency is the sum of its _______ and its _______ in that currency .
net foreign assets ; net FX bought
A positive net exposure to a foreign currency implies that a firm is overall _________ in that currency .
net long
Empirical evidence suggests that stock market movements are _________ predictors of future economic activity .
not consistently accurate
Unlike interest payments on debt , dividends are ________ and failure to pay dividends will not cause the firm to ______.
not guaranteed ; default
To liquidate a futures contract before expiration , the futures holder calls their and requests a ( n ) ________ thus locking in their gains or losses on the position up to that point .
offsetting trade to their original position
Options are traded _______ and _______.
on exchanges ; over the counter
Electronic communications networks ( ECN ) now process about _______ of all trading and _______ extended - hours trading .
one - third ; almost all
On the NYSE , ______ dealer ( s ) may make a market in a particular stock , while on the NASDAQ , ______ dealer ( s ) may make a market for a particular stock .
one ; many
Like futures trading , options trading on exchanges occurs using a ( n ) _________ method .
open - outcry auction
Because it may not be possible to execute a limit order immediately , the order is recorded in a ( n ) _______ maintained by the _________ and is executed when and if the current market price of the stock equals the limit price .
order book ; designated market maker
Because it may not be possible to execute a limit order immediately , the order is recorded in a ( n ) ________ maintained by the _________ and is executed when and if the current market price of the stock equals the limit price .
order book ; designated market maker
If the price of the underlying stock is greater than the strike price , the put option is said to be
out of the money .
A flaw of the Bretton Woods Agreement is that some currencies within the system became _______ and other currencies became _______ at the fixed exchange rates .
overvalued : undervalued .
Holders of the common stock of a corporation have an ownership claim on the firm that reflects their __________ the firm's total stock they hold .
percentage ownership of
The quotes for the smallest firms on the OTC bulletin board are recorded manually on _______ published daily and distributed through the National Association of Securities Dealers .
pink sheets
Among the professional traders working in futures exchanges , the _______ take a position in the futures market based on their expectations of the future direction of prices of the underlying assets .
position traders
When the firm's charter requires that new secondary stock issues be offered to existing shareholders before the general public , this is called the
preemptive right .
A stock market index in which the stock prices of the companies in the index are added together and divided by an adjusted value is called a _______ average .
price - weighted
All of the Dow Jones and Company stock indexes are ______ indexes .
price - weighted
Program trading has been criticized for introducing increased _______ to stock markets .
price volatility
Once authorized , new shares of stock are distributed to existing and new investors through a _________ with the help of investment banks .
primary market sale
The simultaneous buying and selling of a portfolio of at least 15 different stocks valued at more than $ 1 million using computer programs to initiate the trades is called
program trading .
The theory that describes how the exchange rate between two countries will adjust due to differences in inflation between the two countries is called
purchasing power parity .
An option is a contract that gives the holder the _____ but not the _____ to buy or sell an underlying asset at a prespecified price for a specified . time period .
right ; obligation
Derivative securities allow _____ to be transferred from those that want less to those that are willing to bear more .
risk
Issuing securities through a syndicate of investment banks spreads the _____ associated with the issue among multiple banks , and results in a larger ___________.
risk ; pool of investors .
Among the professional traders working in futures exchanges , the _______ take positions for very short periods of time in an attempt to profit from the active trading .
scalpers
When a firm's stock is already trading in public stock markets and it offers an additional issue of stock for sale , this is referred to as a ( n )
seasoned offering .
A rights offering usually allows existing shareholders to purchase shares at a price that is
slightly below the market price .
A ( n ) _______ in futures contracts buys to profit from a price increase or sells to profit from a price decrease .
speculator
An agreement that involves the immediate and simultaneous exchange of cash for securities is called a
spot contract .
An investor who thinks the stock market index will rise will buy a _______, and the investor who thinks the stock market index will fall will buy a _______.
stock index call option ; stock index put option
An option contract for which the underlying asset is the value of a major stock market index is a
stock index option .
A _________ is the composite value of a group of secondary market traded stocks .
stock market index
One of the reasons that _____ are considered to be riskier than _____ is due to their _________ status .
stocks ; bonds ; residual claim
The process by which board of director seats are put up for election and voted for one director at a time is called
straight voting .
A ( n ) _____ is an agreement between two parties to exchange specified periodic cash flows in the future based on an underlying instrument or price .
swap
A group of investment banks that cooperate to help sell and distribute a new security issue is called a
syndicate .
Between 1990 and 2018 , markets in _______ grew more than markets in other parts of the world as a percent of worldwide stock market capitalization .
the Pacific Basin
Stock markets and stock market participants are subject to regulations imposed by _______ and by _______.
the SEC : the exchanges
Electronic trading platforms automatically provide traders with _________ gathered from _________.
the best prices available ; multiple dealers .
Whether the call option buyer exercises the option profitably or lets it expire un - exercised , the buyer always loses
the premium paid .
A consequence of the international Fisher effect is that the gains to a U.S. investor from investing in a foreign currency with higher interest rates will be offset by the depreciation of that currency relative to the dollar , so the investor will realize
the same average nominal returns from investing in the U.S. dollar as from investing in the foreign currency .
A consequence of interest rate parity is that the gains to a U.S. investor from investing in a foreign currency with higher interest rates and covering that position with a forward contract will be offset by difference between the forward and spot rates , so the investor will realize
the same returns from investing in the U.S. or the foreign country .
Today , NYSE Euronext is owned by Intercontinental Exchange ( ICE ) , and the combined ICE - NYSE Euronext is the _______ exchange group globally .
third largest
Circuit breakers promote investor confidence in times of high market volatility by giving investors
time to assimilate incoming information and make investment choices .
A ( n ) _______ involves swapping an obligation to pay interest at a fixed or floating rate for payments representing the total return on a loan ( interest and principal value changes ) .
total return swap
A ( n ) ________ involves swapping an obligation to pay interest at a fixed or floating rate for payments representing the total return on a loan ( interest and principal value changes ) .
total return swap
All transactions on the floor of the NYSE exchange occur at a
trading post .
A stock market index in which the current market values of the companies in the index are added together and divided by their total value on a base date is called a _______ average .
value - weighted
Most of the major stock market indexes , with the exception of the Dow , are ________ indexes .
value - weighted
Hedging reduces a firm's risk by reducing the
volatility of future returns .
Common shareholders have the right to _____ on major issues in the firm , such as the election of the board of directors .
vote
One problem with flash trading is that it can be used to execute ________ in which the same trader illegally acts as buyer and seller on the same transaction , thus creating a distorted picture of market activity in a stock .
wash trades
In 2012 China allowed the yuan to fluctuate much more broadly by _________ against the dollar .
widening the yuan's trading band
The intrinsic value of any out - of - the - money option is
zero .
Swaps help their users better manage risks , such as ( choose all that apply )
•foreign exchange risk •interest rate risk •credit risk
According to interest rate parity , if the interest rate in the US is _______ than the interest rate in a foreign country , the forward rate between the two currencies will be _______ the spot rate , by an approximately equal amount .
•greater than ; greater than •less than ; less than
NYSE stock are divided into four subgroups , each of which has its own index . They are ( select four )
•industrial •transportation •financial •utility
The foreign exchange market is the largest of all financial markets , with daily turnover exceeding _____ per day in 2019 .
$ 8.3 trillion
The euro officially started trading in January of the year
1999 .
The Dow Jones Industrial Average includes the values of ___ large successful firms of interest to investors .
30
Approximately ___ percent of all futures contracts are liquidated before maturity by taking an offsetting position .
99
NYSE Euronext also operates the ______ market , where OTC and pink sheet stocks are traded .
ArcaEdge
NYSE Euronext also operates the _______ market , where OTC and pink sheet stocks are traded .
ArcaEdge
The largest options exchange is the
Chicago Board Options Exchange
The largest options exchange is the
Chicago Board Options Exchange .
Another measure introduced post - 2008 to reduce risk in swap markets was
international standardization of credit swap contracts .
The most widely reported stock market index is the
Dow Jones Industrial Average .
Trading licenses are needed to make trades on the floor of the NYSE . These licenses are sold by ________ and are good for _______.
Dutch auction ; one year
The third - largest exchange in the world based on trading volume is an ____ called the ____ network .
ECN : BATS
The derivative securities markets that are mostly second to the U.S. are in
Europe .
True or false : If a firm misses a preferred dividend payment , the preferred shareholders can force the company into bankruptcy .
False
In 2009 , China began a program of internationalizing its currency by allowing the yuan to be traded by banks in
Hong Kong .
At expiration , an option's value is equal to its
intrinsic value .
The largest foreign exchange trading center is _______ followed by _______.
London ; New York
The agreement that led to the creation of the euro and the European Central Bank was the
Maastricht Treaty .
Historically the _____ has been the leader in daily stock trading volume , while the _____ is the leader in total number of firms listed .
NYSE : NASDAQ
Level 2 ADR's can be traded on the _____ and the _____.
NYSE : NASDAQ
Level 2 ADR's can be traded on the ______ and the ______.
NYSE ; NASDAQ
The _______ consists of all common stocks listed on the NYSE .
NYSE Composite Index
The two major secondary stock markets in the U.S. are the _______ and the _______.
NYSE Euronext ; NASDAQ
For very small firms , NASDAQ maintains an electronic ________ which is not part of NASDAQ , but supports posting and retrieval of price quote information over an electronic network for small stocks .
OTC bulletin board
Level 1 ADR's are traded only on the
OTC market .
For a call option , if the asset's market price is " S " and the strike price is " X " , then the intrinsic value of an in - the - money call option is
S - X .
The two primary regulators of derivatives trading in the U.S. are the ____ and the ____.
SEC : CFTC
Level 1 ADR's have the least amount of _________ and have very weak _______ requirements .
SEC regulation ; disclosure
In the United States , the _______ increased the cost of operating in the U.S. and resulted in a significant drop in IPO's of foreign firms in U.S. stock markets .
Sarbanes - Oxley Act
True or false : A market order is filled at the best price available as recorded in a public database of prices collected across multiple markets .
True
True or false : Commercial banks are required to include swap risk exposure when calculating risk - based capital requirements .
True
True or false : Level 2 ADR's are subject to SEC regulations and disclosure requirements similar to those imposed on U.S. firms trading on the major U.S. exchanges .
True
True or false : U.S. markets and currencies dominate global derivative securities markets .
True
True or false : With dual - class common stock , one class has more rights to elect directors to the board than the other class , effectively giving those shareholders control of the board .
True
A cross currency exchange rate is an exchange rate between two currencies that does not involve the
U.S. dollar .
Before the advent of cross currency exchange rates , most cross currency trades had to go through the
U.S. dollar .
The International Fisher effect assumes that the appreciation or depreciation of a foreign currency relative to the U.S. dollar is proportional to the difference between ________ and ________.
U.S. nominal interest rates ; foreign nominal interest rates
The gold standard was dominant in the late 19th and early 20th centuries because the _______ which was the dominant international trading country , had a long - standing commitment to the gold standard .
United Kingdom
A forward contract can be used as _______ against the risk that future spot prices on an asset will move against the investor , by guaranteeing a future price for the asset today .
a hedge
In a ( n ) ________ two parties agree to swap currencies based on a agreed - upon fixed exchange rate over a period of time .
fixed - fixed currency swap
If two countries both fixed the value of a unit of their currency to a quantity of gold , then the exchange rate between those two currencies was
fixed .
A practice in which , for a fee , traders are allowed to see incoming buy or sell orders milliseconds earlier than general market traders and quickly respond with their own transactions is called
flash trading .
A _____ is like a put option on interest rates , and is used to hedge against decreases in interest rates .
floor
Cash flows from the sale of products , services or assets denominated in a foreign currency are transacted in
foreign exchange markets .
The price at which one currency can be exchanged for another currency is called the
foreign exchange rate .
Currency swaps can be effectively used to reduce
foreign exchange risk .
To reduce the risk that the foreign currency will change relative to the dollar over the holding period , the firm can use a ________ to lock in the exchange rate at the end of the period .
forward contract
The exchange rate that is written into a forward contract is called the
forward rate .
The emphasis of SEC regulations is on _________ but not _________.
full and fair disclosure of information ; preventing investors from making bad decisions
Hedging of currency risk reduces both possible _____ and possible _____ from currency movements .
gains ; losses
In a dual - class common stock arrangement , the shareholders with the weaker voting rights are often compensated by receiving
higher dividend rights .
Movements in stock market indices based on the same stock market tend to be
highly correlated .
The single largest holders of corporate stock in the U.S. are
households .
If the price of the underlying stock is less than the strike price , the put option is said to be
in the money .
Firms that re - invest profits in positive NPV projects today rather than paying dividends may see their stock price _______ over time and their shareholders rewarded with future _____.
increase ; capital gains
Spot transactions occur because the buyer of the asset believes its value will
increase in the immediate future .
An exchange rate quote that gives the cost of one U.S. dollar in foreign currency is called a ( n )
indirect quote .
A consequence of the assumption that real risk - free interest rates are the same between two countries is that the interest rate differential between the two countries is equal to the
inflation rate differential between the two countries .
Brokerage firms require that their customers initially post only a portion of their futures contracts , called a ( n ) _______ whenever they request a trade .
initial margin
When a firm offers its stock to be traded in public stock markets for the first time , this is referred to as a ( n )
initial public offering .
Interest rate swaps can be effectively used to reduce
interest rate risk .
_____ interest rates in a country ______ capital which _______ demand for that country's currency .
•Low ; repel ; decreases •High : attract ; increases
The obligations of an NYSE stock specialist include ( choose all that apply )
•buy or sell the stock as needed to make a market •stabilize order flow and prices for the stock
If a foreign currency _______ between the time an investor buys it and the time the investor sells it , the investor ______.
•depreciates ; loses •appreciates ; gains
Preferred stock is a hybrid security with characteristics between stocks and bonds , such as ( choose all that apply )
•it pays a fixed periodic dividend payment •it represents an ownership interest in the firm •it pays dividends only after the bondholders have received their payments •it represents a claim on the firm's assets subordinate to the bondholders
In an interest rate swap , the _____ agrees to make a number of _______ payments based on a rate and a notional principal .
•seller ; floating - rate •buyer ; fixed - rate
