FIN 320 Chapter 18 SB
if US dollars are deposited in banks outside the US banking system, they are referred to as:
Eruodollars
What is the acronym for the interest rate most international banks charge one another for overnight eurodollar loans?
LIBOR
an agreement to exchange currencies at a future point in time at an exchange rate that is agreed upon today is called
a forward trade
the condition that a commodity costs the same regardless of the currency used or where it is purchased is called
absolute purchasing power parity
the implicit exchange rate between two currencies when both are quoted in a third currency is called the _______
cross rate
if the Japanese Yen is less expensive in the forward market than it is today, it is said to be selling at a
discount
interest rate parity
eliminates covered interest arbitrage opportunities
t/f an interest rate swap occurs when two parties exchange a sub-par loan for a market rate loan
false
an interest rate swap involves swapping a ______ payment for a _________ payment
fixed rate; floating rate or floating rate; fixed rate
the world's largest financial market is the:
foreign exchange market
short term exposure to exchange rate risk can be reduced by importing raw materials and using _______ contracts
forward
British and ________ governments issue gilts
irish
which of the following are true concerning triangle arbitrage?
it helps keep the currency market in equilibrium, it is a profitable situation involving three separate currency exchange transactions
what are some strategies for hedging long term exchange rate risk?
matching foreign currency inflows and outflows
the foreign exchange market is where ________
one country's currency is traded for another country's currency
the different types of exchange rate risk include which of the following?
short term exposure, long term exposure, translation exposure
a cross rate between two foreign currencies is usually quoted in what currency?
the US dollar
currently, the spot exchange rate for the Swiss franc is SF 1 = $1.10 or SF = $1.12 90 days forward. Which of the following is true?
the dollar is selling at a discount to the Swiss franc, the Swiss franc is at a forward premium
when a us company calculates its accounting net income, it must report all income, including income from foreign operations, in dollars. This leads to _____ exposure to exchange rate risk
translation
relative purchasing power parity tells us that the exchange rate will rise if the US inflation rate is lower than that of a foreign country. The foreign currency will ______ in value relative to the US dollar
depreciate
money deposited in a financial center outside the country whose currency is involved is called _______
eurocurrency
in covered interest arbitrage, investors protect themselves against changes in exchange rates by locking in the
forward exchange rate
relative PPP implies that the change in an exchange rate is driven by the difference in the __________ of the two countries involved
inflation rates
an agreement to trade currencies within two business days at today's exchange rate is called a
spot trade
conditions that must be present for absolute purchasing power to exist include which of the following?
there must be no trade barriers, the goods must be identical
the _________ rate is the exchange rate for a non-U.S. currency expressed in terms of another non-U.S. currency
cross
protecting oneself from a change in the exchange rate by locking in the forward exchange rate today is called
covered interest arbitrage
users of the foreign exchange market include
foreign exchange brokers who match buy and sell orders, importers who pay for goods using foreign currencies, speculators who try to profit from changes in exchange rates
a foreign bond refers to a bond
that is issued in a single country, denominated in the currency of that country
t/f if the purchasing power parity did not hold, it would be possible to engage in arbitrage simply by transporting product to other countries
true
a eurobond refers to a bond
the is issued in the multiple countries, usually denominated in the currency of the issuer's country
why is it more challenging to manage long term exchange rate risk exposure than to hedge short term risks?
organized forward markets do not exist for long term needs of corporations
the exchange rate in an agreement to exchange currency at some time in the future is called the _________ rate
forward
the concept that exchange rates adjust to keep purchasing power constant among currencies is referred to as
purchasing power parity
a security issued in the United States representing shares of a foreign stock is call a
American depository receipt
the interest rate most international banks charge one another for overnight eurodollar loans is the ________ interbank offer rate
London
