FINA 450 EXAM 1
When the cross rate for currencies offered by two banks differs from the exchange rate offered by a third bank, a triangular arbitrage opportunity exists.
True
The top three currency pairs traded with the U.S. dollar are:
U.K. pound, euro, Japanese yen.
If the direct quote for a U.S. investor for British pounds is $1.43/pound, then the indirect quote for the U.S. investor would be _____ and the direct quote for the British investor would be _____.
pound0.699/$; pound0.699/$
Refer to Table 5.1. According to the information provided in the table, the 6-month yen is selling at a forward _______ of approximately _____ per annum. (Use the mid rates to make your calculations.)
premium; 2.09%
A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market. A) "forspot" B) "forward against spot" C) "repurchase agreement" D) "spot against forward"
D) "spot against forward"
Which of the following is NOT an attribute of the "ideal" currency? A) monetary independence B) exchange rate stability C) full financial integration D) All are attributes of an ideal currency.
D) All are attributes of an ideal currency.
Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market? A) obtaining or providing credit for international trade transactions B) minimizing the risks of exchange rate changes C) the transfer of purchasing power between countries D) All of the above were identified as functions of the foreign exchange market.
D) All of the above
Which of the following is NOT true regarding the market for foreign exchange? A) The rate of exchange is determined in the market. B) The market provides the physical and institutional structure through which the money of one country is exchanged for another. C) Foreign exchange transactions are physically completed in the foreign exchange market. D) All of the above are true.
D) All of the above are true.
Which of the following is NOT an argument against dollarization? A) Dollarization causes a loss of sovereignty over domestic monetary policy. B) Dollarization causes the country to lose the power of seignorage. C) The central bank of the dollarized country loses the role of lender of last resort. D) Dollarization removes currency volatility against the dollar.
D) Dollarization removes currency volatility against the dollar.
________ are NOT one of the three categories reported for foreign exchange. A) Spot transactions B) Futures transactions C) Swap transactions D) Strip transactions
D) Strip transactions
Which of the following statements is NOT true? A) The Gold Standard Era was characterized by growing openness in trade, but limited capital mobility. B) The Bretton Woods Era (post WWII) realized the increasing benefits of open economies. Furthermore, trade was increasingly dominated by capital. C) Since March 1973, exchange rates have become much more volatile and less predictable than previous periods. D) The time period between world wars 1 and 2 (the inter war years) witnessed significant reductions in trade barriers and a rapid acceleration in international trade.
D) The time period between world wars 1 and 2 (the inter war years) witnessed significant reductions in trade barriers and a rapid acceleration in international trade.
A eurodollar deposit is a demand deposit.
False
BRICs is a term used in international finance to represent assets that are considered to be inexpensive and sturdy, but fundamentally unsound and and incapable of coping with the upheavals now apparent in international financial markets.
False
Because countries have different financial regulations and customs, it is common for MNEs to apply their domestic rules and regulations when doing financial business in a foreign country.
False
Defensive measures are designed to enhance growth and profitability of the firm itself.
False
Domestic firms tend to make GREATER use of financial derivatives than MNEs because they can bear the greater risk presented by these financial instruments.
False
International trade might have approached the comparative advantage model in the 19th century, and it does so even more today.
False
Relative to MNEs, purely domestic firms tend to have GREATER political risk.
False
Since March 1973, when exchange rates become more volatile and less predictable than during the "fixed" exchange rate period, the nominal exchange rate index of the U.S. dollar peaked in 2011.
False
The European Central Bank is a strong and independent central bank that has completely replaced the individual central banks of the countries that use the euro as their currency.
False
The People's Republic of China has two official currencies, the Chinese renminbi (RMB) and the yuan (CNY).
False
The actions of corporate insiders and the actions of rulers of sovereign states are both agency costs that act as an impediment to the growth of globalization.
False
The five strategic motives driving the decision to invest abroad and become an MNE (market seekers, raw material seekers, production efficiency seekers, knowledge seekers, and political safety seekers) are mutually exclusive.
False
Under the terms of Bretton Woods countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.
False
Under the terms of Bretton Woods, countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.
False
Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and 4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was:
0.2055/$
A forward contract to deliver British pounds for U.S. dollars could be described either as ______ or ______
selling pounds forward; buying dollars forward
In the foreign exchange market, _______ seek all of their profit from exchange rate changes while ______ seek to profit from simultaneous exchange rate differences in different markets.
speculators; arbitrageurs
A _______ transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
swap
Exchange Rate Pass-Through may be defined as:
the degree to which the prices of imported and exported goods change as a result of exchange rate changes
If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation of product between markets, the product's price should be the same in both markets. This is known as:
the law of one price
Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity? yen129.87/$ euro1.1226/$ euro0.00864/yen
yen114.96/euro
Refer to table 5.1. The ask price for the two-year swap for a British pound is:
$1.4257/pound
Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Plillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players?
41.7%
Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true? A) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies. B) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses. C) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate. D) Fixed rates provide stability in international prices for the conduct of trade.
A) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies.
Which of the following factors of production DO NOT flow freely between countries? A) raw materials B) All of the above factors of production flow freely among countries. C) (non-military) technology D) financial capital
A) Raw materials
It is characteristic of foreign exchange dealers to: A) act as market makers, willing to buy and sell the currencies in which they specialize. B) trade only with clients in the retail market and never operate in the wholesale market for foreign exchange. C) bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale. D) All of the above are characteristics of foreign exchange dealers.
A) act as market makers, willing to buy and sell the currencies in which they specialize.
Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase. A) dealers; brokers B) brokers; dealers C) speculators; arbitrageurs D) central banks; treasuries
A) dealers; brokers
The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes. A)foreign exchange market B) LIBOR C) federal open market D) futures market
A) foreign exchange market
The authors identify two tiers of foreign exchange markets: A) interbank and client markets. B) client and retail market. C) bank and nonbank foreign exchange. D) commercial and investment transactions.
A) interbank and client markets.
For the three years from early 2002 to early 2005, the euro maintained a strong and steady rise in value against the U.S. dollar (USD). After a brief respite in 2005, the euro continued its climb against the USD into 2008. Which of the following were NOT a contributing factor in the assent of the euro and the decline in the dollar? A) large U.S. balance of payment surpluses B) a general weakening of the dollar after the attacks of September 11, 2001 C) severe U.S. balance of payments deficits. D) All of the above were contributing factors.
A) large U.S. balance of payment surpluses
If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is: A) overvalued. B) undervalued. C) very competitive. D) There is not enough information to answer this question
A) overvalued
________ are agents who facilitate trading between dealers without themselves becoming principals in the transaction. A) Foreign exchange dealers B) Foreign exchange brokers C) Central banks D) Arbitrageurs
B) Foreign exchange brokers
Which of the following is NOT a required convergence criteria to become a full member of the European Economic and Monetary Union (EMU)? A) Government debt should be no more than 60% of GDP. B) National birthrates must be 2.0 or lower per person. C) Nominal inflation should be no more than 1.5% above the average inflation rate for the three members with the lowest inflation rates in the previous year. D) The fiscal deficit should be no more than 3% of GDP.
B) National birthrates must be 2.0 or lower per person.
The greatest amount of foreign exchange trading takes place in the following three cities: A) London, Frankfurt, and Paris. B) New York, London, and Tokyo. C) London, Tokyo, and Zurich. D) New York, Singapore, and Zurich.
B) New York, London, and Tokyo
According to the authors, what is the single most important mandate of the European Central Bank? A) Establish an EMU trade surplus with the United States. B) Promote price stability within the European Union. C) Price, in euros, all products for sale in the European Union. D) Promote international trade for countries within the European Union.
B) Promote price stability within the European Union.
The greatest volume of daily foreign exchange transactions are: A) spot transactions. B) swap transactions. C) forward transactions. D) This question is inappropriate because the volume of transactions are approximately equal across the three categories above.
B) Swap Transactions
The countries that use the euro as their currency have: A) gained control over their own money supply (monetary independence), allowed the free movement of capital ina and out of their economies (financial integration), but give up exchange rate stability. B) agreed to use a single currency (exchange rate stability), allow the free movement of capital in and out of their economies (financial integration), but give up individual control of their own money supply (monetary independence).
B) agreed to use a single currency (exchange rate stability), allow the free movement of capital in and out of their economies (financial integration), but give up individual control of their own money supply (monetary independence).
The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve? A) exchange rate stability and full financial integration B) full financial integration and monetary independence C) monetary independence and exchange rate stability D) A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.
B) full financial integration and monetary independence
Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, a country that has given up their own sovereignty over monetary policy is considered to have: A) a residual agreement. B) hard pegs. C) soft pegs. D) floating arrangements.
B) hard pegs.
The ________ is a derivative forward contract that was created in the 1990s. It has the same characteristics and documentation requirements as traditional forward contracts except that they are only settled in U.S. dollars and the foreign currency involved in the transaction is not delivered. A) virtual forward B) nondeliverable forward C) internet forward D) dollar only forward
B) nondeliverable forward
A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange. A) forward B) spot C) futures D) none of the above
B) spot
Another name for the International Bank for Reconstruction and Development is: A) the European Monetary System. B) the World Bank. C) the Marshall Plan. D) the Recon Bank.
B) the World Bank.
One of the innovations introduced by Bretton Woods was the creation of the Special Drawing Right or SDR. The SDR is an international reserve asset created by the: A) International Bank of Reconstruction and Development (IBRD) B) U.S. Department of the Treasury C) International Monetary Fund (IMF) D) World Bank (WB)
C) International Monetary Fund
________ investments are designed to promote and enhance the growth and profitability of the firm. ________ investments are designed to deny those same opportunities to the firm's competitors. A) Defensive; Proactive B) Conservative; Aggressive C) Proactive; Defensive D) Aggressive; Proactive
C) Proactive; Defensive
________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction. A) Foreign exchange brokers B) Central banks C) Speculators and arbitrageurs D) Treasuries
C) Speculators and arbitrageurs
According to the terminology associated with changes in currency values, which of the following choices is the case when a currency's value relative to other currencies is changed by a government? A) depreciation and appreciation B) devaluation and appreciation C) devaluation and revaluation D) depreciation and revaluation
C) devaluation and revaluation
A small economy country whose GDP is heavily dependent on trade with the United States could use a(n) ________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate. A) independent floating B) managed float C) pegged exchange rate with the United States D) pegged exchange rate with the Euro
C) pegged exchange rate with the United States
A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate. A) rate; rate B) quote; quote C) rate; quote D) quote; rate
C) rate; quote
Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, countries with "fixed exchange rates" are considered to have: A) a residual agreement. B) hard pegs. C) soft pegs. D) floating arrangements.
C) soft pegs.
A ________ transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. A) futures B) spot C) swap D) forward-forward
C) swap
The theory that suggests specialization by country can increase worldwide production is: A) the international Fisher effect B) the theory of foreign direct investment. C) the theory of comparative advantage D)the theory of working capital management
C) the theory of comparative advantage
The four currencies that constitute about 80% of all foreign exchange trading are: A) U.S. dollar, U.K. pound, yen, and Chinese yuan. B) U.K pound, Chinese yuan, euro, and Japanese yen. C) U.S. dollar, euro, Chinese yuan, and U.K. pound. D) U.S. dollar, Japanese yen, euro, and U.K. pound.
D) U.S. dollar, Japanese yen, euro, and U.K. pound.
A well-established, large, Brazil-based MNE will probably be most adversely affected by which of the following elements of firm value? A) access to qualified labor pool B) high-quality strategic management C) an open marketplace D) access to capital
D) access to capital
Which of the following is a way in which the euro affects markets? A) Consumers and business enjoy price transparency and increased price-based competition. B) Countries within the Euro zone enjoy cheaper transaction costs. C) Currency risks and costs related to exchange rate uncertainty are reduced. D) all of the above
D) all of the above
Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods? A) widely divergent national monetary and fiscal policies among member nations B) several unexpected economic shocks to member nations C) differential rates of inflation across member nations D) all of the above
D) all of the above
Which of the following may be participants in the foreign exchange markets? A) speculators and arbitrageurs B) central banks and treasuries C) bank and nonbank foreign exchange dealers D) all of the above
D) all of the above
Which of the following may be participants in the foreign exchange markets? A) speculators and arbitrageurs B) central banks and treasuries C) bank and nonbank foreign exchange dealers D) all of the above
D) all of the above
The twin agency problems limiting financial globalization are caused by these two groups acting in their own self-interests rather than the interests of the firm. A) corporate insiders and attorneys B) rulers of sovereign states and unsavory customs officials C) attorneys and unsavory customs officials D) corporate insiders and rulers of sovereign states
D) corporate insiders and rulers of sovereign states
Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, countries that are predominantly market-driven are considered to be: A) a residual agreement. B) hard pegs. C) soft pegs. D) floating arrangements.
D) floating arrangements
The phase of the globalization process characterized by imports from foreign suppliers and exports to foreign buyers is called the: A) import-export banking phase. B) domestic phase. C) multinational phase. D) international trade phase.
D) international trade phase
The International Monetary Fund (IMF): A) was created as a result of the Bretton Woods Agreement. B) in recent years has provided large loans to Russia, South Korea, and Brazil. C) aids countries with balance of payment and exchange rate problems. D) is all of the above.
D) is all of the above.
In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Which of the following is NOT a reason why market-seeking firms produce in foreign countries? A) satisfaction of local demand in the domestic markets B) satisfaction of local demand in the foreign country C) All of the above are market-seeking activities. D) political safety and small likelihood of government expropriation of assets
D) political safety and small likelihood of government expropriation of assets
Financial globalization has not resulted in: A) continuing imbalances of balance of payments. B) an increase in quantity and speed in the flow of capital across the world. C) capital markets less open and a decrease in the availability of capital for many organizations. D) uniform ways of ownership, control, and governance across the world.
D) uniform ways of ownership, control, and governance across the world.
The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?
Full financial integration and monetary independence
All exchange rate regimes must deal with the trade-off between rules and discretion as well as between cooperation and independence.
True
The reference rate of interest in the eurocurrency market is the: A) Treasury Rate B)Federal Funds Rate C) London Interbank Offered Rate D) Prima Rate
London Interbank Offered Rate
While trading in foreign exchanges takes place worldwide, the major currency trading centers are located in:
London, New York, and Tokyo.
Two general conclusions can be made from the empirical tests of purchasing power parity (PPP):
PPP holds up well over the long run but poorly for the short run, and the theory holds better for countries with relatively high rates of inflation.
Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price.
True
By and large, high capital mobility is forcing emerging market nations to choose between the two extremes of a free floating exchange rate or a hard peg regime.
True
Comparative advantage in the 21st century is based more on services and their cross border facilitation by telecommunications and the Internet.
True
Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities.
True
Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.
True
A currency board exists when a country's central bank commits to back its money supply entirely with foreign reserves at all times.
True
Eurocurrency markets serve two valuable purposes: 1) Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity; and 2) the Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs, including the financing of imports and exports.
True
If exchange rates were fixed, investors and traders would be relatively certain about the current and near future exchange value of each currency.
True
In general, NDF markets normally develop for country currencies having large cross-border capital movements, but still subject to convertibility restrictions.
True
MNEs must modify finance theories like cost of capital and capital budgeting because of foreign complexities.
True
Members of the International Monetary Fund may settle transactions among themselves by transferring Special Drawing Rights (SDRs).
True
Multinational Enterprises (MNEs) are firms, both for profit companies and not-for-profit organizations, that have operations in more than one country, and conduct their business through foreign subsidiaries, branches, or joint ventures with host country firms.
True
Ownership, control, and governance changes radically across the world. The publicly traded company is not the dominant global business organization—the privately held or family-owned business is the prevalent structure—and their goals and measures of performance differ dramatically.
True
The Eurocurrency market continues to thrive because it is a large international money market relatively free from governmental regulation and interference. Recent events may lead to greater regulation.
True
The authors argue that financial inefficiency caused by influential insiders may prove to be an increasingly troublesome barrier to international finance.
True
The members of the EU do have relative freedom to set their own fiscal policies - government spending, taxation, and the creation of government surpluses or deficits. They are expected to keep deficit spending within limits.
True
Typically, a "greenfield" investment abroad is considered an investment having a greater foreign presence than a joint venture with a foreign firm.
True
The _______ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes.
foreign exchange market
World War I caused the suspension of the gold standard for fixed international exchange rates because the war:
interrupted the free movement of gold.