International Finance Ch.3

Which of the following is not true regarding electronic communications networks (ECNs)? A) They have a visible trading floor. B) Trades are executed by a computer network. C) They have been created in many countries to match orders between buyers and sellers. D) They allow investors to place orders on their computers. E) All of the above are true.

A) They have a visible trading floor.

Eurobonds: A) are usually issued in bearer form. B) typically carry several protective covenants. C) cannot contain call provisions. D) Both A and B

A) are usually issued in bearer form.

According to the text, the forward rate is commonly used for: A) hedging B) immediate transactions. C) previous transactions. D) bond transactions.

A) hedging

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?

$Purchase order / Peso bid quote $100,000 / $0.126 = 793,651

Systematic risk is

*Market risk *the Non diversifiable risk that remains even after investors fully diversify their portfolio holdings

A fully diversified U.S. portfolio is about

27 percent as risky as a typical individual stock.

The bid/ask spread for small retail transactions is commonly in the range of ____ percent.

3 to 7

When obtaining a loan, the risk premium paid above LIBOR depends on the: A) risk-free interest rate of the borrower. B) credit risk of the borrower. C) borrower's stock price. D) lender's stock price.

B) credit risk of the borrower.

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.

The Oriental Mercantile Bank, headquartered in Singapore, services many U.S.-based MNC clients. Assume that it quotes USD per SGD at 0.7352-0.7358 (SGD refers to Singapore dollars). Assume that a U.S. customer is receiving SGD 40,000 from a customer in Singapore and wishes to convert this amount into USD. What is the amount received in USD? A) $29,927 B) $29,834 C) $29,600 D) $29,408

D) $29,408 the firm receives SGD 40,000 from a customer. So, the converted value in USD = SGD 40,000 * $0.7352/SGD = $29,408

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

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.

A U.S. investor bought a one-year French security for €10,000 and received €10,550 at the end of the year. The exchange rate on the date the investment was made was $0.87265/€ and the rate on the date it matured was $1.27244/€. The dollar-equivalent rate of return was

Dollars invested = €10,000 ×$0.87265/€ = $8,726.50. Dollars received = €10,550 ×$1.27244/€ = $13,424.24. Dollar rate of return = ($13,424.24 - $8,726.50)/$8,726.50 = 53.83%.

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. True or False

False

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

False; because the lower the spread, the more liquid the currency is.

Retail bid-ask spreads are ________, and so ______ profitable than wholesale spreads, because market maker must cover the fixed cost of a transaction that applies to even small currency trades.

Higher, More

U.S.-based mutual funds known as country funds.

Invests exclusively in stocks of a single country.

A U.S. bank is quoting 1.22 and 1.24 for USD per EUR. What is the spread in percentage terms?

Spread = 1.24 - 1.22 = 0.02 Spread % = 0.02 / 1.24 = 1.61%

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. True or False

True

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

True

You will get more diversification... across industries than across countries. across countries than across industries. across stocks and bonds than across countries. none of the above

across countries than across industries.

Advantages of investing in mutual funds known as country funds include: Speculation in a single foreign market at minimum cost. Using them as building blocks of a personal international portfolio. Diversification into emerging markets that are otherwise practically inaccessible. All of the above

all of the above

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.

direct; indirect

With regard to the OIP

the composition of the optimal international portfolio is identical for all investors of a particular country, whether or not they hedge their risk with currency futures contracts.

With regard to the OIP

the composition of the optimal international portfolio varies depending upon the numeraire currency used to measure returns.

The degree of "home bias" varies across investors

wealthier, more experienced, and sophisticated investors are less likely to exhibit home bias.