Chapter 9
91) Which of the following is true about a quote of ¥117.87/$? A) It is equal to $.008484/¥. B) The quote is in U.S. dollars. C) This is an indirect quote on the yen. D) It costs a little more than a dollar to buy one yen.
A) It is equal to $.008484/¥.
55) ________ refers to the most commonly quoted interest rate that London banks charge other large banks that borrow Eurocurrency. A) London Interbank Offer Rate (LIBOR) B) London Interbank Bid Rate (LIBID) C) Spot rate D) Cross rate
A) London Interbank Offer Rate (LIBOR)
81) ________ in the foreign exchange market specialize in currency futures and options transactions. A) Securities exchanges B) Eurocurrency markets C) Interbank markets D) Over-the-counter markets
A) Securities exchanges
32) ________ refers to shares of ownership in a company's assets that give shareholders a claim on the company's future cash flows. A) Stock B) A bond C) Debt D) A draft
A) Stock
50) Which of the following factors is responsible for growth in the international equity market? A) advent of cybermarkets B) spread of countertrade C) centrally planned economies D) government partnerships
A) advent of cybermarkets
64) In a quoted exchange rate of $1.69/British pound, the British pound is called the ________. A) base currency B) counter currency C) cross currency D) quoted currency
A) base currency
29) Company debt normally takes the form of ________. A) bonds B) equity C) stocks D) bank loans
A) bonds
51) Which of the following terms refers to a stock market with no central geographic location? A) cybermarket B) foreign exchange market C) capital market D) international bond market
A) cybermarket
57) The rate at which one currency is interchanged for another is called the ________. A) exchange rate B) interbank interest rate C) official cash rate D) prime rate
A) exchange rate
72) The exchange rate at which two parties agree to exchange currencies on a specified future date is called a ________ rate. A) forward B) prime C) spot D) cross
A) forward
60) The practice of insuring against potential losses that result from adverse changes in exchange rates is called currency ________. A) hedging B) arbitrage C) speculation D) conversion
A) hedging
54) Rates that the world's largest banks charge one another for loans are called ________. A) interbank interest rates B) London Interbank Bid Rates C) exchange rates D) official bank rates
A) interbank interest rates
68) The exchange rate between the euro (€) and the dollar is €0.8461/$. Which of the following is the correct direct quote on the dollar? A) $2.20/€ B) $1.1819/€ C) $5.50/€ D) $0.8461/€
B) $1.1819/€
61) ________ is the instantaneous purchase and sale of a currency in different markets for profit. A) Currency hedging B) Currency arbitrage C) Currency speculation D) Currency conversion
B) Currency arbitrage
41) ________ is a prominent operational center. A) Dubai B) London C) Singapore D) Mexico
B) London
67) While designating an exchange rate, the ________ is always the denominator. A) counter currency B) base currency C) cross currency D) quoted currency
B) base currency
31) Which of the following is a debt instrument that specifies the timing of principal and interest payments? A) stock B) bond C) share D) equity
B) bond
71) The exchange rate at which a bank will purchase a currency is called a ________ rate. A) prime B) buy C) ask D) forward
B) buy
93) If ABC Software simultaneously purchases and sells foreign exchange for two different dates, the company is said to be involved in ________. A) increasing its foreign exchange rate risk B) conducting a currency swap C) entering an arbitrage situation D) buying and selling at the spot rate
B) conducting a currency swap
74) A(n) ________ is a right to exchange a specific amount of a currency on a specific date at a specific rate. A) forward contract B) currency option C) currency hedging D) interest arbitrage
B) currency option
36) One of the major forces responsible for the rapid growth rate of the international capital market is ________. A) economic nationalism B) information technology C) currency control D) extensive regulation
B) information technology
43) The international bond market consists of all bonds sold by issuing companies, governments, or other organizations ________. A) within their own countries B) outside their own countries C) within developing nations D) within developed nations
B) outside their own countries
42) ________ are usually located on small island nations or territories with favorable tax and/or secrecy laws. A) Cybermarkets B) Over-the-counter markets C) Booking centers D) Operational centers
C) Booking centers
73) ________ is the simultaneous purchase and sale of foreign exchange for two different dates. A) Currency hedging B) Currency speculation C) Currency swap D) Currency arbitrage
C) Currency swap
52) The market consisting of all the world's currencies that are banked outside their countries of origin is called the ________. A) foreign exchange market B) interbank market C) Eurocurrency market D) offshore financial center
C) Eurocurrency market
35) Which of the following is a major purpose of the international capital market? A) to reduce entrepreneurial initiatives B) to increase the cost of borrowing C) to reduce risk for lenders D) to reduce the money supply for borrowers
C) to reduce risk for lenders
49) Foreign bonds issued and traded in Asia outside Japan and normally denominated in dollars are called ________. A) bulldog bonds B) yankee bonds C) samurai bonds D) dragon bonds
D) dragon bonds
56) The market in which currencies are bought and sold and their prices determined is called the ________. A) Eurocurrency market B) international capital market C) international bond market D) foreign exchange market
D) foreign exchange market
33) The ease with which bondholders and shareholders may convert their investments into cash is called ________. A) barter B) clearing C) countertrade D) liquidity
D) liquidity
37) The unbundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments is called ________. A) currency hedging B) commercialization C) currency arbitrage D) securitization
D) securitization
94) If ABC Software holds a currency option to purchase Swiss francs at SF 1.67/$ in 30 days, at the end of which the exchange rate is SF1.70/$, then ABC Software ________. A) is required to follow through on a currency exchange B) has succeeded in hedging against exchange rate risk C) would exercise its currency option D) would not exercise its currency option
D) would not exercise its currency option
76) ________ dominates the foreign exchange market. A) London B) New York C) Tokyo D) Beijing
A) London
59) Investors use the foreign exchange market for ________. A) stock dilution B) currency speculation C) market capitalization D) mean reversion
B) currency speculation
47) Bonds sold outside the borrower's country and denominated in the currency of the country in which they are sold are called ________. A) municipal bonds B) foreign bonds C) Eurobonds D) domestic bonds
B) foreign bonds
44) A bond issued by a Venezuelan company, denominated in U.S. dollars, and sold in Britain, France, and Germany is an example of a ________. A) dragon bond B) yankee bond C) Eurobond D) samurai bond
C) Eurobond
53) British pounds of a British trading company that are deposited in a bank are called ________. A) Eurodollars B) U.S. dollars C) Europounds D) Pounds
C) Europounds
83) ________ is traded freely in the foreign exchange market, with its price determined by the forces of demand and supply. A) Representative money B) Private currency C) Hard currency D) Fiat money
C) Hard currency
85) Which of the following is used by governments for the convertibility of currencies in their countries? A) multiple exchange rates B) countertrade C) import deposit requirements D) OTC market
D) OTC market
82) ________ is a decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants. A) Securities exchanges B) Eurocurrency market C) Interbank market D) Over-the-counter market
D) Over-the-counter market
Scenario: ABC Software ABC Software is a producer of educational software for children below the age of twelve. The company has operations in Switzerland and would like to expand its foreign operations with a new facility in China. 92) ABC Software has had difficulty obtaining funds to expand. A friend of the CEO recommends that the company should explore an offshore financial center, which ________. A) is a country or territory whose financial sector features very few regulations and few, if any, taxes B) tends to be characterized by political and economic instability making, it an inexpensive but risky source of funds C) typically lends money to companies that have had difficulty getting financing elsewhere because of poor credit records D) is a financial center located in a resort community and is characterized by poor telecommunications infrastructure
A) is a country or territory whose financial sector features very few regulations and few, if any, taxes
39) Which of the following represents a country or territory whose financial sector features very few regulations and few, if any, taxes? A) offshore financial center B) interbank market C) international financial services district D) Eurocurrency market
A) offshore financial center
34) An expanded money supply ________. A) reduces the cost of borrowing B) increases interest rates C) makes it difficult for financial institutions to lend money D) diminishes entrepreneurial initiatives in a country
A) reduces the cost of borrowing
46) The absence of government regulation in the Eurobond market ________. A) substantially reduces the cost of issuing a bond B) lowers the risk level of the bond C) makes Eurobonds less popular than foreign bonds D) exists because of the difficulty of regulating a multi-country market
A) substantially reduces the cost of issuing a bond
65) An exchange rate of ¥117.87/$ indicates ________. A) that 117.87 yen buys one dollar B) that 117.87 dollars buys one yen C) a direct quote on the dollar D) an indirect quote on the yen
A) that 117.87 yen buys one dollar
88) If Trader's Paradise purchases euros expecting the value to rise and generate a profit for the company, it is engaging in currency ________. A) swap B) speculation C) hedging D) arbitrage
B) speculation
70) Which of the following is an exchange rate that requires delivery of the traded currency within two business days? A) forward rate B) spot rate C) cross rate D) prime rate
B) spot rate
75) A currency used as an intermediary to convert funds between two other currencies in the foreign exchange market is called a ________. A) local currency B) vehicle currency C) community currency D) private currency
B) vehicle currency
48) Foreign bonds issued in the U.S. are called ________. A) bulldog bonds B) yankee bonds C) samurai bonds D) dragon bonds
B) yankee bonds
38) The world's three most important financial centers are ________. A) Zurich, Paris, and Washington B) China, Brazil, and Mexico C) Tokyo, London, and New York D) Dubai, Beijing, and Germany
C) Tokyo, London, and New York
87) If Trader's Paradise purchases and sells the euros simultaneously in different markets for profit, it would be engaging in currency ________. A) swap B) speculation C) hedging D) arbitrage
D) arbitrage
80) In the interbank market, the process of aggregating the currencies that one bank owes another and then carrying out that transaction is called ________. A) swapping B) dumping C) hedging D) clearing
D) clearing
89) When doing business with former communist countries, Trader's Paradise insists on getting paid in a currency that can be traded freely in the foreign exchange market. The price of this currency is determined by the forces of supply and demand. Which of the following is the mode of payment illustrated in this scenario? A) community currency B) private currency C) local currency D) convertible currency
D) convertible currency
69) An exchange rate calculated using two other exchange rates is called a(n) ________. A) interest arbitrage B) forward contract C) forward rate D) cross rate
D) cross rate
30) A loan in which the borrower promises to repay the borrowed amount plus a predetermined rate of interest is called a(n) ________. A) equity B) exchange rate C) stock D) debt
D) debt
95) The company's financial advisors recommend that ABC Software conduct most of its business in a vehicle currency. Which of the following is true of vehicle currencies? A) A vehicle currency is a contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate. B) The U.S. dollar, Australian dollar, Japanese yen, and British pound are all examples of vehicle currencies. C) The U.S. dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency. D) The Chinese yuan is expected to become a vehicle currency in the near future as China's position in world trade continues to grow.
C) The U.S. dollar became a vehicle currency after World War II when all of the world's major currencies were tied indirectly to the dollar because it was the most stable currency.
77) The ________ is the currency that dominates the foreign exchange market. A) Japanese yen B) British pound C) U.S. dollar D) Australian dollar
C) U.S. dollar
28) A(n) ________ is a system that allocates financial resources in the form of debt and equity according to their most efficient uses. A) international equity market B) forward market C) capital market D) eurocurrency market
C) capital market
63) The purchase or sale of a currency with the expectation that its value will change and generate a profit is called ________. A) currency hedging B) currency arbitrage C) currency speculation D) currency conversion
C) currency speculation
58) The bid-ask spread in the foreign exchange market is the ________. A) price at which a bank will buy a currency B) price of currency in the foreign exchange market C) difference between the bid and ask quotes for a currency D) the time lapsed between a bid quote and an ask quote
C) difference between the bid and ask quotes for a currency
40) An offshore financial center is usually characterized by ________. A) extensive regulations B) economic and political instability C) excellent telecommunications D) high taxes
C) excellent telecommunications
45) Eurobonds are popular because ________. A) they are less risky than traditional bonds B) they are always denominated in euros C) governments of nations in which they are sold do not regulate them D) European companies are considered very stable
C) governments of nations in which they are sold do not regulate them
Scenario: Trader's Paradise Trader's Paradise is a global merchant that sells a variety of products. The company operates in forty-eight different countries (some developed, some developing) and some former communist countries. The company faces substantial risks given the differing conditions in foreign exchange markets. 86) To insure against potential losses that result from adverse changes in exchange rates, Trader's Paradise should use currency ________. A) swap B) speculation C) hedging D) arbitrage
C) hedging
78) The world's largest banks exchange currencies at spot and forward rates in the ________. A) International Finance Corporation B) Eurocurrency market C) interbank market D) World Bank
C) interbank market
62) The profit-motivated purchase and sale of interest-paying securities denominated in different currencies is called ________. A) currency conversion B) currency hedging C) interest arbitrage D) interbank interest rates
C) interest arbitrage
79) Banks in the interbank market ________. A) provide long-term loans to small-sized and medium-sized companies B) provide long-term loans to large companies C) offer advice on trading strategies D) exchange currencies exclusively at spot rates
C) offer advice on trading strategies
84) Governments impose currency restrictions in their countries to ________. A) encourage future investment outflows B) indirectly reduce imports and exports C) protect currencies from speculators D) exhaust their reserve of hard currencies
C) protect currencies from speculators
66) While designating an exchange rate, the numerator indicates the ________. A) base currency B) transaction currency C) quoted currency D) cross currency
C) quoted currency
Scenario: Sally goes to Japan Sally Johnson has identified a market for her company's products in Japan. She is excited about expanding her company, but knows that she needs to learn how the foreign exchange market works before she can successfully sell her products abroad. 90) If Sally sees a quote of ¥117.87/$, she should know that ________. A) the yen is the base currency here B) this is a direct quote on the dollar C) this is a direct quote on the yen D) the quote is in U.S. dollars
C) this is a direct quote on the yen