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