FIN 558 Exam 1

Foreign direct investment occurs when a firm buys a minimum of ____ of a firm in another country

10%

Exchange rates between 2 counties that do not involve the dollar are______

Cross rates

A lower nominal interest rate in one country indicates the fact that the country's currency was expected to ________.

Appreciate

Which account should NOT be included in the asset section of a central bank balance sheet?

Currency in circulation

The ______ is/are a record of all of a country's transactions with the rest of the world.

Balance of Payments

Spain imports USD50 million in automobiles in a given year. This would result in a _______ in Spain's ________ account.

Debit, current

If Mexico has a current account surplus, then it will have a capital account ____.

Deficit

Ford builds a factory in Mexico. This is best described as a _____ in the U.S. ______ account.

Deficit, capital

A higher nominal interest rate in one country indicates the fact that the country's currency was expected to ________.

Depreciate

The name for the bank market for deposits and loans that is denominated in a currency different than the country of the market

External currency market

Name of the exchange rate system in which countries allow the value of their currency to be determined freely in the foreign exchange markets around the world without any government restrictions is ______

Floating currencies

The exchange rate system in which a country allows the value of the currency to be determined by the market forces of supply and demand is known as a

Floating exchange rate

What is the name of the contract where corporations, institutional investors, and individuals are required to pay or to receive a specific amount of foreign currency at a specific exchange rate at a particular date in the future?

Forward currency contract

Which of the following forecasting techniques is typically based on formal economic models of exchange determination, which link exchange rates to money supply, inflation rates, productivity growth rates, and the current account?

Fundamental Analysis

What best describes the type of investment that occurs when a firm builds a new factory overseas?

Greenfield

The U.S. is a net _______ of goods and a net ________ of services.

Importer, exporter

Which account should be included in the asset section of a central bank balance sheet?

International Reserves, Domestic Credit, Government Bonds

Interbank interest rates in various cities around the world are often the basis for interest rates in contractual loan agreements. What is the most important of these rates?

London Interbank Offer Rate (LIBOR)

When the external purchasing power or a currency is greater than the internal purchasing power, the currency is said to be ________.

Overvalued

All of the following options are reasons why the prices of goods and services deviate from the law of one price EXCEPT -price index -tariffs and quotas. -sticky prices -speculation

Price Index

What is the name of the ratio of a price level at one point in time to the price level in a designated base year?

Price Index

What is the name of the computer network in which member banks globally send and receive messages pertaining to foreign exchange transactions?

SWIFT

In the ________ exchange rate system, the currency has limited flexibility and the rate is kept within a fixed band.

Target zone

Which of the following forecasting techniques is usually used for short-term forecasts using only past exchange rate data, and some other data such as the volume of currency trade, to predict future exchange rates?

Technical Analysis

Which organization promotes international monetary cooperation by hosting regular meetings of central banks from around the world?

The Bank for International Settlements

Which international organization develops and analyzes potential policies and treaties that are intended to promote economic growth?

The Organization for Economic Cooperation and Development

Which organization seeks to reduce the amount of poverty in the world by providing grants, loans, and technical assistance to low-income countries?

The World Bank

Which organization has a dispute settlement mechanism to help member countries resolve disagreements of international agreements?

The World Trade Organization

Bid ask spreads are larger in the forward market than spot because

The forward market is less liquid than the spot market

Keeps cross-rates in line with exchange rates quoted relative to the USD

Triangular Arbitrage

When the forward rate is equal to the expected future spot rate, the forward rate is said to be __________ the future spot rate

an unbiased predictor

When someone in the currency market can buy a currency at a low price and sell it for a higher price, it is known as

arbitrage

Suppose a central bank conducts a policy to appreciate its own currency. This action will lead to a _______ its foreign currency reserves

decrease

When a real appreciation occurs in the domestic currency, who tends to be more profitable?

domestic importers

"Covered" in "covered interest parity" implies that transaction foreign exchange risk is _________ from an investment in a foreign currency.

eliminated

The Fisher Effect decomposes nominal interest rates into the ________ and the expected rate of inflation.

expected real interest rate

What are the three major components of the official reserves account?

foreign exchange reserves, gold, and IMF-related reserve assets

What is the most likely outcome if a central bank suddenly prints a large amount of new money?

higher inflation

A real depreciation of the domestic currency ________ importers and ________ exporters.

hurts, helps

When a central bank buys foreign currency, its international reserves _______

increase

The primary concern with a growing negative net international investment position is that the future _______ may reduce consumption by the debtor country.

interest payments paid

Within the United States, what is the name for the power of a dollar when it is used to purchase an amount of goods and services?

internal purchasing power

One of the major reasons for the existence of the forward market is to _______

manage currency risk especially risk associated with a transaction

One of the major reasons for the existence of the forward market is to ________.

manage currency risk especially risk associated with a transaction

The goal of a multinational firm is to

maximize the firm's value

When the central bank attempts to influence the supply of money in a country by the sale or purchase of government bonds, the practice is known as ________.

open market operations

The fourth decimal place in a dealer's quote in the trade jargon is known as the

pip

It is 1998. The spot and 30-day forward rates for the Dutch guilder are $.3075 and $.3120, respectively. The guilder is said to be selling at a forward

premium

In the absence of pure competition, firms who segment markets may be able to charge different prices in different countries for the same good. This practice is known as ________.

pricing to market

When a producer charges different prices for the same good in different markets, the practice is known as ________.

pricing-to-market

A bond that promises to pay a single payment at maturity is known as a ________ bond.

pure discount

An exchange rate pass-through describes the way managers of the firm choose to respond with their relative prices to changes in the ________

real exchange rate

When the firm's nominal profits are divided by the price level, the result is known as ________.

real profitability

What is the name of the unit of account created by the IMF which is sometimes used to denominate contracts?

special drawing right

The _____ includes no cash flows between the deposit date and the maturity date.

spot interest rate

Which one of the following reasons for violations of the Law of One Price is the most obvious?

tariffs and restrictions on imports

What is meant by the conditional future spot rate?

the conditional mean of the probability distribution of future spot rates

If there is no systematic difference between the forward rate and the expected future spot rate, then the expected forward market return should be ________.

zero