International Finance Final Exam Basic Concepts
How much of the probability distribution of future spot rates is between plus or minus two standard deviations? A) 95.44% B) .167% C) 98% D) 4.55%
A) 95.44%
One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland". The current spot rate between the euro and dollar is $1.3225/euro. What is the expected spot rate in one year if uncovered interest rate parity holds? A) $1.3315/euro B) $1.3135/euro C) $1.3225/euro D) None of the above
A) $1.3315/euro
The cash manager at AmFlex Company needs to buy 1,000,000 British pounds to pay a British supplier. A currency broker quotes him a bid-ask rate of ₤.4865-.5116/US$. What will be the dollar cost the 1,000,000 pounds? A) $2,055,499 B) $1,954,652 C) $486,618 D) $511,587
A) $2,055,499
) ________ states that the spot exchange rate is determined by the relative prices of similar baskets of goods. A) Absolute purchasing power parity B) Relative purchasing power parity C) Interest rate parity D) The Fisher Effect
A) Absolute purchasing power parity
________ refers to the possibility of export revenue when a foreign market is served by direct foreign investment and the former exports to that market are unable to be sold elsewhere. A) Cannibalization of exports B) Cannibalization of imports C) Capital budgeting D) Adjusted net present value
A) Cannibalization of exports
The decomposition of the nominal interest rate into the sum of the expected real interest rate and the expected rate of inflation is known as the A) Fisher Effect. B) Siegel Paradox. C) bid-ask spread. D) exchange rate pass-through.
A) Fisher Effect.
The price of a Big Mac in the U.S. is $3.73 and the price in Mexico is Peso 32.0. What is the implied PPP of the peso per dollar? A) Peso 8.58/$1 B) Peso 10.8/$1 C) Peso 11.76/$1 D) None of the above
A) Peso 8.58/$1
What is the name of the international organization that was founded to ensure the stability of the international system of payments and exchange rates among national currencies? A) The International Monetary Fund B) The World Bank C) The World Trade Organization D) The International Finance Corporation
A) The International Monetary Fund
The basic principle of capital budgeting is that A) all projects with positive adjusted cash flows should be accepted. B) all projects with adjusted cash flows of zero or greater. C) only projects with adjusted cash flows should be accepted. D) only projects financed entirely with equity be accepted.
A) all projects with positive adjusted cash flows should be accepted.
The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0.8709/euro. Thus, the dollar has ________ by ________. A) appreciated; 2.30% B) depreciated; 2.30% C) appreciated; 2.24% D) depreciated; 2.24%
A) appreciated; 2.30%
When someone in the currency market can buy a currency at a low price and sell it for a higher price at the same time, it is known as ________. A) arbitrage B) the bid-ask spread C) hedging D) interbank currency market
A) arbitrage
Why are the bid-ask spreads larger in the forward market than in the spot market? A) because the forward market is less liquid than the spot market B) because the spot market is more volatile than the forward market C) because the forward market is more liquid than the spot market D) because the spot market is less liquid than the forward market
A) because the forward market is less liquid than the spot market
If you want to hedge and owe a firm a foreign currency in the future, you would A) buy the foreign currency forward. B) sell the foreign currency forward. C) speculate on the possibility to not hedge. D) buy the currency now and deposit into a bank account until needed.
A) buy the foreign currency forward.
What is the name for the set of regulations pertaining to flows of capital into and out of a country? A) capital controls B) target zone system C) crawling peg D) lead-lag operations
A) capital controls
) Which one of the following are the main participants in the global currency markets? A) commercial banks B) insurance companies C) hedge funds D) private equity funds
A) commercial banks
Which one of the following is the most common method of overcoming the agency problem in developed countries outside of the U.S. and the U.K? A) concentrated ownership B) currency boards C) hostile takeovers D) foreign direct investment
A) concentrated ownership
Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________. A) conflicting; not efficient B) conflicting; efficient C) consistent; inefficient D) None of the above
A) conflicting; not efficient
Which account should NOT be included in the asset section of a central bank balance sheet? A) currency in circulation B) official international reserves C) domestic credit D) government bonds
A) currency in circulation
If a country has a capital account ________, it is ________ net foreign assets. A) deficit, acquiring B) deficit, selling C) surplus, acquiring D) surplus, in equilibrium as far as its
A) deficit, acquiring
In which one of the following systems would it be least difficult to quantify the currency risk? A) floating exchange system B) target zone system C) pegged exchange rate system D) currency board
A) floating exchange system
From the perspective of the MNC, the most important purpose of the forward markets is the process of ________. A) hedging B) arbitraging C) speculating D) preventing default
A) hedging
One important purpose of the forward markets for foreign exchange allows global traders to protect themselves by ________. A) hedging B) arbitraging C) speculating D) preventing default
A) hedging
The sources of funds for a multinational corporation and its subsidiaries can be subdivided into two categories, ________ and ________. A) internally-generated, externally generated B) retained earnings, internally-generated C) capital markets-generated, externally generated D) retained earnings, externally-generated
A) internally-generated, externally generated
The exposure of a return to fluctuations in the return on the market portfolio, which cannot be diversified away is called A) market risk. B) risk return. C) idiosyncratic risk. D) systematic risk.
A) market risk.
Which of the following is one of the forces that determine the equilibrium between the current account and the real exchange rate? A) movements in net foreign assets B) changes in inventories inside the economy C) the net change in the merchandise account D) the balance of trade deficit
A) movements in net foreign assets
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 ________. A) open market operations B) a sterilized float C) a dirty float D) changing the required reserves
A) open market operations
The fourth decimal place (for currency pairs trading around one) in a dealer's quote in the trade jargon is known as the A) pip. B) round trip. C) spread. D) haircut.
A) pip.
In the field of finance, the market where initial public offerings are made is known as the ________ market. A) primary B) secondary C) money market D) derivative
A) primary
The basic principal of capital budgeting is that ________ with a positive adjusted net present value should be accepted by the firm. A) projects B) investments C) all cash flows D) accounts receivable
A) projects
Two of the most often used determinants of exchange rates are ________. A) real interest rate differentials and current account balances B) nominal interest rates and current account balances C) real interest rate differentials and real price levels D) nominal interest rate and inflation rate differentials
A) real interest rate differentials and current account balances
One of the problems with cash flow computations is that it often ignores ________. A) real options B) currency exposure C) terminal value D) incremental cash flows
A) real options
What is the name of the value of the real resources that the central bank obtains through the creation of base money? A) seigniorage B) sterilized intervention C) dollarization D) target zone
A) seigniorage
Which one of the following would most likely be caused by the financial side effects of a project? A) the costs of financial distress B) subsequent new projects C) cannibalization of exports D) an end to licensing revenues to the parent
A) the costs of financial distress
Covered interest arbitrage moves the market ________ equilibrium because ________. A) toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two B) toward; investors are now more willing to invest in risky securities C) away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the two D) away from; demand for the stronger currency forces up interest rates on the weaker security
A) toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two
One fee investment bankers earn is based on the ________ that is the difference between what the banker's corporate client receives from the issue of securities and what the public pays. A) underwriting discount B) bid-ask spread C) free cash flows D) net present value of the client firm
A) underwriting discount
In the forward market the bid-ask spreads begin to ________ as the maturity date of the contract grows closer. A) widen B) narrow C) stabilize D) disappear
A) widen
If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________. A) £0.699/$; £0.699/$ B) $0.699/£; £0.699/$ C) £1.43/£; £0.699/$ D) £0.699/$; $1.43/£
A) £0.699/$; £0.699/$
The CFO at SmithKlone Company receives a lump sum payment from a foreign vendor of 2,000 euros and intends to convert them to US$. When she calls her currency broker, the quote given is €.6250-.6667/US$. What can she expect to realize in US$ from the broker? A) $3,200 B) $3,000 C) $1,250 D) $1,334
B) $3,000
On December 3,2001, spot Japanese yen were sold at $0.008058. Suppose the 180-day forward Japanese yen was selling at a 1.91% annualized premium, what is the 180-day forward rate of the yen? A) 0.008245 B) 0.008135 C) 0.008457 D) 0.008550
B) 0.008135
The ________ quote refers to the dollar price of a foreign currency. A) European B) American C) Bid D) Ask
B) American
________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency. A) Dealers; ask; bid B) Dealers; bid; ask C) Brokers; ask; bid D) Brokers; bid; ask
B) Dealers; bid; ask
When a firm issues shares in multiple foreign markets, sometimes simultaneously with distribution in the domestic market, the issue is part of the A) external equity market. B) Euro-equity market. C) depositary receipt market. D) emerging market.
B) Euro-equity market.
Which one of the following is not a characteristic of a liquid market? A) Market makers stand ready to buy and sell currencies. B) Foreign exchange dealers make transactions only with dealers. C) It becomes easy to match buyers and sellers. D) Transaction costs are low.
B) Foreign exchange dealers make transactions only with dealers.
) ________ techniques are typically based on formal economic models of exchange rate determination. A) Technical analysis B) Fundamental analysis C) Exchange rate forecasting D) Mean absolute error
B) Fundamental analysis
) ________, unlike ADRs, can trade across many markets and settle in the currency of each market. A) Global registered shares B) Global depository receipts C) Euro equities D) Cross-listed stock
B) Global depository receipts
________ trading systems, often found in foreign exchange markets, are good examples of markets in which market makers stand prepared to buy at their bid prices and sell at the ask or offer prices. A) Order-driven B) Price-driven C) Cross-listed D) Cross-holding
B) Price-driven
Which one of the following is an investment from which the payoff over time is derived from the performance of an underlying asset? A) a common stock certificate B) a derivative security C) a corporate bond D) a mortgage bond
B) a derivative security
It is characteristic of foreign exchange dealers to A) bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale. B) act as market makers, willing to buy and sell the currencies in which they specialize. C) trade only with clients in the retail market and never operate in the wholesale market for foreign exchange. D) All of the above are characteristics of foreign exchange dealers.
B) act as market makers, willing to buy and sell the currencies in which they specialize.
What economic field of study explores the problems associated with a firm that arise from a separation of ownership and control and devises ways to resolve them? A) futures and options B) agency theory C) foreign direct investment D) franchising
B) agency theory
The hedging strategy that offsets foreign assets with foreign liabilities is known as ________ hedge. A) an income-statement B) balance-sheet C) decentralized debt D) decentralized equity
B) balance-sheet
Which of the following does NOT add cash flows to the parent's free cash flows? A) royalties B) cannibalization of exports C) overhead management fees D) licensing agreements
B) cannibalization of exports
) 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) central banks; treasuries B) dealers; brokers C) brokers; dealers D) speculators; arbitragers
B) dealers; brokers
Which of the following represent liabilities to a bank? A) deposits it accepts from its customers and securities it buys B) deposits it accepts from its customers, the borrowing it does in security markets and its equity capital C) the borrowing it does in security markets and the loans it provides D) loans to customers
B) deposits it accepts from its customers, the borrowing it does in security markets and its equity capital
When an exchange rate is quoted by a dealer in country as the local currency price of one unit of foreign currency, he is quoting the ________. A) indirect quote B) direct quote C) bid quote D) ask quote
B) direct quote
12) The phenomenon of foreign currency driving out local currencies as a means of payment and a savings vehicle is known as ________. A) seigniorage B) dollarization C) sterilization D) devaluation
B) dollarization
) Which type of bond is issued and traded within the internal market of a single country and denominated in the currency of that country? A) dragon bond B) domestic bond C) Eurobond D) foreign bond
B) domestic bond
What is the name given to the straight fixed-rate bond issued in one currency which pays coupon interest in that same currency, but the promised repayment of principal at maturity is denominated in another currency? A) international bond B) dual-currency bond C) equity-related bond D) foreign bond
B) dual-currency bond
The stock markets of developing countries are often referred to as ________, and the young stock markets of the least developed countries are called ________. A) external equity markets, frontier markets B) emerging markets, frontier markets C) external equity markets, emerging markets D) emerging markets, undeveloped markets
B) emerging markets, frontier markets
The Fisher Effect decomposes nominal interest rates into the ________ and the expected rate of inflation. A) expected real exchange rate B) expected real interest rate C) expected forward rate of return D) nominal exchange rate
B) expected real interest rate
When a country unexpectedly opens its capital markets to the world economy, the real interest rate in the country should ________ dramatically. A) rise B) fall C) segment D) stabilize
B) fall
What is the name of the exchange rate system where the governments attempt to make sure the values of their currencies trade at particular values in the foreign exchange market, relative to another currency or a "basket" of currencies? A) European currency unit B) fixed currencies C) floating currencies D) dirty float currency
B) fixed currencies
determined by the market forces of supply and demand is known as a A) currency board. B) floating exchange rate. C) target zone. D) pegged exchange rate system
B) floating exchange rate.
What is the name of the exchange rate specified in the forward contract? A) spot rate B) forward rate C) future exchange rate D) cross-rate
B) forward rate
What currency forecasting technique links exchange rates to macroeconomic variables such as money supply and inflation? A) technical analysis B) fundamental analysis C) exchange rate forecasting D) mean absolute error
B) fundamental analysis
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? A) market-based forecasts B) fundamental analysis C) technical analysis D) statistical analysis
B) fundamental analysis
What is the name of the action that uses derivative securities to reduce risks arising from underlying business transactions in financial markets? A) forward contracts B) hedging C) forward rates D) speculating
B) hedging
) What is the most likely outcome if a central bank suddenly prints a large amount of new money? A) no change in the inflation rate B) higher inflation C) recession D) prosperity
B) higher inflation
If projects are mutually exclusive, the project with the ________ should be accepted by the firm. A) lowest ANPV B) highest ANPV C) highest return D) lowest tax burden
B) highest ANPV
When a central bank buys foreign currency, its international reserves ________. A) decrease B) increase C) remain unchanged D) are difficult to determine
B) increase
What is the term used to refer to the ability of the firm to deduct interest payments to reduce its tax liability? A) tax credits B) interest tax shield C) interest loophole D) tax forgiveness
B) interest tax shield
The main resources of the International Monetary Fund are provided by A) the members of the World Bank. B) its member countries primarily through payments of quotas. C) members of the Organization for Economic Cooperation and Development. D) the Bank for International Settlements.
B) its member countries primarily through payments of quotas.
The difference between the ask rate and the bid rate is known as the A) arbitrage profit. B) dealer's profit. C) spread. D) bid-ask spread
D) bid-ask spread
Which one of the following is NOT an external source of corporate funding? A) bank loan B) retained earnings C) debt security D) equity
B) retained earnings
What is the name of the unit of account created by the IMF which is sometimes used to denominate contracts? A) European currency unit B) special drawing right C) floating currencies D) basket of currencies
B) special drawing right
) Which one of the following is NOT a financial side effect to account for when developing the adjusted net present value of a project? A) subsidized financing from governments B) the Federal Reserve Chair announces an interest rate increase C) the cost of issuing securities D) the costs of financial distress
B) the Federal Reserve Chair announces an interest rate increase
What is the largest financial market in the world measured in dollar-volume trade? A) the U.S. stock markets B) the currency markets C) the forward and swap currency markets D) the global market for loanable funds
B) the currency markets
All of the following are true about an American Depository Receipt EXCEPT: A) the depositary bank converts all dividends and other payments into U.S. dollars. B) there are no custodial fees. C) shares are held in custody by a U.S. depository bank. D) it represents a specific number of shares in the home market.
B) there are no custodial fees.
When transactions are conducted on the spot currency markets, ________ business day(s) is(are) allowed for contract settlement. A) one B) two C) five D) ten
B) two
If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is A) correctly priced. B) under priced. C) over priced. D) There is not enough information to determine if the price is appropriate or not.
B) under priced.
) If according to the law of one price if the current exchange rate of dollars per British pound is $1.75/£, then at an exchange rate of $1.85/£, the dollar is A) overvalued. B) undervalued. C) correctly valued. D) unknown relative valuation.
B) undervalued.
The implied PPP rate of exchange of Mexican pesos per U.S. dollar is 8.58 according to the Big Mac Index. The current exchange rate is Peso 10.8/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is A) overvalued. B) undervalued. C) correctly valued. D) There is not enough information to answer this question
B) undervalued.
Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $44,600 which is the UK price multiplied by the current exchange rate of $1.63/£. Jaguar has committed to keeping the US price at $44,600 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $1.75/£, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate? A) £22,803 B) £25,486 C) £27,363 D) £44,600
B) £25,486
) Given the following exchange rates, which of the following choices represents a potentially profitable intermarket arbitrage opportunity? ¥129.87/$ euro 1.1226/$ euro 0.00864/¥ A) ¥115.69/euro B) ¥114.96/euro C) $0.8908/euro D) $0.0077/¥
B) ¥114.96/euro
The broker at Deutsche Bank quotes bid-ask rates of ¥104.15-30/$. What would be its direct asking price for yen if the bank's €/$ ask rate is .6550? A) €.0061/¥ B) €.00628/¥ C) €159.24/¥ D) €164.25/¥
B) €.00628/¥
One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately A) $0.96/C$. B) $1/C$1. C) $1.04/C$1. D) Relative PPP provides no guide for this type of question.
C) $1.04/C$1.
One-year interest rates are currently 2.50% in the United States and 3.70% in Great Britain. The current spot rate between the pound and dollar is $1.9000/£. What is the expected spot rate in one year if uncovered interest rate parity holds? A) $1.9000/£ B) $1.9222/£ C) $1.8780/£ D) $1.8500/£
C) $1.8780/£
) Suppose the spot rate and forward rate for the British pound are $1.4248 and $1.4179 respectively. Assume the forward pound is selling at a 1.94% annualized discount, what is the number of days of the forward contract? A) 180 days B) 120 days C) 90 days D) 60 days
C) 90 days
The legal and financial structure controlling the relationship between a company's shareholders and its management is called the A) Agency Theory. B) Stakeholder Alternative. C) Corporate Governance. D) Concentrated Ownership.
C) Corporate
Which type of bond is denominated in one or more currencies but is traded in external markets outside the borders of the countries issuing the currencies? A) international bond B) domestic bond C) Eurobond D) foreign bond
C) Eurobond
What is the name of the risk that a financial institution may not deliver the currency on one side of a completed currency transaction? A) dealer risk B) market risk C) Herstatt risk D) exchange rate risk
C) Herstatt risk
Why would technical analysis to forecast future exchange rates be ineffective if all parity conditions prevailed? A) The best predictor of future rates would be the current spot rates. B) The only predictor would be the volatility of future exchange rates. C) The best predictor of future rates would be the forward rate. D) The unbiased predictor would not exist due to market trends.
C) The best predictor of future rates would be the forward rate.
If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true? A) The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now. B) The distribution of possible actual spot rates in the future is centered on the forward rate. C) The future spot rate will actually be equal to what the forward rate predicts. D) All of the above are true.
C) The future spot rate will actually be equal to what the forward rate predicts.
What currency currently serves as the world's primary vehicle currency? A) Japanese yen B) British pound C) U.S. Dollar D) European euro
C) U.S. Dollar
The Sharpe ratio is measured as the ________ return relative to the ________ of the return. A) risk, trade-off B) variability, loss C) average excess, volatility D) risk, average excess
C) average excess, volatility
3) What is the name for the composite currency that consists of various units of other currencies? A) pegged currency B) seignorage C) basket of currency D) special drawing rights
C) basket of currency
The first step in deriving an ANPV for a project is to A) add the net present value of financial side effects. B) add the present value of any growth options. C) calculate the net present value of the project's cash flows. D) determine the terminal value of the project.
C) calculate the net present value of the project's cash flows.
A Macedonian homeowner deciding for a Euro-denominated, lower rate mortgage is A) effectively initiating long term covered interest arbitrage. B) should start seeking US dollar salary to mitigate the risk of falling behind the payment schedule. C) creating debt service FX exposure for the whole life of the loan. D) remaining "uncovered" unless she has sub-lease contract denominated in Macedonian Denar
C) creating debt service FX exposure for the whole life of the loan.
If you were trading currency in the New York currency market, the exchange rate between two currencies not expressed in U.S. dollars would be known as the ________ quote. A) direct B) indirect C) cross-rate D) European
C) cross-rate
When countries have pegged exchange rate systems, they often set up ________ to improve the credibility of the system in the eyes of the global traders. A) target zone systems B) futures markets for currencies C) currency board systems D) sterilized interventions
C) currency board systems
Official international reserves consist of three major components EXCEPT: A) gold reserves. B) foreign exchange reserves. C) deposits of private financial institutions. D) IMF-related reserves assets
C) deposits of private financial institutions.
A firm is in ________ if it is having difficulty meeting its commitments to its creditors such as the bondholders. A) bankruptcy B) default C) financial distress D) receivership
C) financial distress
What is the 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? A) European currency unit B) fixed currencies C) floating currencies D) dirty float currency
C) floating currencies
A balance-sheet hedging strategy would offset ________ with ________. A) depreciating currencies, appreciating currencies B) foreign revenues, foreign expenses C) foreign assets, foreign liabilities D) floating exchange rates systems, fixed exchange rate systems
C) foreign assets, foreign liabilities
Cross-listing of stocks and demutualization have led to the ________ of stock exchanges. A) externalization B) securitization C) globalization D) order-driven trading systems
C) globalization
Turnover is inversely related to the costs of trading stocks because A) high trading costs cause investors to trade more. B) low trading costs cause investors not to trade. C) high trading costs cause investors to trade less. D) low trading costs cause investors not to trade more.
C) high trading costs cause investors to trade less.
When does delivery occur on a 90-day forward contract? A) in 90 days corresponding to two business days preceding the third Wednesday of the month B) immediately but the contract is not closed for 90 more days C) in 90 days corresponding to the calendar date of the spot value date D) two business days following the spot value date
C) in 90 days corresponding to the calendar date of the spot value date
When discounting cash flows, it is important that only the ________, after-tax cash flows be used. A) monthly B) annual C) incremental D) total
C) incremental
The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs. A) international Fisher Effect B) absolute PPP C) interest rate parity D) the law of one price
C) interest rate parity
For the most part, stocks are ________ ________, so you ________ diversify away all of a portfolio's variance. Because the average covariance is ________, even a large portfolio of international stock will have a ________ variance. A) negatively related, can, negative, negative B) negatively related, cannot, positive, negative C) positively correlated, cannot, positive, positive D) positively correlated, can, negative, positive
C) positively correlated, cannot, positive, positive
) If a country has a capital account ________, it is ________ net foreign assets. A) surplus, acquiring B) deficit, selling C) surplus, selling D) surplus, in equilibrium as far as its
C) surplus, selling
In the ________ exchange rate system, the currency has limited flexibility and the rate is kept within a fixed band. A) currency board B) floating exchange rate C) target zone D) pegged exchange rate system
C) 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? A) market-based forecasts B) fundamental analysis C) technical analysis D) statistical analysis
C) technical analysis
If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product's price should be the same in both markets. This is known as A) relative purchasing power parity. B) interest rate parity. C) the law of one price. D) equilibrium.
C) the law of one price.
The evidence of the phenomenon of home bias seems to be ________. A) true for most developing countries B) true for most developed countries C) true for most countries in the world D) untrue for the developed countries
C) true for most countries in the world
A swap transaction in the forward market involves the simultaneous sale and purchase of a certain amount of foreign currency for ________. A) one specific date in the future B) many different dates in the future C) two different dates in the future D) speculation under the correct conditions
C) two different dates in the future
From the viewpoint of a British investor, which of the following would be a direct quote in the foreign exchange market? A) SF2.40/£ B) $1.50/£ C) £0.55/euro D) $0.90/euro
C) £0.55/euro
Other things equal, and assuming efficient markets, if a Honda Accord costs $21,375 in the U.S. then at an exchange rate of $1.63/£, the Honda Accord should cost ________ in Great Britain. A) £21,375 B) £18,365 C) £13,113 D) £42,322
C) £13,113
Assume the current U.S. dollar-British spot rate is 0.6134£/$. If the current nominal one-year interest rate in the U.S. is 2.5% and the comparable rate in Britain is 3.5%, what is the approximate forward exchange rate for 360 days? A) 1.42£/$ B) 0.6075£/$ C) 0.6134£/$ D) 0.6194£/$
D) 0.6194£/$
The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $3.73 in the United States and 320 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index? A) $0.015/¥ B) 87.2¥/$ C) $0.00012/¥ D) 85.79¥/$
D) 85.79¥/$
If you were asked to forecast the future spot rate of a currency, how much of the probability distribution of the rate is between plus or minus 2 standard deviations? A) 12.55% B) 24.55% C) 62.87% D) 95.44%
D) 95.44%
17) What is the negative side effect on the money supply of a non-sterilized foreign exchange intervention? A) A higher money supply eventually leads to lower inflation, and the foreign exchange objective of the central bank's policy may conflict with its abroad goal of price stability. B) A higher money supply eventually leads to higher inflation, and the foreign exchange objective of the IMF's policy may conflict with its domestic goal of price stability. C) A higher money supply eventually leads to lower inflation, and the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability. D) A higher money supply eventually leads to higher inflation, and the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability.
D) A higher money supply eventually leads to higher inflation, and the foreign exchange objective of the central bank's policy may conflict with its domestic goal of price stability.
Which of the following is NOT an assumption of market efficiency? A) Instruments denominated in other currencies are perfect substitutes for one another. B) Transaction costs are low or nonexistent. C) All relevant information is quickly reflected in both spot and forward exchange markets. D) All of the above are true.
D) All of the above are true.
Which of the following may be participants in the foreign exchange markets? A) bank and nonbank foreign exchange dealers B) central banks and treasuries C) speculators and arbitragers D) All of the above.
D) All of the above.
What is the name of the international organization that fosters monetary and financial cooperation and serves as a bank for central banks? A) WTO B) EU C) World Bank D) Bank for International Settlements
D) Bank for International
3) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this is known as ________ whereas ________ are expressed as dollars per foreign unit. A) European terms; indirect B) American terms; direct C) American terms; European terms D) European terms; American terms
D) European terms; American terms
What are the costs of cross-listing? A) It exploits growth opportunities with additional foreign capital. B) It reduces the cost of capital. C) It increases the stock price. D) It costs money paid in exchange fees and it may impose a high level of examination on the company's managers.
D) It costs money paid in exchange fees and it may impose a high level of examination on the company's managers.
________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate. A) The Fisher Effect B) The International Fisher Effect C) Absolute Purchasing Power Parity D) Relative Purchasing Power Parity
D) Relative Purchasing Power Parity
Which one of the following is NOT a trading cost? A) payment of brokerage commissions and other fees B) The investor must buy from the trader at the trader's high sell price and must sell to the trader at the trader's low bid price. C) When the market is not very liquid, and an investor's trade is a relatively large one, it can adversely affect the price the investor gets. D) The price on the trade falls when the investor buys or rises when the investor sells.
D) The price on the trade falls when the investor buys or rises when the investor sells.
Which of the following options is NOT a correct reason to discuss technical analysis? A) Forex dealers make extensive use of technical analysis. B) The forward rate may not be an unbiased predictor of the future spot rate, even in an efficient market. C) If a sufficiently large segment of the trading world is using technical analysis, demands and supplies to trade currencies will be buffeted by these traders even if they are irrational. D) The variables on the fundamental analysis as well as the macroeconomic inputs are all available at frequent intervals.
D) The variables on the fundamental analysis as well as the macroeconomic inputs are all available at frequent intervals.
With covered interest arbitrage, A) the market must be out of equilibrium. B) a "riskless" arbitrage opportunity exists. C) the arbitrageur trades in both the spot and future currency exchange markets. D) all of the above
D) all of the above
What is the name of the rate currency traders quote in the interbank market to sell foreign currencies? A) bid-ask spread B) bid rate C) cross rate D) ask rate
D) ask rate
) What is the name of the important phenomenon that has led to globalization of exchanges around the world over the past two decades? A) cross-holding B) cross-market C) securitization D) cross-listing
D) cross-listing
A higher nominal interest rate in one country indicates the fact that the country's currency was expected to ________. A) appreciate B) evaluate C) devalue D) depreciate
D) depreciate
Most investors' portfolios in different countries have a strong home bias which means they hold a ________ share of domestic assets compared to the ________ market portfolio. A) proportionately medium, international B) disproportionately small, world C) proportionately large, international D) disproportionately large, world
D) disproportionately large, world
According to the theory of interest rate parity, the difference in national interest rates for securities of similar risk and maturity should be ________ and ________ sign to the forward rate discount or premium for the foreign currency, except for transaction costs. A) equal to; of the same B) less than; of the same C) greater than; opposite in D) equal to; opposite in
D) equal to; opposite in
When a firm's management chooses not to pay out dividends from its free cash flow, it develops ________ that may lead to high agency costs. A) negative net present value B) additional depreciation C) no more growth options D) financial slack
D) financial slack
Which type of bond is issued in a domestic market by a borrower overseas, denominated in the domestic currency, marketed to domestic residents, and regulated by the domestic authorities? A) international bond B) domestic bond C) Eurobond D) foreign bond
D) foreign bond
In a forward contract no monies change hands until the maturity date of the contract known as the ________, A) spot value date B) exercise date C) forward contract date D) forward settlement date
D) forward settlement date
) When a firm undertakes a project and obtains an option to do another project in the future, it is often referred to as a ________. A) put B) call C) hedge D) growth option Answer: D
D) growth option Answer: D
If expected real interest rates are similar across countries, countries with ________ expected inflation rates will have ________ nominal interest rates, and countries with ________ expected inflation rates will have ________ nominal interest rates. A) high, high, high, low B) high, low, high, low C) low, high, low, high D) high, high, low, low
D) high, high, low, low
A/an ________ quote in the United States would be foreign units per dollar, while a/an ________ quote would be in dollars per foreign currency unit. A) direct; direct B) direct; indirect C) indirect; indirect D) indirect; direct
D) indirect; direct
What do the market makers in the currency markets provide? A) insurance against default by the buyers B) solvency C) stability D) liquidity
D) liquidity
What is the name of the effect related to market liquidity that occurs when a market lacks liquidity and an investor's trade is relatively large and results in an adverse effect on the price the investor gets? A) turnover B) blocked funds C) demutualization D) market impact
D) market impact
What is the name of the account in which many central banks require their banks to hold a percentage of the deposits as reserves at the central bank? A) retained earnings B) excess reserves C) margin account D) required reserves
D) required reserves
GDRs are like ADRs, but they can trade across many markets and A) they are always associated with existing companies seeking to increase their shareholder base. B) they are not associated with companies wanting to tap the equity market for the first time. C) are primarily interested on raising additional capital. D) settle in the currency of each market.
D) settle in the currency of each market.
What is the name given to the variance that cannot be diversified away? A) nonsystematic covariance B) market covariance C) nonsystematic variance D) systematic variance
D) systematic variance
Whereas other forecasters use macroeconomic data to forecast future exchange rates, ________ techniques focus entirely on historical financial data. A) equilibrium condition B) parity condition C) rational expectations D) technical analysis
D) technical analysis
Which one of the following would be an example of a growth option to add when developing the adjusted net present value of a project? A) the expansion of the nation's money supply B) the cost of issuing securities C) the cost of financial distress D) the award of another project by a satisfied customer from the current project.
D) the award of another project by a satisfied customer from the current project.
What is the term for the conditional mean of the probability distribution of future spot rates? A) the expected swap rate B) the future exchange rate C) the outright rate D) the expected future spot rate
D) the expected future spot rate
) According to the Big Mac Index, the implied PPP exchange rate is Mexican Peso 8.58/$1 but the actual exchange rate is Peso 11.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________. A) overvalued; approximately 21% B) overvalued; approximately 27% C) undervalued; approximately 21% D) undervalued; approximately 27%
D) undervalued; approximately 27%
) ________ is the amount of inventory and cash that the firm must have on hand to run its business. A) Capital expenditure B) Free cash flow C) Net working capital D) Incremental cash flow
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