4324
The inflation rates in the U.S. and France in January 1991 were expected to be 4% per annum and 7% per annum, respectively. If the current spot rate that day was $.1050, then the expected spot rate in three years was -.0964 -.1112 .1150 .0992
-.0964
If the expected inflation rate is 5% and the real required return is 6%, then the Fisher effect says that the nominal interest rate should be -6% -11.3% -11% -1%
-11.3%
Suppose it is January 1990 and the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the intrinsic value of one DM 62,500 call option? 768.75 -2331.25 -1562.50 -950
-1562.50
Suppose the price indexes in Mexico and the U.S., which both began the year at 100, are at 160 and 103, respectively, by the end of the year. If the exchange rate began the year at Mex$4.5 = $1 and ended the year at Mex$5.9 = $1, then the change in the real value of the peso during the year is (a "" indicates a real devaluation) -0% - -8.2% -5% -18.5%
-18.5%
How much, in dollars, is traded daily in foreign exchanges? -3.2 Trillion 2.3 Billion 2.3 Trillion 3.2 Billion
-3.2 Trillion
?Suppose Apple is selling Macintosh computers in 1996 in Germany for DM 5,500 when the exchange rate is DM 1 = $0.68. If the DM rises to $0.71, what price must Apple charge to maintain its dollar unit revenue? -5743 -5268 -6361 -5147
-5268
Suppose the current spot rate for the Australian dollar is U.S.$0.8321. The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is -0 -630 -740 -2340
-630
. Suppose it is May 1998 and the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the time value of one DM 62,500 call option? -768.75
-768.75
*___________ is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit form a price discrepancy. -Internationalization -Financing -Total Risk -Arbitrage
-Arbitrage
*The multinational financial system does NOT enable companies to -avoid currency controls -Avoid exchange rate risks -access lower cost financing sources -reduce taxes
-Avoid exchange rate risks
*When the U.S. dollar becomes weaker, U.S. exports become more ____ in foreign markets. -Competetive -Credit Worth -Costly -Productive
-Competetive
?Governments intervene in the foreign exchange markets for all of the following EXCEPT to -Earn foreign exchange -Reduce economic uncertainty _Improve the nations export to competitiveness -Reduce inflation
-Earn foreign exchange
*The most likely explanation for the rise of the U.S. dollar during the early 1980s is that the U.S. --Budget deficit lowered US interest rates -Trade deficit accelerated US inflation -Budget degicit raised US interest rates -Economy slowed dramatically
-Economy slowed dramatically
*Companies gradually increase their commitment to international business with strategies that are progressively more sophisticated. Which one of the following steps is NOT one of the steps? -Setting up a sales subsidiary -Exporting -Creating a legal entity in the new target country -Setting up a distribution system
-Setting up a sales subsidiary
*The European Monetary system is best described as a -Clean float -Target Zone Arrangement -Dirty Float Managed Float
-Target Zone Arrangement
*What is the name of the theory that states exchange adjusted prices on identical tradable goods and financial assets must be within transactions costs of equality globally? The law A. One Price B. Arbitrage C. Parity D. Capital Market Segmentation
A. One Price
?The asset market view of exchange rate determination does NOT stat that the spot rate
A. Should follow a random walk
*During the 1994 peso problem, Mexico made a fundamental error by not allowing the _______ of the peso to fall A. Supply B. Demand C. Real exchange rate D. Devaluation
A. Supply
?The foreign currency price of foreign goods in terms of the local currency price of domestic goods is called A. The real exchange rate B. The balance of Trade C. The trade weighted exchange rate D. Purchasing parity
A. The real exchange rate
*What is another name for gifts and grants overseas? A. Unilateral Transfers B. Basic Balance C. Reserve Assets D. Direct Investments
A. Unilateral Transfers
*If a country's freely floating currency is undervalued in terms of purchasing power parity, its capital account is likely to be A. in defecit or trending toward a defecit B. in surplus or trending toward a surplus C subsidized by the IMF D. A candidate for loans from the World Bank
A. in defecit or trending toward a defecit
*The spot rate on the euro is $1.33 and the 180day forward rate is $1.34. The difference between the two rates means A. interest rates are higher in the U.S. than in Germany B. The euro has risen in relation to the dollar C. The inflation rate in Germany is declining D. The euro is expected to fall in value relative to the dollar
A. interest rates are higher in the U.S. than in Germany
*American terms refers to the A. number of U.S. dollars per unit of foreign currency B. Number of foreign currency units per U.S. dollar C. Quotation system found in the United States D. Bid-ask spread on the U.S. dollar
A. number of U.S. dollars per unit of foreign currency
*Which of the following would accompany a weak U.S. dollar? American importers reduce their dollar costs American exporters improve their profit margins American exporters raise their foreign currency prices American exporters lose market share abroad
American exporters improve their profit margin
*A 150% real return in Brazil is higher than a 15% dollar return in the U.S. -Because Arbitrage opportunities exist -When the inflation controls are suspended in Brazil -Assuming both rates are real returns -Regardless of nominal or real returns.
Assuming both rates are real returns
*What is the name of the policy aimed to lessen the need to monetize a government's budget deficit by reducing the expenditures often with the unintended outcome of increased unemployment? -Managed float Fixed rate system Target zone arrangement Austerity
Austerity
On January 1, 1994, the annual infaltion rates in the U.S. and Italy were expected to be 4% and 7% respectively. If the current spot rate on that day was $1=L2,000, then the expected spot rate for the lira in three years was A. $0.0005471 B. .0004591 C .0011590 D .0009892
B. .0004591
Suppose it is 1995 and the following direct quotes are received for spot and one month French Francs in New York: .1160-680406. Then the outright 30 day forward quote for the French Franc was A. .1156-62 B. .1164-74 C. .1166-72 D .1154-64
B. .1164-74
On January 1, 1988 was projected at 5% annually for the next 5 years and at 12% annually in Italy for the same time period, and the lira/$ spot rate that day was currently at L2400=$1, then the PPP estimate of the spot rate five years from now was A. 1738 B. 3314 C. 2560 D. 2250
B. 3314
8. Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real? A. 40% B. 67% C. 28% D. 32%
B. 67%
?In a freely-floating exchange rate, system the sale of Japanese cars to the United States will be offset by which item on the US balance of payments? A. A credit on the net liquidity balance B. A debit on the capital account C. A debit on the trade account D. A credit to the current account
B. A debit on the capital account
*Tourism sows up on the ____________ account A. Merchandise B. Current C. Capital D. Official Reserves
B. Current
*When the home currency price of a certain fixed quantity of the foreign currency is quoted, it is preferred to as the A. Indirect quotation B. Direct quotation C. European quotation D. American quotation
B. Direct quotation
*The risk that a central bank will not make the necessary transfer of foreign currency to complete a currency settlement is known as _________ risk. A. Exchange Rate B. Herstatt C. Interest-Rate D. Settlement
B. Herstatt
*If a real value of a nation's freely floating currency increases, and the nation's current account is initially zero, its capital account will most likely be A. In deficit B. In surplus C. Adjusted for the rate of inflation D. Decreased by the amount of increase in the current account
B. In surplus
*In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar? A. It will decline B. It will rise C. There is no impact on the dollar D. The IMF will step in to adjust rising exchange rates.
B. It will rise
The spot and 30 day forward rates for the Dutch euro are $1.4757 and $1.48, respectively. The guilder is said to be selling at a forward A. premium of 1.2% B. Premium of 3.5% C. Discount 3.5% D. Discount 1.2
B. Premium of 3.5%
?Which one of the following parity theories states that, in its absolute version, price levels globally should be equal when expressed in a common currency? A. The unbiased forward Rate B. Purchasing Power Parity C. International Fisher Effect D. International Fisher
B. Purchasing Power Parity
An american company that imports leather goods from England is most likely to be A. Long pounds B. Short pounds C. Long and short pounds D Can't tell
B. Short pounds
*The current standard for measuring translation exposure is the current/noncurrent method FASB 52 FASB 8 the monetary/nonmonetary method
FASB 52
*The economic benefits associated with swaps may derive from all of the following EXCEPT appeal or acceptability of one borrower to a certain class of investor in nations with fixed or pegged exchange rates different perceptions by investors of risk and creditworthiness of the two parties to the swap legal restrictions on spot and forward foreign exchange transactions
In nations with fixed or pegged exchange rates
*Although the mechanics of central bank interventions in the global currency markets may vary from country to country, the goal is always the same, to ________ the demand for one currency by ______ the supply of another
Increasing, increasing
?The spot rate on the euro is $1.33 and the 180day forward rate is $1.34. The difference between the two rates means -The Euro has risen in relation to the dollar -The inflation rate in Germany is declining -Interest rates are higher in the U.S. than in Germany -The Euro is expected to fall in value relative to the dollar
Interest rates are higher in the U.S. than in Germany
*Suppose that on January 1, 1987, the spot rate on the dutch guilder was .39 and the 180 day forwatd was .40. The difference between the spot rate and forward rates suggested that A. interest rates were higher in the U.S. than the Netherlands B. The guilder had risen in relation to the dollar C.The inflation rate in the Netherlands was declining D. The guilder was expected to fall in value relative to the dollar.
Interest rates were higher in the U.S. than the Netherlands
*A rise in the inflation rate in one nation relative to others will be associated with a fall in the first nation's exchange rate and with a rise of its interest rate relative to foreign interest rates. The two conditions combined result in the _________ Effect. -Fisher -International Fisher -Unbiased Forward Rate -Herstatt
International Fisher
Which of the following has provided a major inducement for speculators to participate in the futures market? * High volume compared to the forward market Low margin requirements Low bid-ask spreads All of the above
Low margin requirements
*The ___________ are the archetype of the modern multinational firm that goes overseas to produce and sell in foreign markets. -Market seekers -Whaling Companies -Cost minimizers -raw material seekers
Market seekers
*In the currency futures market, what is the term that describes the number of contracts in a currency outstanding at any one time? Closed Interest In-The-Money Long Position Open Interest
Open Interest
*When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize the impact of their foreign exchange market interventions, it is referred to as a(n. ________ operation. -Floating Currency Spot Rate Revaluation Open Market
Open Market
Suppose McDonald's charges Ptas. 25 for a burger in Madrid. Its costs are Ptas. 18 per burger and these costs are not expected to change with the exchange rate. If the peseta devalues from $0.107 to $0.096, what price will McDonald's have to charge for its burgers to maintain its dollar profit margin? - Ptas. 27.86 -Ptas. 22.43 -Ptas. 25.8 Ptas. 24
Ptas. 25.8
*In a __________ swap, two parties exchange floating interest payments based on different reference rates. forward rate basis notional coupon
basis
*The exchange of debt-service obligations denominated in one currency for the service on an agreed-upon principal amount of debt denominated in another currency is known as a currency swap a floating-rate bond a fixed-rate bond an interest rate swap
a currency swap
Suppose that the interbank forward bid for March 20 on Swiss francs is $0.7827 at the same time that the price of IMM Swiss franc futures for delivery on March 20 is $0.7795. How much of an arbitrage profit could a dealer earn per March Swiss franc futures contract of SFr 125,000? a) $400 b) $68 c) $21 D) $58
a) $400
*Swaps provide a real economic benefit to the counterparties only if a barrier exists to prevent ______ from functioning fully. hedging arbitrage forfeiting factoring
arbitrage
*Which one of the following is credited with an important role on the Chicago Mercantile Exchange because, in the process of realizing profit opportunities, they keep futures rates in line with bank forward rates? arbitrageurs speculators hedgers currency traders
arbitrageurs
Dell Computer has a £1 million receivable that it expects to collect in one year. Suppose the interest rate on pounds is 15%. How could Dell protect this receivable using a money market hedge? lend £986,754 pounds today borrow £869,565 pounds today lend £1 million pounds today borrow £1 million pounds today
borrow £869,565 pounds today
*The type of exposure that arises from the need, for purposes of reporting and consolidating, to convert the financial statements of foreign operations from the local currencies involved to the home currency is known as translation exposure accounting exposure transaction exposure both a and b
both a and b
*10. On March 1, 1998, Bechtel submits a francdenominated bid on a project in France. Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract ? Sell the franc amount of the bid forward for U.S. dollars buy French francs forwarding the amount of the contract sell a call option on francs in the amount of the franc exposure buy a put option on francs in the amount of the franc exposure
buy a put option on francs in the amount of the franc exposure
?If a foreigner purchases a U.S. government security a) the supply of dollars rises b) the federal government deficit declines c) the demand for dollars rises d) the U.S. money supply rises e)none of the above
c) the demand for dollars rises
*The ability to take advantage of the portfolio effect through exposure netting to manage foreign risk assumes the firm will use segmentation of its hedging activities to the firm's foreign subsidiaries centralization of its hedging activities decentralization of its hedging activities foreign banks and the purchase of forward contracts
centralization of its hedging activities
?Companies gradually increase their commitment to international business with strategies that are progressively more sophisticated. Which one of the following steps is NOT one of the steps? -exporting -creating a legal entity in the new target country -setting up a sales subsidiary -setting up a distribution system
creating a legal entity in the new target country
*Under FASB 52, most financial statements must be translated using the current/noncurrent method monetary/nonmonetary method temporal method current rate method
current rate method
?While the strategic marketing and production adjustments occur over the long run, financial management may finance the firm's operations such that shortfalls in cash flows during the adjustments are offset by a reduction in __________ expenses.
debt-servicing
*A weak dollar will cost American exporters market share abroad enable American importers to reduce their dollar costs enable American exporters to improve their profit margins force American exporters to raise their foreign currency prices
enable American exporters to improve their profit margins
*Critics of the multinational corporation would NOT fault its tendency to shift production from one location to another in search of lower costs avoid taxes cause balance of payments difficulties engage in environmental protection measures
engage in environmental protection measures
*A _________ future is a cash-settled futures contract for a three-month $1,000,000 eurodollar deposit that pays LIBOR. forward forward rate agreement currency swap eurodollar
eurodollar
*Hedging cannot provide protection against ________ exchange rate changes. nominal expected real pegged
expected
*One argument that favors centralization of foreign risk management is the ability to take advantage of the portfolio effect through ________. risk sharing exposure netting offshore banking risk shifting
exposure netting
*Translation exposure reflects the exposure of a company's foreign sales to currency movements financial statements to currency movements foreign operations to currency movements cash flows to currency movements
financial statements to currency movements
*A(n) __________ is a contract that fixes an interest rate today on a future loan or deposit step-down ste-up inverse floater forward forward
forward forward
?(n) ________ is a cash-settled, over-the-counter forward contract that allows a company to fix an interest rate to be applied to a specified future interest period on a notional principal amount. dual currency bond interest rate currency swap exchange of principal forward rate agreement
forward rate agreement
*The _______ the price elasticity of demand, the _____ the incentive to hold down price and thereby expand sales. lower, greater greater, lower lower, lower greater, greater
greater, greater
*A company producing an undifferentiated product and competing with internationally diversified competitors will face a relatively ___ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility. -low low high low high high low high
high low
?The type of exposure that measures the extent to which currency fluctuations can alter a company's future operating cash flows, that is, its future revenues and costs is known as operating exposure transaction exposure accounting exposure translation exposure
operating exposure
*A currency swap is most similar in economic purpose to a parent company loan debt-equity swap basis swap parallel loan
parallel loan
?With respect to home currency (HC) appreciation, the key issue for a domestic firm is its degree of ____. market share marketing plan pricing flexibility product differentiation
pricing flexibility
*With respect to production management of exchange risk, ________ and plant location are the principal variables that companies may change to manage the risk. product innovation product sourcing product retirement Market Selection
product innovation
?Product innovation and plant location are the principal variables that companies may change to manage the risk with respect to product management market selection product pricing product retirement
product management
*One way a MNC may improve productivity in the face of exchange rate volatility is by revising ________. and shifting production between plants the promotional strategy product offerings the input mix
product offerings
*Which of the following strategies assumes that the MNC has already collected a portfolio of different facilities world wide? product innovation product sourcing raising productivity production shifting
production shifting
*If the world capital market were fully integrated, the incentive to swap would be ____ because ____ arbitrage opportunities would exist. increased; fewer reduced; more increased; more reduced; fewer
reduced; fewer
*The value of a European option always rises with the interest rate exceeds its intrinsic value rises with the time to maturity rises with the volatility of the exchange rate
rises with the volatility of the exchange rate
*A U.S. exporter that anticipates an appreciation of the dollar should consider raising dollar prices on exports borrow foreign currencies scout out possible foreign production sites sell foreign currencies forward
scout out possible foreign production sites
*In a forward market hedge, a company that is long a foreign currency will ____ the foreign currency forward. lend buy sell borrow
sell
*Which one of the following is most likely to depreciate? currency with a highnational growth rate hard currency soft currency currency with interest rates expected to decrease
soft currency
*What is the name of the debt instruments with a high coupon in earlier payment periods and a lower coupon in later payment periods? inverse floaters step-down coupon notes structured notes callable step-up notes
step-down coupon notes
*Under the gold standard fiat money is more valuable price levels stayed constant over time price levels rose dramatically the long-run stability of the price level includes alternating periods of inflation and deflation
the long-run stability of the price level includes alternating periods of inflation and deflation
*The greatest boost to a firm's competitiveness comes from compressing the time it takes to bring new and improved products to market also known as _________. the product cycle product innovation market segmentation input mix
the product cycle
*The major difference between the temporal method and the monetary/nonmonetary method is that under the monetary/nonmonetary method, fixed assets are translated at the historical rate, whereas under the temporal method, fixed assets may be translated at the current rate under the monetary/nonmonetary method, long-term debt is translated at the historical rate, whereas under the temporal method, long-term debt is translated at the current rate under the monetary/nonmonetary method, inventory is always translated at the historical rate, whereas under the temporal method, inventory may be translated at the current rate if the inventory is shown on the balance sheet at market values under the monetary/nonmonetary method, accounts receivable are always translated at the historical rate, whereas under the temporal method, receivables may be translated at the current rate
under the monetary/nonmonetary method, inventory is always translated at the historical rate, whereas under the temporal method, inventory may be translated at the current rate if the inventory is shown on the balance sheet at market values
*During periods of exchange rate volatility, firms dealing in _______ products face more exchange rate risk than the firms selling _________ products. low supply, high supply low demand, high demand differentiated, undifferentiated undifferentiated, differentiated
undifferentiated, differentiated
*During a home currency appreciation, exporters may pull out of markets that foreign competition makes ________. profitable unprofitable more liquid more competitive
unprofitable
*Economic exposure is based on the extent to which the ______ of the firm will change when exchange rates change. value competitive advantages long-term liabilities current assets
value
*To which balance of payment category would purchases of gold by the bank of England Belong? A. Official Reserve Account B. Current Account C. Capital Account D. Unilateral Transfers
A. Official Reserve Account
?Under a fixed rate system, a country that followed policies that would lead to higher rate of inflation that that experienced by its trading partners would -Experience a balance of payment deficits as its goods became more exepensive -Experience a balance of payments surplus as its goods become more expensive -See a decrease in the supply of its currency on the foreign exchange markets -Find its currency subject to upward pressure
-Experience a balance of payment deficits as its goods became more exepensive
?- To some U.S. manufacturers and labor unions, a cheap yuan value gives China's __________ an unfair advantage in the global economy. -Bankers -Imports -Subsidies -Exporters
-Exporters
*______ is nonconvertibible paper money backed only by faith in the monetary authorities
-Fiat Money
*Under which one of the following would a country that followed policies leading to a lower inflation rate than that experienced by its trading partners would come under pressure to expand its money supply? -Freely-Floating currency-system -Managed Float -Currency Board -Fixed rate currency system
-Fixed rate currency system
* What is the name for the strategy used by governments where participants will adjust their current and expected future currency needs as price levels change, interest differentials appear, and economic growth occurs? -Free Float -Clean Float -Managed Float -Dirty Float
-Free Float
*Calls for a new gold standard reflect -Fundamental distrust of governments willingness to maintain the integrity of fiat money -The durability and desiriability of gold -A fear of deflation -A and B only
-Fundamental distrust of governments willingness to maintain the integrity of fiat money
*Under the classic gold standard, if prices began rising in the U.S. -Gold would flow out of the U.S. and the U.S. money supply would drop -The dollar value of the pound would rise -The dollar value of the pound would fall -The U.S. would begin running a balance of trade surplus
-Gold would flow out of the U.S. and the U.S. money supply would drop
*Which of the following is an example of reverse foreign investment? -Honda builds a factory in Ohio -British Telecom issues new stock in the United States -American investors buy shares in Sony -Apple builds a plain in Ireland that exports to the U.S.
-Honda builds a factory in Ohio
*Underlying the emerging markets currency crises, there is a fundamental conflict among policy objectives that the target nations have failed to resolve. Which one of the following is NOT in conflict? -Free capital movement -Independent domestic monetary policy -Fixed Exchange Rates -IMF Bailouts
-IMF Bailouts
*Suppose the current spot rate for the pound is $01.7427. A put option with an exercise price of $01.7550 is said to be -In the money -Out of the money -At the money -Past breakeven
-In the money
*Which one of the following is a consequence of increased global competition? -The creation of new steel plants -The end of free trade agreements between governments of the world -Increased comfort level of trade unions with the consequences -Increased anxiety among workers in the old industrial countries.
-Increased anxiety among workers in the old industrial countries.
*Economic Globalization: -Integration of national economies into international economy -Integration of international economies into the national economy -Integration of international ideas and communciations into the national identity -Integration of national ideas and communications into the international identity
-Integration of international economies into the national economy
*Which of the following is NOT a failing of the theory of comparative advantage? -It assumes that there are no differencaitated products -It assumes a scarcity of resources -It assumes that factors of production are immobile -it ignores the role of uncertainty and economies of scale
-It assumes a scarcity of resources
*When government intervention attempts to reduce for exporters and importers the uncertainty caused by disruptive exchange rate changes for the short and medium term, it is referred to as _________. -Dirty Float -Unofficial Pegging -Leaning against the wind --Smoothing out daily fluctuations
-Leaning against the wind
*A weak peso is most likely to cause -Less unemployment but more inflation in Mexico -More unemployment but less inflation in Mexico -Less unemployment and less inflation in Mexico -Added employment and inflation in Mexico
-Less unemployment but more inflation in Mexico
?Managed floats do NOT fall into which of the following categories of central bank intervention? -Smoothing out daily fluctuations -Leaning against the wind -Unofficial pegging -Letting market forces set exchange rates
-Letting market forces set exchange rates
?Which one of the following is an alternate and/or a precursor to setting up a production facility abroad? -exporting -setting up sales subsidiary -setting up a distribution system -Liscensing
-Liscensing
*When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize the impact of their foreign exchange market interventions, it is referred to as a(n. ________ operation. -Open Market -Floating Currency -Revaluation -Spot Rate -Is influenced by a nation's annual economic growth
-Open Market
? Suppose the current spot rate for the euro is $1.3427. A call option with an exercise price of $1.3550 is said to be -In the money -Out of the money -At the money -Past breakeve
-Out of the money
*Options traded on the interbank market are known as -Over the counter options -Long Term Options -Exchange traded options -Listed Options
-Over the counter options
Which one of the following parity theories states that, in its absolute version, price levels globally should be equal when expressed in a common currency? -Purchasing Power Parity -International Fisher Effect -Interest rate Parity -The unbiased forward rate
-Purchasing Power Parity
*What is the name given to profits earned by a central bank from money creation? -Seniorage Interest arbitrage Moral Hazard Fiat Money
-Seniorage
*Assume you are a critic of the World Bank. Which one of the following would NOT be one of your criticisms? -World bank projects do not come under the scrutiny of the global market -The Bank should move its lending operations out of China -The bank is financing projects that encourage governments to enact changes that make countries more attractive to private investors -The bank is funding projects to countries without giving them any incentive to change in efficient operations in the economy.
-The bank is financing projects that encourage governments to enact changes that make countries more attractive to private investors
*The basic difference(s) between forward and futures contracts is that forward contracts have no daily limits on price fluctuations whereas futures contracts have a daily limit on price fluctuations -all of the above forward contracts are individually tailored while futures contracts are standardized forward contracts are negotiated with banks whereas futures contracts are bought and sold on an organized exchange
-all of the above
*The ________ is an exchange rate system that is relatively free from central bank and other government-type interventions. -dirty float -Target zone arrangement -managed float -clean float
-clean float
*Which of the following theories identifies specialization as the main reason for international business activity? -Theory of globalization -Product life cycle theory of international trade -theory of diversification -doctrine of comparative advantage
-doctrine of comparative advantage
*The value of good financial management is ___________ in the global markets because of the much greater probability of market imperfections and multiple tax rates -neutralized -arbitraged away -minimized -enhanced
-enhanced
Major advantages of futures contracts include -extensive delivery dates available -freedom to liquidate the contract at any time before its maturity -large number of currencies traded -unlimited contract sizes
-freedom to liquidate the contract at any time before its maturity
*When a firm operates globally it offers advantages such as -greater political power at home -less taxes on its profits -greater negotiating power with foreign minority groups -greater negotiating power with labor unions
-greater negotiating power with labor unions
*If a country's freely floating currency is undervalued in terms of purchasing power parity, its capital account is likely to be -In surplus or trending toward a surplus -a candidate for loans from the World Bank -in defecit or trending toward a deficit -Subsidized by the IMF
-in defecit or trending toward a deficit
? The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium. -real exchange -nominal exchange -nominal interest -adjusted dividend
-nominal exchange
*What is the name of the theory that states exchange-adjusted prices on identical tradeable goods and financial assets must be within transaction costs of equality globally? The Law of -one Price -Capital market Segmentation Parity -Arbitrage
-one Price
*The prime transmitter of global competitive forces is the -public utility firm -financial management experience of the U.S. markets -the multinational corporation -Federal reserve system of the U.
-the multinational corporation
Suppose you are holding a long position in a euro futures contract that matures in 76 days. The agreed-upon price is $1.15 for 125,000 euro. At the close of trading today, the futures price has risen to $1.155. Under marking to market, you now -hold a futures contract that has risen in value by $1,250 -will receive $625 and a new futures contract priced at $1.155 -hold a futures contract that has fallen in value by $625 -must pay over $1,250 to the seller of the futures contract
-will receive $625 and a new futures contract priced at $1.155
On January 1, 1990, the annual inflation rates in the U.S. and Greece were expected to be 3% and 8%, respectively. If the current spot rate that day for the drachma was $.007, then the expected spot rate in three years was -.00751 -.00694 -.00607 -.00823
.00102
Suppose five year deposit rates on Eurodollars and Euro marks are 12% and 8%, respectively. If the current spot rate for the mark is $0.50, then the spot rate for the mark five years from now implied by these interest rates is -.5185 -.4169 -.4821
.5997
*The FASB document that aims to establish accounting and reporting standards for derivative instruments and for hedging activities is FASB 133 52 8 100
133
*What is the name of the foreign bank account that a trader maintains in a foreign bank and from which they would request transfer of currency to the account of another trader with whom they have concluded a transaction? A. Nostro Account B. Short Sale Account C. Settlement Account D. Interbank Account
A. Nostro Account
On January 1, 1990 inflation rates in the U.S. and Greece were expected to be 3%and 8% respectively. If the current spot rate that day for the drachma was $.007 then the expected spot rate in three years then the expected spot rate in three years was A. .00607 B. .00823 C. .00751 D. .00694
A. .00607
4. If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate by A. 11.11% B. 25.55% C. 10.11% D. 33.32%
A. 11.11%
. The French euro devalued by 17% against the U.S. dollar. This is equivalent to the revaluation of the dollar against the euro by A. 20.48% B. 16.31% C. 17% D. 17.54%
A. 20.48%
*When an importer goes long in the forward market, they would be A. Buying currency for future delivery. B. Selling currency for future delivery C. Arbitraging the interest rate differential D. Buying a forward contract a premium
A. Buying currency for future delivery.
*Which one of the following statements concerning exchange rate changes is correct? A. Changes in expected, as well as actual, inflation will cause exchange rate changes. B. Changes in expected, but not actual, inflation will cause exchange rate changes. C. An increase in currency's expected rate of inflation makes that currency less expensive to hold over time, all other things being equal. D. A nominal interest rate differential
A. Changes in expected, as well as actual, inflation will cause exchange rate changes.
^^^A balance of trade deficits results in a current account A. Deficit B. Surplus C. IMF Intervention
A. Deficit
*What theory holds that a country's trade deficit worsens just after its currency depreciates because price effects will dominate the effect on volume of imports in the short run? A. J-curve theory B. Protectionism Theory C. Official Reserve Transactions Theory D. Net Liquidity Balance Theory
A. J-curve theory
*Which of the following would not be considered as part of a nation's capital account? A. License Fees Earned by HP B. Purchases by the chinese U.S. real Estate C. Increases in Brazilian bank deposits in San Francisco Banks D. Purchases of the U.S. Treasury bonds by the Bank of England
A. License Fees Earned by HP
*Most international currency transactions are conducted by A. Major Banks B. Arbitrageurs C. Speculators D. Hedgers
A. Major Banks
*Which of the following accounts is the best measure of the change in private domestic borrowing or lending that is required to keep payments in balance without adjusting official reserves A. Net liquidity Balance B. Direct Investment C. Basic Balance D. Official Reserve transactions balance
A. Net liquidity Balance
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 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
*Traders on the foreign exchange market use ________ to eliminate or cover the risk of loss n export or import orders denominated in foreign currencies. A. Currency Options B. Forward Contracts C Money-Market Hedges D Currency Futures contracts
C Money-Market Hedges
*Hedgers, mostly ___________ engage in forward contracts on the foreign exchange market to protect the home currency value of various foreign currency denominated assets and liabilities on their balance sheets. A. Commercial Banks B. Public Utilities C Multinational corporations D specultators
C Multinational corporations
*What is the name of the market in the U.S. where trades take places in currency futures? A) Philadelphia Stock Exchange B) New York Futures Market C) Chicago Mercantile Exchange D) United Currency Options Marke
C) Chicago Mercantile Exchange
If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the euro by A. 1000% B. 200% C. 100% D. 55%
C. 100%
?Suppose the price indexes in Mexico and the U.S., which both began the year at 100, are at 160 and 103m respectively by the end of the year. If the exchange rate began the year at Mex$4.5=$1 and ended the year at Mex $5.9=$1, the the change in the real value of the peso during the year is A. 0% B. -5% C. 18.5% D. -8.2%
C. 18.5%
?The sale of American computers to the spanish govenrment shows up as A. A debit on the official reserves account B. A credit on the official reserves account C. A credit on the trade account D. A debit on the current account
C. A credit on the trade account
*A 150% return in Brazil is higher than a 15% dollar return in the U.S. A. Because Arbitrage opportunities exist B. When the inflation controls are suspended in Brazil C. Assuming both rates are real returns D. Regardless of nominal or real returns
C. Assuming both rates are real returns
?The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other is called the A. Balance of trade B. Capital account balance C. Balance of payments D. Current Account Balance
C. Balance of payments
*The overwhelming majority of foreign exchange transactions involve A. multinational corporations buying and selling foreign exchange B. Importers and exporters buying and selling foreign exchange C. Banks buying and selling foreign exchange D. Governments buying and selling foreign exchange
C. Banks buying and selling foreign exchange
*Of the following, exchange rates depend most upon relative A. Political Systems B. Trade deficits C. Inflation rate between nations D. Monetary systems
C. Inflation rate between nations
*Most currency transactions are channeled through the worldwide _________ market which accounts for _________ of foreign exchange transactions. A. Stock, 50% B. Interbank, 50% C. Interbank, 95% D Internet, 30%
C. Interbank, 95%
Suppose the spot direct quotes for the pound sterling and the euro are $1.3981-89 and $1.230-33, respectively. What is the direct quote for the pound in Paris? A. EE1.1339-73/P B. P.8793-.8819E C. P.80812/E D. P .097687/E
C. P.80812/E
*The Japanese Current account surplus can best be attributed to A. The high rate of Japanese domestic investment B. Japanese Protectionism C. The high rate of Japanese Savings D. Government budget deficits
C. The high rate of Japanese Savings
*The Japanese current account surplus can best be attributed to A. The high rate of Japanese domestic Investment B. Japanese protectionism C. The high rate of Japanese savings D. government of budget deficits
C. The high rate of Japanese savings
?When real interest rates are determined by the global supply and demand for funds, we claim that it is an example of -A real interest rate differential -A nomional interest rate differential -Capital market segmentation Capital market integration
Capital market integration
*Which one of the following statements concerning exchange rate changes is correct? -Changes in expected, but not actual, inflation will cause exchange rate changes -Changes in expected as well as actual inflation will cause exchange rates -An increase in a currency' expected rate of inflation makes that currency more in demand at the same price, all other things being equal. -An increase in a currency's expected rate of inflation makes that currency less expensive to hold over time, all other things being equal.
Changes in expected as well as actual inflation will cause exchange rates
In a(n) _____ swap, one party pays a fixed rate calculated at the time of trade as a spread to a particular Treasury bond, and the other side pays a floating rate. interest rate currency coupon basis
Coupon
*The most likely way to reduce the Japanese trade surplus is to A. Revalue the Japanese yen B. Impose Quotas on imports from Japan C. Boos Japanese savings D Boost Japanese consumption
D Boost Japanese consumption
?Suppose Annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years is A. $.00276 B. $.01190 C. $.03221 D. $.00102
D. $.00102
6. If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate against the peso by A. 300% B. 200% C. 250% D. 400%
D. 400%
*Trading on the foreign exchange market is A. Located in physical headquarters in London B. Takes place within an organized exchange C. COnducted by license brokers from the London stock Exchange D. An electronically linked network of banks, brokers and dealer
D. An electronically linked network of banks, brokers and dealer
? The account that records imports and exports of goods, services, income, and current unilateral transfers is known as A. Capital Account B. Financial Account C. Balance of payments D. Current
D. Current
*A ___________ between a bank and a customer calls for a fixed delivery date, at a fixed exchange rate for a specified amount of one currency against another currency A. Spot Quotation B. Currency Option C. Currency Swap D. Forward Contract
D. Forward Contract
*The World's largest currency trading market is A. New York B. Frankfurt C. Tokyo D. London
D. London
*The sale of U.S. Treasury bonds by a Frenchman shows up as A. A credit on the captial account B. A debit on the trade account C. A credit on the official reserves account D. None of the above
D. None of the above
The spot and 180 day forward rates for the euro are $1.3310 and 1.3402, respectively. The euro is said to be selling at a forward A. Discount of 6.9% B. Premium of 6.9% C. Discount of 1.4% D. Premium of 1.4%
D. Premium of 1.4%
*Recent U.S. trade deficits can be attributed to A. Japanese protectionism B. High U.S. wages and benefits C. Lack of American Competetiveness abroad D. The US Savings deficit
D. The US Savings deficit
*__________ a certain currency exposure means establishing an offsetting currency position so that the gain or loss from the exposure on the original currency is exactly offset buy the gain or loss from the currency hedge. Risk shifting Hedging Arbitraging Cross-hedging
Hedging
*The current exchange rate system can best be characterized as a ______ system -Free Float Managed Flaot Fixed-rate Hybrid
Hybrid
*The average interest rate offered by a specific group of multinational banks in London is known as the LIBOR rate Eurobond rate prime rate fed funds rate
LIBOR rate
*___________ were the earliest multinationals. -Cost minimizers -Raw-material seekers -Market seekers -oil companies
Raw-material seekers
*Historically, the primary motive for U.S. multinationals to produce abroad has been to -Respond more quickly to the marketplace -Lower costs -Gain tax benefits -avoid trade barriers
Respond more quickly to the marketplace
*The gold standard was dissolved in 1973 because -The U.S. printed too many dolalrs to maintain gold at $35/oz -Some countries preferred to hold gold instead of dollars -High interest rates raised the cost of holding gold -Only a and b
Some countries preferred to hold gold instead of dollars
*In order to boost the value of the DM relative to the dollar -The fed should sell dollars for DM and Bundesbank should buy DM with dollars -The Fed should sell dollars for DM and Bundesbank should buy dollars with DM The fed should sell DM for dollars and the Bundesbank should buy DM with dollars The fed should sell DM for dollars and the Bundesbank should sell dollars for DM
The fed should sell dollars for DM and Bundesbank should buy DM with dollars
*When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention. -Unsterilized Sterilized Foreign market Subsidized
Unsterilized
?The direct spot quote for the Canadian dollar is $.76 and the 180day forward rate is $.74. The difference between the two rates is likely to mean that -infaltion in the U.S during the past year was lower than in Canada -interest rates are rising faster in Canada than in the U.S. -prices in Canada are expected to rise more rapidly than in U.S. -The Canadian dollar's spot rate is expected to rise in terms of the U.S. dollar
infaltion in the U.S during the past year was lower than in Canada
This shows how much money must be in the futures market account balance when the contract is first entered into. It is the performance bond call initial performance bond account balance maintenance performance bond
initial performance bond
*An __________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount. currency bond interest rate currency bond
interest rate
*Suppose a U.S. corporation wants to secure fixed-rate funds in pounds in order to reduce its pound exposure, but is hampered in doing so because it is a relatively unknown credit in the British financial market. In contrast, a British company that is well established in its own country may desire floating-rate dollar financing, but is relatively unknown in the U.S. financial market. What is the most appropriate form of swap for these two parties? interest rate swap currency swap interest rate/currency swap debt/equity swap
interest rate/currency swap
Suppose that on January 1, 1987, the spot rate on the Dutch guilder was $0.39 and the 180day forward rate was $0.40. The difference between the spot and forward rates suggested that -The guilder was expected to fall in value relative to the dollar -interest rates were higher in the U.S. than the Netherlands -the guilder had risen in relation to the dollar -the inflation rate in the Netherlands was declining
interest rates were higher in the U.S. than the Netherlands
*What is the name for the value of the option that is the amount by which the option is in-the-money? the currency spread economic value intrinsic value market price
intrinsic value
*The time value of a European option decreases with the time that remains until the option expires is always positive for an in-the-money option is always positive for an at-the-money option is always positive for an out-of-the-money option
is always positive for an out-of-the-money option
*_______ exposure arises because currency fluctuations can alter a company's future revenues and expenses. transaction operating translation political
operating
*A company producing a differentiated product and competing with internationally diversified competitors will face a relatively __ price elasticity of demand for its products and possess a relatively ___ degree of pricing flexibility. high, low low, low low, high high, high
low, high
?In the face of exchange rate volatility, developing a pricing strategy must address two key issues: market share and profit margin market selection and segmentation market share and the work force market share and segmentation
market share and profit margin
?A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow. currency collar forward contract currency options money-market hedge
money-market hedge
A(n) __________ involves offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are exd to move in such a way that losses on the first exposed position should be offset by gains on the second currency exposure and vice versa. pecte
money-market hedge
*Firms that attempt to reduce risk and beat the market simultaneously may end up with a loss as well as reduced risk more risk, not less a profit as well as reduced risk less risk
more risk, not less
*is possible for transaction exposure to be positive and translation exposure in the same currency to be always positive synonymous negative exactly offsetting
negative
*If the rate of inflation in all of the world's currency markets rises from 5% to 7%, this will tend to make forward exchange rates move toward -larger premiums or smaller discounts in relation to the dollar -smaller premiums or larger discounts in relation to the dollar -parity -no change on average
no change on average
?The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium. -real exchange -nominal exchange -nominal interest -adjusted dividend
nominal interest
*You can speculate on a pound depreciation by selling pound futures and a pound put option selling pound futures and buying a pound call option none of the above buying pound futures and a pound put option
none of the above
*Given the added risks associated with doing business abroad, companies should avoid foreign markets altogether not limit their foreign sales limit their foreign sales to 40% of their total sales limit their foreign assets to less than 30% of total assets
not limit their foreign sales
*1. In the swap market, the reference amount against which the interest is calculated is known as the notional principal swap differential arbitrage principal basis amount
notional principal
*The theoretical principal underlying the swap is termed the basis amount notional principal swap differential arbitrage principal
notional principal
*Currency swaps are often used to provide long-term financing in foreign currencies but NOT because long term capital markets are easily accessible of high foreign taxes long term forward foreign exchange markets are absent long term capital markets are not well develop
of high foreign taxes
