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Chapter 3: International Financial Markets

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Chapter 3 International Financial Markets 1. Assume that a bank’s bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid -ask percentage spread is: A) about 4.44%. B) about 4.26%. C) about 4.03%. D) about 4.17%. ANSWER: B SOLUTION: Bid-ask percentage spread = ($.47 – $.45)/$.47 = 4.26% 2. Assume that a bank’s bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid -ask percentage spread is: A) about 4.99%. B) about 4.88%. C) about 4.65%. D) about 4.43%. ANSWER: C SOLUTION: Bid-ask percentage spread = ($.0043 – $.0041)/$.0043 = 4.65% 3. The bid/ask spread for small retail transactions is commonly in the range of _______ percent; the bid/ask spread for wholesale transactions is commonly in the range of _______ percent. A) 3 to 7; .01 to .03 B) 2 to 5; 1 to 2 C) 10 to 15; .01 to .03 D) 1 to 2; .05 to .07 ANSWER: A 4. _______ is not a factor that affects the bid/ask spread. A) Order costs B) Inventory costs C) Volume D) All of these factors affect the bid/ask spread. ANSWER: D

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5. According to the text, the forward rate is commonly used for: A) hedging. B) Eurocurrency transactions. C) Eurocredit transactions. D) Eurobond transactions. ANSWER: A 6. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90 days, it could: A) obtain a 90-day forward purchase contract on euros. B) obtain a 90-day forward sale contract on euros. C) purchase euros 90 days from now at the spot rate. D) sell euros 90 days from now at the spot rate. ANSWER: B 7. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: A) obtain a 90-day forward purchase contract on Canadian dollars. B) obtain a 90-day forward sale contract on Canadian dollars. C) purchase Canadian dollars 90 days from now at the spot rate. D) sell Canadian dollars 90 days from now at the spot rate. ANSWER: A 8. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is: A) about .3621 Canadian dollars. B) about .3977 Canadian dollars. C) about 2.36 Canadian dollars. D) about 2.51 Canadian dollars. ANSWER: B SOLUTION: $.35/$.88 = .3977 9. Which of the following is not true with respect to spot market liquidity? A) The more willing buyers and sellers there are, the more liquid a market is. B) The spot markets for heavily traded currencies such as the Japanese yen are very liquid. C) A currency’s liquidity affects the ease with which an MNC can obtain or sell that currency. D) If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. ANSWER: D

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10. Forward markets for currencies of developing countries are: A) prohibited. B) less liquid than markets for developed countries. C) more liquid than markets for developed countries. D) only available for use by government agencies. ANSWER: B 11. A forward contract can be used to lock in the _______ of a specified currency for a future point in time. A) purchase price B) sale price C) purchase price or sale price D) none of these ANSWER: C 12. The forward market: A) for euros is very illiquid. B) for Eastern European countries is very liquid. C) does not exist for some currencies. D) none of these. ANSWER: C 13. _______ is not a bank characteristic important to customers in need of foreign exchange. A) Quote competitiveness B) Speed of execution C) Forecasting advice D) Advice about current market conditions E) All of these are important bank characteristics to customers in need of foreign exchange. ANSWER: E 14. The Basel II accord would: A) eliminate all bank capital requirements. B) reduce the amount of capital banks are required to hold. C) require banks to take more risks and to document their risk. D) correct some inconsistencies that still exist. ANSWER: D 15. The international money market primarily concentrates on: A) short-term lending (one year or less). B) medium-term lending. C) long-term lending. D) placing bonds with investors. E) placing newly issued stock in foreign markets. ANSWER: A

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16. The international credit market primarily concentrates on: A) short-term lending (less than one year). B) medium-term lending. C) long-term lending. D) providing an exchange of foreign currencies for firms who need them. E) placing newly issued stock in foreign markets. ANSWER: B 17. The main participants in the international money market are: A) consumers. B) small firms. C) large corporations. D) small European firms needing European currencies for international trade. ANSWER: C 18. LIBOR is: A) the interest rate commonly charged for loans between banks. B) the average inflation rate in European countries. C) the maximum loan rate ceiling on loans in the international money market. D) the maximum deposit rate ceiling on deposits in the international money market. E) the maximum interest rate offered on bonds that are issued in London. ANSWER: A 19. A syndicated Eurocredit loan: A) represents a loan by a single bank to a syndicate of corporations. B) represents a loan by a single bank to a syndicate of country governments. C) represents a direct loan by a syndicate of oil-producing exporters to a less developed country. D) represents a loan by a group of banks to a borrower. ANSWER: D 20. The international money market is primarily served by: A) the governments of European countries, which directly intervene in foreign currency markets. B) government agencies such as the International Monetary Fund that enhance the development of countries. C) several large banks that accept deposits and provide loans in various currencies. D) small banks that convert foreign currency for tourists and business visitors. ANSWER: C 21. International money market transactions normally represent the equivalent of: A) $1 million or more. B) $1,000 to $10,000. C) $10,000 and $100,000. D) $100,000 and $200,000. ANSWER: A 22. From 1944 to 1971, the exchange rate between any two currencies was typically: A) fixed within narrow boundaries.

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B) floating, but subject to central bank intervention. C) floating, and not subject to central bank intervention. D) nonexistent; that is, currencies were not exchanged, but gold was used to pay for all foreign transactions. ANSWER: A 23. As a result of the Smithsonian Agreement, the U.S. dollar was: A) the currency to be used by all countries as a medium of exchange for international trade. B) forced to be freely floating relative to all currencies without any boundaries. C) devalued relative to major currencies. D) revalued (upward) relative to major currencies. ANSWER: C 24. According to the text, the average foreign exchange trading around the world _______ per day. A) equals about $200 billion B) equals about $400 billion C) equals about $700 billion D) exceeds $1 trillion ANSWER: D 25. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to _______ against the yen, it would likely wish to hedge. It could hedge by _______ dollars forward. A) depreciate; buying B) depreciate; selling C) appreciate; selling D) appreciate; buying ANSWER: B 26. Loans of one year or longer extended by banks in Europe are called: A) Eurocurrency loans. B) Eurocredit loans. C) Eurobond loans. D) parallel loans. ANSWER: B

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27. Futures contracts are typically _______; forward contracts are typically _______. A) sold on an exchange; sold on an exchange B) offered by commercial banks; sold on an exchange C) sold on an exchange; offered by commercial banks D) offered by commercial banks; offered by commercial banks ANSWER: C 28. Eurobonds: A) are usually issued in bearer form. B) typically carry several protective covenants. C) cannot contain call provisions. D) are usually issued in bearer form AND typically carry several protective covenants. ANSWER: A 29. Which of the following is true? A) Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S. B) U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S. C) U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries. D) None of these are true. ANSWER: C 30. Eurobonds: A) can be issued only by European firms. B) can be sold only to European investors. C) can be issued only by European firms AND can be sold only to European investors. D) none of these. ANSWER: D 31. Which currency is used the most to denominate Eurobonds? A) the British pound. B) the Japanese yen. C) the U.S. dollar. D) the Swiss franc. ANSWER: C 32. When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be: A) based on the closing prices in the U.S. during the previous day. B) based on the closing prices in Canada during the previous day. C) based on the prevailing prices in locations where the foreign exchange markets have been open. D) officially set by central banks before the U.S. market opens. ANSWER: C 33. The U.S. dollar is not ever used as a medium of exchange in: A) industrialized countries outside the U.S.

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B) any Latin American countries. C) Eastern European countries where foreign exchange restrictions exist. D) none of these. ANSWER: D 34.

Which of the following is not true regarding the Bretton Woods Agreement? A) It called for fixed exchange rates between currencies. B) Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels. C) The agreement lasted from 1944 until 1971. D) Each country used gold to back its currency. E) All of these are true regarding the Bretton Woods Agreement. ANSWER: D

35.

A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)? A) 73.75. B) 125. C) 1.69. D) 0.014. E) none of these. ANSWER: D SOLUTION: ($.008/$.59) = F$.014/¥

36. A share of the ADR of a Dutch firm represents one share of that firm’s stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be: A) $13.64. B) $15.00. C) $16.50. D) 16.50 euros. E) none of these. ANSWER: C SOLUTION: 15 × $1.10 = $16.50

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37. The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be: A) $48.90. B) $146.70. C) $55.21. D) none of these. ANSWER: B SOLUTION: 3 × 30 × $1.63 = $146.70 38. In general, stock markets allow for more price efficiency and attract more investors when they have all of the following except: A) more voting rights for shareholders. B) more legal protection. C) more enforcement of the laws. D) less stringent accounting requirements. ANSWER: D 39. If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the _______ market to raise long-term funds. A) derivative B) long-term credit C) money D) foreign exchange ANSWER: B 40.

A put option is the amount or percentage by which the existing spot rate exceeds the forward rate. A) true. B) false. ANSWER: B

41.

The forward rate is the exchange rate used for immediate exchange of currencies. A) true. B) false. ANSWER: B

42.

The ask quote is the price for which a bank offers to sell a currency. A) true. B) false. ANSWER: A

Chapter 3: International Financial Markets 43.

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The existence of imperfect markets has prevented the internationalization of financial markets. A) true. B) false. ANSWER: B

44.

Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold. A) true. B) false. ANSWER: A

45.

An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction. A) true. B) false. ANSWER: B

46.

The Single European Act and the Basel Accord prevented a trend toward increased globalization in the banking industry. A) true. B) false. ANSWER: B

47.

A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. A) true. B) false. ANSWER: A

48.

A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time. A) true. B) false. ANSWER: B

49.

The strike price is also known as the premium price. A) true. B) false. ANSWER: B

410 50.

International Financial Management The interest rate commonly charged for loans between banks is called the cross rate. A) true. B) false. ANSWER: B

51.

The Bretton Woods Agreement is a 1988 accord between 12 countries to standardize banks’ capital requirements across countries; the resulting capital ratios are computed using riskweighted assets. A) true. B) false. ANSWER: B

52.

The Basel Accord is a 1987 agreement among the major European countries to make regulations more uniform across European countries and to reduce taxes on goods traded between these countries. A) true. B) false. ANSWER: B

53.

A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. A) true. B) false. ANSWER: A

54. Eurobonds are certificates representing bundles of stock. A) true. B) false. ANSWER: B 55. If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low. A) true. B) false. ANSWER: A 56. If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low. A) true. B) false. ANSWER: B 57. The preferences of corporations and governments to borrow in foreign currencies and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market.

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A) true. B) false. ANSWER: B 58. Large commercial banks play a major role in the international money market by accepting shortterm deposits in large amounts (such as the equivalent of $1 million or more) and in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies. A) true. B) false. ANSWER: A 59. The term “eurobor” is widely used to reflect the interbank offer rate on euros. A) true. B) false. ANSWER: A 60. The term “eurobor” is widely used to reflect the total amount of euros borrowed by the firms in Europe per month to finance their growth. A) true. B) false. ANSWER: B 61. Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market. A) true. B) false. ANSWER: A 62. In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States. A) true. B) false. ANSWER: B 63. Global regulations require that shareholders in all countries have the same rights wherever there are stock markets. A) true. B) false. ANSWER: B 64. Shareholders have more voting power in some countries than others. A) true. B) false. ANSWER: A

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65. Shareholders can have influence on a wider variety of management issues in some countries. A) true. B) false. ANSWER: A 66. The legal protection of shareholders is the same among countries. A) true. B) false. ANSWER: B 67. Shareholders in some countries may have more power to effectively sue publicly-traded firms if their executives or directors commit financial fraud. A) true. B) false. ANSWER: A 68. In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy. A) true. B) false. ANSWER: A 69. The government enforcement of securities laws varies among countries. A) true. B) false. ANSWER: A 70. The degree of financial information that must be provided by public companies is the same among all countries. A) true. B) false. ANSWER: B

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71. In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders. A) true. B) false. ANSWER: B...