Deck 8: Foreign Exchange and International Financial Markets

Question 1

Which term refers to the price of the foreign currency in terms of the home currency?

A) direct exchange rate
B) indirect quote
C) indirect exchange rate
D) direct spot price

Answer 1

A

Question 2

Tyler, a U.S. citizen, received a quote on the dollar/yen relationship of ¥108.21/$1. Tyler most likely received a(n) ________ quote.

A) indirect
B) direct
C) yen
D) dollar

Answer 2

A

Question 3

The equilibrium point between the quantity of a currency supplied and the quantity of the currency demanded is the exchange rate.

Answer 3

True

Question 4

A(n) ________ is the price of the home currency in terms of the foreign currency.

A) direct exchange rate
B) direct quote
C) indirect exchange rate
D) indirect rate price

Question 5

Foreign exchange rates are usually published daily in most major newspapers.

Question 6

Carol, an American banker, received a quote between the U.S. dollar and the Japanese yen of $.00924/¥1. Carol most likely received a(n) ________ quote.

A) indirect
B) direct
C) dollar
D) yen

Question 7

The primary purpose of the foreign-exchange market is to ________.

A) encourage globalization
B) assist developing countries
C) facilitate currency conversions
D) stabilize the currency exchange rate

Question 8

In a flexible exchange rate system, the price of foreign exchange is established by central banks.

Question 9

A call option ________.

A) is a privately traded currency vehicle available only through stockbrokers
B) grants the right to buy a specified amount of foreign currency at a set price
C) allows the holder to buy foreign exchange at the wholesale rate
D) is another term for currency future

Question 10

The price of foreign exchange is set by demand and supply in the marketplace.

Question 11

Which of the following is not an example of a participant in the foreign exchange market?

A) Pakistani tourists exchanging rupees for British pounds at a bank in London
B) British retailer Marks and Spencer purchasing appliances from a British supplier
C) the U.S. government arranging a multimillion-dollar loan to Mexico
D) Toyota exporting cars to Canada from factories in Japan

Question 12

The rising value of the Canadian dollar relative to the U.S. dollar has which of the following effects?

A) Canadian imports to the United States are down.
B) Canadian vacationers pay higher costs for trips to the United States.
C) Canadian consumers pay higher prices for U.S.-made goods.
D) Canadian retailers in border towns lose customers to U.S. stores.

Question 13

During one week in August 2007, the yen rose 4 percent versus the U.S. dollar, 9 percent against the Australian dollar, and 11 percent relative to the New Zealand dollar.

Question 14

A(n)________ shows the demand for a currency that is derived from foreigners' desire to acquire the country's goods, services, and assets.

A) direct quote
B) indirect quote
C) derived demand curve
D) upward sloping curve

Question 15

The rising value of the Canadian dollar relative to the U.S. dollar makes American goods cheaper to consumers in Canada.

Question 16

What most likely happens when the price of yen falls?

A) the quantity of yen demanded goes down
B) the demand curve slopes downward
C) the demand curve slopes upward
D) the value of yen fluctuates

Question 17

The price of foreign exchange is set by ________.

A) the international monetary fund
B) the gold standard
C) demand and supply in the marketplace
D) administrators of the World Bank

Question 18

The world's largest trading markets include which one of the following?

A) London
B) Frankfurt
C) Dallas
D) Peking

Question 19

Worldwide volume of foreign exchange trading is about ________ per day.

A) $2 billion
B) $50 billion
C) $2 trillion
D) $5.1 trillion

Question 20

________ is a commodity that consists of currencies issued by countries other than one's own.

A) Eurozone
B) Foreign exchange
C) Floating exchange
D) International monetary fund

Question 21

As a retail customer, what price do you usually pay for foreign exchange?

Question 22

It is common in the United States to quote the British pound on a direct basis and the Japanese yen on an indirect basis.

Question 23

The euro is the primary transaction currency for the foreign exchange market.

Question 24

An inconvertible currency ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 25

________ attempt to exploit small differences in the price of a currency between markets by buying currencies in lower-priced markets and selling in higher-priced markets.

A) Commercial customers
B) Speculators
C) Arbitrageurs
D) Individuals

Question 26

Exchange rates are quoted both directly and indirectly.

Question 27

Which of the following would be considered a soft currency?

A) Swiss franc
B) Guyanese dollar
C) Canadian dollar
D) U.S. dollar

Question 28

If the British pound is selling at $1.5212 spot on September 3, and at a 90-day forward rate of $1.5203, then ________.

A) the pound is selling at a forward premium
B) the pound is selling at a forward discount
C) an investor should buy a call option
D) speculators should buy put options

Question 29

What is the primary transaction currency for the foreign exchange market? What are the dominant currencies in the international bond market?

Question 30

A person normally purchases items using the indirect exchange rate.

Question 31

Explain the theory of purchasing power parity. How does it affect arbitrage?

Question 32

What percentage of all foreign-exchange trading involves the U.S. dollar?

A) 25 percent
B) 47 percent
C) 70 percent
D) 88 percent

Question 33

Currencies that are freely tradable are called ________.

A) hard currencies
B) soft currencies
C) foreign currencies
D) inconvertible currencies

Question 34

The direct exchange rate and the indirect exchange rate are reciprocals of one another.

Question 35

Foreign exchange speculation is not attractive to investors because of its low risk nature.

Question 36

________ assume exchange rate risks by acquiring positions in a currency and hoping that they can correctly predict changes in the currency's market value.

A) Commercial customers
B) Speculators
C) Arbitrageurs
D) Individuals

Question 37

Why are arbitrage activities important to the international monetary system?

Question 38

What is the international Fisher effect? Explain how it relates to the foreign-exchange market?

Question 39

Most developing countries have hard currencies.

Question 40

Explain how the rising value of the Canadian dollar relative to the U.S. dollar affects Canadian consumers, Canadian visitors to the United States, and Canadian exporters to the United States.

Question 41

A forward transaction ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradeable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 42

The ________ consists of foreign-exchange transactions that are to be consummated immediately.

A) soft currency market
B) spot market
C) hard currency market
D) forward market

Question 43

If a currency is selling at a forward premium it most likely means that the foreign-exchange market believes that the ________.

A) currency will depreciate over time
B) country's economy is weak
C) currency will appreciate over time
D) country's economy is strong

Question 44

What percentage of all foreign exchange transactions take place in the spot market?

A) 10 percent
B) 24 percent
C) 38 percent
D) 47 percent

Question 45

Moffet Manufacturing wants the right to sell a foreign currency at a specified price at any time up to a specified date. Moffet most likely needs a ________.

A) forward premium
B) forward discount
C) call option
D) put option

Question 46

A ________ allows, but does not require, a firm to buy or sell a specified amount of foreign currency at a specified price on a specified date.

A) forward swap
B) currency option
C) call option
D) discount put

Question 47

A swap transaction ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradeable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 48

________ is the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy.

A) Commercial exchange
B) Foreign exchange
C) Arbitrage
D) Parity

Question 49

In the world of spot markets, what is the meaning of immediately?

A) two days after the trade date
B) four business days after the trade date
C) on the trade date
D) simultaneous due to electronic transfers

Question 50

A spot transaction ________.

A) is a foreign exchange transaction that is consummated immediately
B) is a foreign exchange transaction that occurs sometime in the future
C) involves currencies that are not freely tradeable
D) involves a transaction in which the same currency is bought and sold simultaneously

Question 51

The currencies of countries suffering from balance of payment trade deficits or high inflation rates are more likely to sell at a ________.

A) spot discount
B) spot premium
C) forward discount
D) forward premium

Question 52

The theory of ________ states that the prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changes.

A) supply and demand
B) purchasing power parity
C) arbitrage
D) competitive advantage

Question 53

What is a currency selling at if the forward price is higher than the spot price?

A) forward premium
B) forward discount
C) par value
D) swap value

Question 54

The currencies of countries enjoying BOP trade surpluses or low inflation rates are more likely to sell at a ________.

A) spot discount
B) spot premium
C) forward discount
D) forward premium

Question 55

Apex Enterprises wants the right to buy a foreign currency at a specified price at any time up to a specified date. Apex most likely needs a ________.

A) forward premium
B) forward discount
C) call option
D) put option

Question 56

A ________ is a contract for a standard amount on a standard delivery date.

A) forward contract
B) currency future
C) currency option
D) call option

Question 57

What is a currency selling at if the forward price is less than the spot price?

A) forward premium
B) forward discount
C) par value
D) swap price

Question 58

The ________ consists of foreign-exchange transactions that are to occur sometime in the future.

A) soft currency market
B) spot market
C) hard currency market.
D) forward market

Question 59

If a currency is selling at a forward discount it means that the foreign-exchange market most likely believes that the ________.

A) currency will depreciate over time
B) country's economy is weak
C) currency will appreciate over time
D) country's economy is strong

Question 60

The ________ represents the marketplace's aggregate prediction of the spot price of the currency rate in the future.

A) forward price
B) spot price
C) exchange rate
D) par value

Question 61

Spot transactions account for 38 percent of all foreign exchange transactions.

Question 62

Which of the following is a common form of foreign exchange arbitrage?

A) two-point arbitrage
B) long-distance arbitrage
C) internet arbitrage
D) covered interest

Question 63

________ suggests that national differences in expected inflation rates yield differences in nominal interest rates among countries.

A) Two-point arbitrage
B) Three-point arbitrage
C) The international Fisher effect
D) The law of one market price

Question 64

The forward price of a foreign currency is typically the same as its spot price.

Question 65

Currency futures represent only 1 percent of the foreign-exchange market.

Question 66

The ________ is the primary third currency used in calculating cross rates.

A) euro
B) U.S. dollar
C) Japanese yen
D) Swiss franc

Question 67

Two-point arbitrage is also known as ________.

A) equilibrium arbitrage
B) forward arbitrage
C) discount arbitrage
D) geographic arbitrage

Question 68

Which form of arbitrage involves profiting from price differences in two distinct markets?

A) geographic arbitrage
B) three-point arbitrage
C) covered interest
D) arbitrage of goods

Question 69

________ focus on offering banking and other financial services to nonresident customers.

A) Subsidiary banks
B) Branch banks
C) Affiliated banks
D) Offshore financial centers

Question 70

Suppose £1 is trading for $2.00 in New York City and $1.80 in London. A foreign exchange trader could take $1.80 and buy £1 in London's financial exchange market and then sell it for $2.00 in New York's financial exchange market. What is this an example of?

A) two-point arbitrage
B) three-point arbitrage
C) covered interest
D) arbitrage of goods

Question 71

Swap transactions are the only mechanism for obtaining foreign exchange in the future.

Question 72

________ is profitable whenever the cost of buying a currency directly differs from the cross rate of exchange.

A) Two-point arbitrage
B) Three-point arbitrage
C) Covered interest
D) Arbitrage of goods

Question 73

What kind of arbitrage occurs when the difference between two countries' interest rates is not equal to the forward discount/premium on their currencies?

A) two-point arbitrage
B) three-point arbitrage
C) covered interest
D) geographic arbitrage

Question 74

Ross Manufacturing wants to sell foreign exchange on a spot basis and contracts with an international bank to handle the transaction. What is the most likely reason that Ross uses an international bank in this case?

A) The bank can customize the spot to meet Ross' needs.
B) Laws require that banks handle spot transactions.
C) The bank will not charge Ross a service fee.
D) Ross is a U.S. organization.

Question 75

Which of the following would most likely help international businesspeople to forecast future changes in exchange rates?

A) swap transaction
B) forward price
C) put option
D) spot price

Question 76

The ________ is an exchange rate between two currencies calculated through the use of a third currency.

A) forward rate
B) call rate
C) cross rate
D) covered interest rate

Question 77

The currency option requires a firm to buy or sell a specified amount of a foreign currency at a specified price any time up to a specified date.

Question 78

________ suggests that arbitrage activities will continue until the price of the good is identical in both markets.

A) Purchasing power parity
B) The law of one price
C) Equilibrium pricing
D) Two-point arbitrage

Question 79

International bankers can customize currency options for their commercial clients.

Question 80

Which form of arbitrage is considered the most important in the foreign-exchange market?

A) two-point arbitrage
B) three-point arbitrage
C) covered interest
D) arbitrage of goods