Quiz 3: International Financial Markets

The market efficiency hypothesis is the simple statement that security prices fully reflect all available information.

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.

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) A or B D) none of the above

A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

From 1944 to 1971, the exchange rate between any two currencies was typically: A) fixed within narrow boundaries. 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.

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 US 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 the above

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 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.

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.

If a French 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.

____ is not a factor that affects the bid/ask spread. A) Order costs B) Inventory costs C) Volume D) All of the above factors affect the bid/ask spread

The strike price is also known as the premium price.

The bid/ask spread for small retail transactions is commonly in the range of ____ per cent; the bid/ask spread for wholesale transactions is commonly in the range of ____ per cent. A) 3 to 7; 0.01 to 0.03 B) 2 to 5; 0.05 to 0.10 C) 10 to 15; 0.01 to 0.03 D) 1 to 2; 0.05 to 0.07

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.

The international bond markets facilitate international transfers of short-term credit, thereby enabling governments and large corporations to borrow funds from various countries.

The US dollar is not ever used as a medium of exchange in: A) industrialized countries outside the US. B) in any Latin American countries. C) in Eastern European countries where foreign exchange restrictions exist. D) none of the above.

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 US 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 the above

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.

Eurobonds are certificates representing bundles of stock.

The Basel II accord would: A) replace the Basel Accord. 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.

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.

The ask quote is the price for which a bank offers to sell a currency.

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. E) A and B

Eurobonds: A) can be issued only by European firms. B) can be sold only to European investors. C) A and B D) none of the above

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.

Assume that a bank's bid rate on Japanese yen is £0.0026 and its ask rate is £0.0028. Its bid/ask percentage spread is: A) about 7.52%. B) about 7.70%. C) about 7.14%. D) about 4.43%.

The first statement about exchange rate movements says, that 'the current exchange rate is the ___ estimate of the future rate with the small added cost of time, being the ____ difference between the two currencies'. A) best, riskless interest rate B) best, premium interest rate C) worst, riskless interest rate D) worst, premium interest rate

According to the text, the forward rate is commonly used for: A) hedging. B) Eurocurrency transactions. C) Eurocredit transactions. D) Eurobond transactions.

Assume the Canadian dollar is equal to £0.51 and the Peruvian sol is equal to £0.16. The value of the Peruvian sol in Canadian dollars is: A) about 0.3621 Canadian dollars. B) about 0.3137 Canadian dollars. C) about 2.36 Canadian dollars. D) about 2.51 Canadian dollars.

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 the above

Assume a Japanese firm invoices exports to the UK in pounds. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the pound to ____ against the yen, it would likely wish to hedge. It could hedge by ____ pounds forward. A) depreciate; buying B) depreciate; selling C) appreciate; selling D) appreciate; buying

A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.

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.

____ 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 the above are important bank characteristics to customers in need of foreign exchange.

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.

Which currency is used the most to denominate Eurobonds? A) The British pound B) The Japanese yen C) The US dollar D) The Swiss franc

Assume that a bank's bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Its bid/ask percentage spread is: A) 4.00%. B) 4.26%. C) about 3.85%. D) about 4.17%.

A direct quote can be described as 'the value of home currency', and an indirect quote can be described as 'how much foreign currency will buy home.'

Which of the following is true? A) Non-UK firms may desire to issue bonds in the UK due to less regulations in the UK. B) UK firms may desire to issue bonds in the UK due to less regulations in the UK. C) UK firms may desire to issue bonds in the non-UK markets due to less regulations in non-UK countries. D) A and B.

International stock markets enable firms to obtain equity financing in foreign countries. Thus, these markets have helped MNCs finance their international expansion.

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.

When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the: A) closing prices in the US during the previous day. B) closing prices in Canada during the previous day. C) prevailing prices in locations where the foreign exchange markets have been open. D) officially set by central banks before the US market opens.

Creditors (including individual investors who purchase debt securities) have which of the following motives for providing credit in foreign markets? A) High foreign exchange rate B) International diversification C) Crisis D) All of the above

The forward rate is the exchange rate used for immediate exchange of currencies.

Which of the following is the motives for investors to invest in foreign markets? A) Economic condition B) Exchange rate expectation C) International diversification D) All of the above

The existence of imperfect markets has prevented the internationalization of financial markets.

If a UK firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 euros 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.

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.

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.

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

The interest rate commonly charged for loans between banks is called the cross rate.

A cross-exchange rate expresses the amount of one foreign currency per unit of another foreign currency.

A Japanese yen is worth £0.0040 and a Fijian dollar (F$) is worth £0.3278. 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) 0.012 E) None of the above

Eurobonds: A) are usually issued in bearer form. B) typically carry several protective covenants. C) cannot contain call provisions. D) A and B

The Single European Act and the Basel Accord prevented a trend toward increased globalization in the banking industry.