Question 1

Which of the following is not true regarding ADRs?

Accepted Answer

ADRs are denominated in U.S. dollars, not the currency of the stock's home country.

Question 2

Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this situation:

Accepted Answer

In this situation, the U.S. firm wants to hedge against the depreciation of the Korean won. The purchase of a call option gives the firm the right but not the obligation to buy Korean won at a predetermined exchange rate (strike price). If the Korean won does depreciate, the firm can exercise the option and purchase Korean won at the lower rate. If the Korean won appreciates, the firm can let the option expire and simply pay the market rate for the Korean imports. It is more appropriate to purchase a call option than to buy dollars forward or sell dollars forward, as these strategies require a specific exchange rate to be selected, which may not work in the firm's favor if the won depreciates more than expected. A put option, on the other hand, would be appropriate if the firm were paying in U.S. dollars, but it is paying for Korean imports in won. Therefore, the best choice in this situation is to purchase a call option.

Question 3

Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars?

Accepted Answer

The answer of Assume that the spot rate of the...

Question 4

Which of the following is not true regarding electronic communications networks (ECNs)?

Accepted Answer

ECNs do not have a visible trading floor. Trades are executed electronically, without the need for a physical trading floor.

Question 5

The more intense the competition for the traded currency, the larger the bid/ask spread.

Accepted Answer

The more intense the competition for a traded currency, the smaller the bid/ask spread, as increased competition among market makers typically leads to tighter spreads.

Question 6

Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies.

Accepted Answer

Banks typically charge larger bid/ask spreads on less liquid, less traded currencies due to higher risk and lower trading volume, not on more liquid currencies.

Question 7

The interest rate on the syndicated loan depends on the:

Accepted Answer

The interest rate on the syndicated loan depends on several factors including the currency denominating the loan, the maturity of the loan, the creditworthiness of the borrower, and the interbank lending rate. Therefore, the correct choice is E - all of the above.

Question 8

Certificates representing bundles of stock of non-U.S. firms are called:

Accepted Answer

Certificates representing bundles of stock of non-U.S. firms are called American Depository Receipts (ADRs). Eurobonds are debt securities issued outside the country of the currency in which they are denominated, FRNs are floating rate notes and Eurobor is a reference rate for Eurocurrency deposits.

Question 9

You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$.

Accepted Answer

The indirect quotation is the foreign currency per unit of domestic currency. To find yen per dollar, divide 1 by the dollar value of yen: 1 / 0.007 = 142.86 ¥/$.

Question 10

Which of the following is probably not an example of the use of forward contracts by an MNC?

Accepted Answer

Selling pounds forward to hedge pound payables is incorrect because it would expose the MNC to more currency risk instead of mitigating it.

Question 11

The international money market is frequently accessed by MNCs for short-term investment and financing decisions, while longer term financing decisions are made in the international credit market or the international bond market and in international stock markets.

Accepted Answer

The statement correctly describes the typical behavior of multinational corporations (MNCs) in terms of accessing different international financial markets for short-term and longer-term financing and investment decisions. The international money market is a common source of short-term funds for MNCs. On the other hand, longer-term financing options are available in the international credit market, bond market, and stock markets.

Question 12

At any given point in time, a bank's bid quote will be greater than its ask quote.

Accepted Answer

This statement is false. A bank's bid quote represents the price that it is willing to buy a security or currency, while its ask quote represents the price that it is willing to sell the same security or currency. Therefore, the bid quote will typically be lower than the ask quote.

Question 13

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.

Accepted Answer

A currency put option provides the right, but not the obligation, to sell a specific currency at a specific price within a specific period of time, not buy.

Question 14

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward?

Accepted Answer

By selling yen forward at the forward rate of $.0095, you will receive 5,000,000 yen * $.0095 = $47,500.

Question 15

A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation.

Accepted Answer

A quotation representing the value of a foreign currency in dollars is a direct quotation, while a quotation representing the number of units of a foreign currency per dollar is an indirect quotation.

Question 16

The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies.

Accepted Answer

The LIBOR (London Interbank Offered Rate) is determined by the market supply of and demand for funds in each currency. Therefore, the LIBOR can vary among currencies due to differences in these market conditions.

Question 17

Which of the following is not a possible bid/ask quotation for the Barbados dollar?

Accepted Answer

The bid ($0.52) is higher than the ask ($0.51), which is not possible in a normal market as the bid price should always be lower than the ask price. Therefore, option C is not a possible bid/ask quotation for the Barbados dollar.

Question 18

Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables?

Accepted Answer

A pound put option gives the holder the right to sell pounds, which would not be useful for reducing exposure to pound payables. The other options involve purchasing or securing pounds, which would be appropriate for managing payables.

Question 19

An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations.

Accepted Answer

The answer of An MNC with receivables in Japanese Yen...

Question 20

Which of the following is not true about syndicated loans?

Accepted Answer

Syndicated loans can be denominated in various currencies, not just in U.S. dollars. Options A, C, and D are true statements about syndicated loans.

Quiz 3: International Financial Markets