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3 Multiple Chapter Choice Identify the choice that best completes the statement or answers the question. spot rate. 1. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask 7. Which of the following is not true with respect to percentage spread is: spot market liquidity? A) about 4.99%. A) The more willing buyers and sellers there are, B) about 4.88%. the more liquid a market is. C) about 4.65%. B) The spot markets for heavily traded currencies D) about 4.43%. such as the Japanese yen are very liquid. C) A currency's liquidity affects the ease with 2. The bid/ask spread for small retail transactions is which an MNC can obtain or sell that currency. commonly in the range of ____ percent. D) If a currency is illiquid, an MNC is typically A) 3 to 7 able to quickly purchase that currency at a B) .01 to .03 reasonable exchange rate. C) 10 to 15 D) .5 to 1 8. Forward markets for currencies of developing countries are: 3. ____ is not a factor that affects the bid/ask spread. A) prohibited. A) Order costs B) less liquid than markets for developed B) Inventory costs countries. C) Volume C) more liquid than markets for developed D) All of the above factors affect the bid/ask countries. spread D) only available for use by government agencies. 4. According to the text, the forward rate is commonly used for: 9. A forward contract can be used to lock in the ____ A) hedging. of a specified currency for a future point in time. B) immediate transactions. A) purchase price C) previous transactions. B) sale price D) bond transactions. C) A or B D) none of the above 5. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 10. The forward market: 100,000 in 90 days, it could: A) for euros is very illiquid. A) obtain a 90-day forward purchase contract on B) for Eastern European countries is very liquid. euros. C) does not exist for some currencies. B) obtain a 90-day forward sale contract on euros. D) none of the above C) purchase euros 90 days from now at the spot 11. ____ is not a bank characteristic important to rate. customers in need of foreign exchange. D) sell euros 90 days from now at the spot rate. A) Quote competitiveness B) Speed of execution 6. If a U.S. firm desires to avoid the risk from C) Forecasting advice exchange rate fluctuations, and it will need D) Advice about current market conditions C$200,000 in 90 days to make payment on imports E) All of the above are important bank from Canada, it could: characteristics to customers in need of foreign A) obtain a 90-day forward purchase contract on exchange. Canadian dollars. B) obtain a 90-day forward sale contract on 12. The Basel II accord is focused on eliminating Canadian dollars. inconsistencies in ____ across countries. C) purchase Canadian dollars 90 days from now at A) capital requirements the spot rate. B) deposit rates D) sell Canadian dollars 90 days from now at the C) deposit insurance 13. 14. 15. 16. 17. 18. D) bank failure policies 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. 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. 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. 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 syndicated 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 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 19. 20. 21. 22. 23. 24. 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. International money market transactions normally represent: A) the equivalent of $1 million or more. B) the equivalent of $1,000 to $10,000. C) the equivalent of between $10,000 and $100,000. D) the equivalent of between $100,000 and $200,000. 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 The bid-ask spread on an exchange rate can be used to directly determine: A) how an exchange rate will change. B) the transaction cost of foreign exchange. C) the forward premium. D) the currency option premium. 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 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) A and B Which currency is used the most to denominate Eurobonds? 25. 26. 27. 28. 29. A) the British pound. B) the Japanese yen. C) the U.S. dollar. D) the Swiss franc. When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be based on the: A) closing prices in the U.S. 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 U.S. market opens. The U.S. dollar is not ever used as a medium of exchange in: A) industrialized countries outside the U.S. B) in any Latin American countries. C) in Eastern European countries where foreign exchange restrictions exist. D) none of the above 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 the above are true regarding the Bretton Woods Agreement. 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 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 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 30. 31. 32. 33. 34. 35. 36. D) none of the above 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. 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 Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000? A) 12,600 B) 775,194 C) 793,651 D) 12,900 An obligation to purchase a specific amount of currency at a future point in time is called a: A) call option B) spot contract C) put option D) forward contract E) both B and D Which of the following is not a method that can be used to invest internationally? A) Investment in MNC stocks B) American depository receipts (ADRs) C) World Equity benchmark Shares (WEBS) D) International mutual funds E) All of the above are methods that can be used to invest internationally. Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is A) .01 B) 118 C) 1.18 D) .0087 When obtaining a loan, the risk premium paid above LIBOR depends on the: A) risk-free interest rate of the borrower. B) credit risk of the borrower. C) borrower's stock price. 37. 38. 39. 40. 41. 42. 43. D) lender's stock price. The largest global exchange is: A) NASDAQ B) Tokyo Stock Exchange C) NYSE Euronext D) London Stock Exchange Which of the following is not true about syndicated loans? A) A borrower that receives a syndicated loan incurs various fees besides the interest rate. B) The loans are only denominated in U.S. dollars. C) The loans are provided by a group of banks to a borrower. D) The loans are usually formed in 6 weeks or less. The interest rate on the syndicated loan depends on the: A) currency denominating the loan. B) maturity of the loan. C) creditworthiness of the borrower. D) interbank lending rate. E) all of the above. 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: A) Buy dollars forward B) Sell dollars forward C) Purchase call option D) Purchase put option Certificates representing bundles of stock of non-U.S. firms are called: A) Eurobonds B) ADRs C) FRNs D) Eurobor 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? A) 10 B) 13.28 C) 30.12 D) 39.84 Which of the following is not true regarding ADRs? A) ADRs are denominated in the currency of the 44. 45. 46. 47. stock's home country. B) ADRs enable U.S. investors to avoid cross-border transactions C) ADRs allow non-U.S. firms to tap into for U.S. market funds. D) ADRs sometimes allow for arbitrage opportunities. Which of the following is not a possible bid/ask quotation for the Barbados dollar? A) $.50/$.51 B) $.49/$.50 C) $.52/$.51 D) $.51/$.52 E) All of the above are possible bid/ask quotations. 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? A) $44,500 B) $45,000 C) $526 million D) $47,500 E) $556 million Which of the following is probably not an example of the use of forward contracts by an MNC? A) Hedging pound payables by selling pounds forward B) Hedging peso receivables by selling pesos forward C) Hedging yen payables by purchasing yen forward D) Hedging peso payables by purchasing pesos forward E) All of the above are examples of using forward contracts. 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. A) direct; indirect B) indirect; direct C) direct; direct D) indirect; indirect E) cannot be answered without more information 48. You observe a quotation of the Japanese yen () of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ /$. A) direct; 142.86 B) indirect; 142.86 C) indirect; 150 D) direct; 150 E) indirect; 0 49. Which of the following is not true regarding electronic communications networks (ECNs)? A) They have a visible trading floor. B) Trades are executed by a computer network. C) They have been created in many countries to match orders between buyers and sellers. D) They allow investors to place orders on their computers. E) All of the above are true. 50. Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables? A) Purchase pounds forward B) Buy a pound futures contract C) Buy a pound put option D) Buy a pound call option 51. Futures contracts are sold on exchanges and are consequently ____ than forward contracts, which can be ____ to satisfy an MNC's needs. A) more standardized; standardized B) more standardized; custom-tailored C) more custom-tailored; standardized D) more custom-tailored; custom-tailored E) less standardized; custom-tailored 52. An MNC's short-term financing decisions are satisfied in the ____ market, while its medium debt financing decisions are satisfied in the ____ market. A) international money; international credit B) international money; international bond C) international credit; international money D) international bond; international credit E) international money; international stock True/False Indicate whether the statement is true or false. 53. The forward rate is the exchange rate used for immediate exchange of currencies. A) True B) False 62. The strike price is also known as the premium price. A) True B) False 54. The ask quote is the price for which a bank offers to sell a currency. A) True B) False 63. The interest rate commonly charged for loans between banks is called the cross rate. A) True B) False 55. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate. A) True B) False 64. The Bretton Woods Agreement is an agreement to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets. A) True B) False 56. The existence of imperfect markets has prevented the internationalization of financial markets. A) True B) False 57. 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 58. 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 59. The Single European Act prevented a trend toward increased globalization in the banking industry. A) True B) False 60. A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency. A) True B) False 61. 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 65. The Basel Accord is an 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 66. 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 67. Eurobonds are certificates representing bundles of stock. A) True B) False 68. 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 69. 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 70. 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. A) True B) False 71. Large commercial banks play a major role in the international money market by accepting short-term 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 72. The term "eurobor" is widely used to reflect the interbank offer rate on euros. A) True B) False 73. 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 74. 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 75. 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 76. Global regulations require that shareholders in all countries have the same rights wherever there are stock markets. A) True B) False 77. Shareholders have more voting power in some countries than others. A) True B) False 78. Shareholders can have influence on a wider variety of management issues in some countries. A) True B) False 79. The legal protection of shareholders is the same among countries. A) True B) False 80. 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 81. 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 82. The government enforcement of securities laws varies among countries. A) True B) False 83. The degree of financial information that must be provided by public companies is the same among countries. A) True B) False 84. In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders. A) True B) False 85. The strike price on a currency option is also known as an exercise price. A) True B) False 86. When receiving quotations on a currency's exchange rate, the bank's bid quote is the rate at which the bank is willing to sell currency. A) True B) False 87. The interest rate in developing countries is usually very low. A) True B) False 88. The more intense the competition for the traded currency, the larger the bid/ask spread. A) True B) False 89. Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies. A) True B) False 90. At any given point in time, a bank's bid quote will be greater than its ask quote. A) True B) False 91. An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations. A) True B) False 92. 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 93. The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies. A) True B) False 94. 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. A) True B) False Chapter 3 Answer Section MULTIPLE CHOICE 1. Register to View AnswerSOLUTION: 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. PTS: 1 Register to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerRegister to View AnswerSOLUTION: PTS: 1 29. Register to View AnswerSOLUTION: PTS: 1 30. Register to View Answer31. Register to View Answer Bid-ask percentage spread = ($.0043 $.0041)/$.0043 = 4.65% PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ($.008/$.59) = F$.014/ 3 30 $1.63 = $146.70 PTS: 1 PTS: 1 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerD E D B C B E C B A A C D A A B A C B A PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 TRUE/FALSE 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerT F F T F F T F F F F F T F T F F T T F T 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: ANS: Register to View AnswerF T T F T T T F F T F F F F F F F T T PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: PTS: 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 ... View Full Document

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