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tb04 - Kirt C Butler Multinational Finance 3rd edition...

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Kirt C. Butler, Multinational Finance , 3 rd edition Chapter 4 Foreign Exchange, Eurocurrencies and Currency Risk Management True/False 1. Eurocurrency markets are highly liquid and relatively unencumbered by government regulation, resulting in borrowing and lending rates that are generally more favorable to customers than domestic rates. ANS: True. 2. A bank that is making a market in lira stands ready to buy lira at its offer price and sell lira at its bid price. ANS: False. The bank will buy at the bid and sell at the offer price. 3. American terms state the dollar value of one unit of foreign currency, such as $0.0085/¥. ANS: True. 4. European terms state the foreign currency price of one U.S. dollar (for example C$1.726/$). ANS: True. 5. If the current spot rate is S 0 $/C$ = $0.5839/C$ and the one-year forward rate is F 1 $/C$ = $0.5754/C$, then the Canadian dollar is selling at a forward premium. ANS: False. The Canadian dollar (in the denominator of the quote) is selling at a forward discount. 6. If the current spot rate is S 0 $/C$ = $0.5839/C$ and the one-year forward rate is F 1 $/C$ = $0.5754/C$, then the U.S. dollar is selling at a forward premium. ANS: True. The Canadian dollar in the denominator is at a forward discount. 7. A bank offers you the following quote: “$0.5841/C$ BID and $0.5852/C$ ASK.” The bank will buy U.S. dollars at $0.5841/C$ or sell U.S. dollars at $0.5852/C$. ANS: False. Banks quote foreign currency in order to make a profit. The bank will buy C$ (and sell $) at $0.5841/C$ or sell C$ (and buy $) at $0.5852/C$. 8. Currency risk is the risk of unexpected changes in foreign currency values. ANS: True. 9. For the most actively traded currencies, national credit markets are operationally more efficient than the Eurocurrency markets. ANS: False. Eurocurrency markets are generally more operationally efficient. 10. Volume in the foreign exchange markets averages about one billion dollars per day. ANS: False. Interbank trading volume averages over one trillion dollars daily. 11. Eurocurrency transactions in the external credit market fall outside the jurisdiction of any single nation. ANS: True. 19
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Kirt C. Butler, Multinational Finance , 3 rd edition 12. One basis point is equal to one percentage point (e.g., one percent of a dollar). ANS: False. It is equal to one hundredth of a percentage point (e.g. 1/100th of a dollar). 13. The majority of the volume in the forward market for foreign exchange is conducted on the floor of the Chicago Mercantile Exchange’s International Monetary Market. ANS: False. Forward exchange contracts are primarily traded through commercial banks. 14. Commercial banks always quote foreign exchange rates with the domestic currency in the denominator of the quote. ANS: False. The domestic currency can be in the numerator or the denominator. 15. A bank’s bid price for one currency is its offer price for another currency.
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