Chapter 3: International Financial Markets

1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage
spread is:

a. about 4.44%.

b. about 4.26%.

c. about 4.03%.

d. about 4.17%.

ANS: B

SOLUTION: Bid-ask percentage spread = ($.47 - $.45)/$.47 = 4.26%

2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask
percentage spread is:

a. about 4.99%.

b. about 4.88%.

c. about 4.65%.

d. about 4.43%.

ANS: C

SOLUTION: Bid-ask percentage spread = ($.0043 - $.0041)/$.0043 = 4.65% 3. The bid/ask spread for
small retail transactions is commonly in the range of ____ percent.

a. 3 to 7

b. .01 to .03

c. 10 to 15

d. .5 to 1

ANS: A

4. ____ 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

ANS: D
7. According to the text, the forward rate is commonly used for:

a. hedging.

b. immediate transactions.

c. previous transactions.

d. bond transactions.

ANS: A

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

ANS: B

9. If a U.S. 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.

ANS: A

10. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the
Peruvian Sol in Canadian dollars is:

a. about .3621 Canadian dollars.

b. about .3977 Canadian dollars.

c. about 2.36 Canadian dollars.

d. about 2.51 Canadian dollars.

ANS: B

SOLUTION: $.35/$.88 = .3977

11. 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.

ANS: D

12. 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.

ANS: B

13. 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

ANS: C

14. 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

ANS: C

15. ____ 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.
ANS: E

16. The Basel II accord is focused on eliminating inconsistencies in ____ across countries.

a. capital requirements

b. deposit rates

c. deposit insurance

d. bank failure policies

ANS: A

17. 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.

ANS: A

18. 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.

ANS: B

19. 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.

ANS: C

20. LIBOR is:

a. the interest rate commonly charged for loans between banks.

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.

ANS: A

21. 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

ANS: D

22. 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 cur-rencies.

d. small banks that convert foreign currency for tourists and business visitors.

ANS: C

23. 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.

ANS: A

25. 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.

ANS: A

26. As a result of the Smithsonian Agreement, the U.S. dollar was:

a. the currency to be used by all countries as a medium of exchange for international trade.

b. forced to be freely floating relative to all currencies without any boundaries.

c. devalued relative to major currencies.

d. revalued (upward) relative to major currencies.

ANS: C

27. According to the text, the average foreign exchange trading around the world ____ per day.

a. equals about $200 billion

b. equals about $400 billion

c. equals about $700 billion

d. exceeds $1 trillion

ANS: D

28. 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

ANS: B

29. 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.

ANS: B

30. 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

ANS: C

31. Eurobonds:

a. are usually issued in bearer form.

b. typically carry several protective covenants.

C. cannot contain call provisions.

d. A and B

ANS: A

32. Which of the following is true?

a. Non-U.S. firms may desire to issue bonds in the U.S. due to less regula-tions 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

ANS: C

33. 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

ANS: D

34. Which currency is used the most to denominate Eurobonds?

a. the British pound.

b. the Japanese yen.

c. the U.S. dollar.

d. the Swiss franc.

35. 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.

ANS: C

36. 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

ANS: D

37. 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.

ANS: D

38. 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

ANS: D
SOLU-TION: ($.008/$.59) = F$.014/¥

51. 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 U.S.
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

ANS: C SOLU-TION: 15 * $1.10 = $16.50

52. 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

d. none of the above

ANS: B

SOLUTION: 3 * 30 * $1.63 = $146.70

69. 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.

ANS: D

71. 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

c.redit cmoney
d. foreign exchange

ANS: B

73. 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

ANS: C

75. 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

ANS: D

76. 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.

ANS: E

77. The interest rate in developing countries is usually very low.

a. True

b. False

ANS: F

78. 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

ANS: D

79. 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.

d. lender's stock price.

ANS: B

80. The largest global exchange is:

a. NASDAQ

b. Tokyo Stock Exchange

c. NYSE Euronext

d. London Stock Exchange

ANS: C

81. 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.

ANS: B

82. 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.

83. 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 appropri-ate in this
situation:

a. Buy dollars forward

b. Sell dollars forward

c. Purchase call option

d. Purchase put option

ANS: C

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

a. Eurobonds

b. ADRs

c. FRNs

d. Eurobor

ANS: B

85. 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

ANS: A

86. Which of the following is not true regarding ADRs?

a. ADRs are denominated in the currency of the 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 U.S. market for funds.

d. ADRs sometimes allow for arbitrage opportunities.

ANS: A

94. 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.

ANS: C

95. 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

ANS: D

96. 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.

ANS: A

97. 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

ANS: A

98. 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

ANS: B

99. 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.

ANS: A

100. 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

ANS: C

101. 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

e. less standardized; custom-tailored

ANS: B

102. 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

ANS: A