2.

Imports have the potential to lower a country's inflation rate because of each of the following
EXCEPT:
A) The import of lower priced goods limits what domestic competitors can charge for goods.
B) The import of lower priced services limits what domestic competitors can charge for services.
C) the higher prices of foreign goods spurs domestic competitors to cut prices.
D) all of the above

3. Consider the following: A foreign automobile company builds a manufacturing plant in Tennessee and
European investors buy U.S. Treasury Bonds.
A) Both activities would be considered direct investment.
B) Both activities would be considered portfolio investment.
C) The auto manufacturer is engaging in portfolio investment, and the European investors are
engaged in direct investing.
D) The auto manufacturer in engaging in direct investment, and the European investors are
engaged in portfolio investing.

4. The Glass-Steagall Act of 1933 separated commercial banking activities from investment banking.
TRUE

1. The process of turning an illiquid asset into a liquid saleable asset is called:
A) swapping
B) wrapping
C) securitization
D) liquidation

2. Which of the following statements concerning credit default swaps as of 2008 is FALSE?
A. As of year-end 2008, CDSs were completely outside the regulatory boundaries.
B. A CDS is a derivative security that may be used for hedging risk or for speculative purposes.
C. CDSs allowed banks to reduce their incentive to monitor the ability of borrowers to repay
their obligations.
D. In order to be a party in a credit default swap, at least one of either the buyer or seller must
own the underlying asset.

3. Mortgage loans in the U.S. marketplace were categorized as:

A. Prime, Alt-A, Sub-prime
B. Prime, Alt-A, Alt-B
C. Prime, Alt-prime, Sub-prime
D. Alt-A, Alt-B, Sub-prime

4. While trading in foreign exchange takes place worldwide, the major currency trading happen in
following three currencies:
A. US dollar, euro, pound
B. US dollar, euro, yen
C. US dollar, euro, renminbi
D. US dollar, pound, yen

5. ________ seek to profit from trading in the market itself rather than having the foreign exchange
transaction being incidental to the execution of a commercial or investment transaction.
A. Speculators and arbitrageurs
B. Foreign exchange brokers
C. Central banks
D. Treasuries
6. Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the
foreign currency per dollar this is known as ________ whereas ________ are expressed as dollars per
foreign unit.
A. European terms; indirect
B. American terms; direct
C. American terms; European terms
D. European terms; American terms

7. The following is an example of an American term foreign exchange quote:

A. $20/£
B. €0.85/$
C. ¥100/€
D. none of the above

8. From the viewpoint of a British investor, which of the following would be a direct quote in the foreign
exchange market?
A. SF2.40/£
B. $1.50/£
C. £0.55/€
D. $0.90/€

9. Assume the current U.S. dollar-British spot rate is 0.6993£/$. If the current nominal one-year interest
rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward
exchange rate for 360 days?
A) £1.42/$
B) £1.43/$
C) £0.6993/$
D) £0.7060/$
Postupak: F=S x (1+ UK RATE)/ (1+ US RATE) (jer je annual, 360 days)

10. Assume the current U.S. dollar-yen spot rate is 90 ¥/$. Further, the current nominal 180-day rate of
return in Japan is 1% and 2% in the United States. What is the approximate forward exchange rate for
180 days?
A) ¥89.12/$
B) ¥89.55/$
C) ¥90.89/$
D) ¥90.45/$
Postupak: F=S x (1+ Japanese semmi rate)/ (1+ US semmi rate ) (jer je semmiannual, 180 days)

11. A German firm is attempting to determine the euro/pound exchange rate and has the following
exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€. Calculate the
euro/pound cross rate.

EUR 1,27186/ pound; postupak: (1,5509/1,2194)

12. _______ states that differential rates of inflation between two countries tend to be offset over time
by an equal but opposite change in the spot exchange rate.
A) The Fisher Effect
B) The International Fisher Effect
C) Absolute Purchasing Power Parity
D) Relative Purchasing Power Parity
 13. The relationship between the percentage change in the spot exchange rate over time and the
differential between comparable interest rates in different national capital markets is known as:
A) absolute PPP.
B) the law of one price.
C) relative PPP.
D) the international Fisher Effect.

14. Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate
was $1.25/euro and Plillips charged 120 euro per player in Euroland and $150 per DVD player in the
United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD
player. What is the degree of pass through by Phillips NV on their DVD players?
A) 92%
B) 33.3%
C) 41.7%
D) 4.1%

15. Covered interest arbitrage moves the market ______ equilibrium because ________.
A) toward; purchasing a currency on the spot market and selling in the forward market narrows
the differential between the two
B) toward; investors are now more willing to invest in risky securities
C) away from; purchasing a currency on the spot market and selling in the forward market
increases the differential between the two
D) away from; demand for the stronger currency forces up interest rates on the weaker security

1. How would following transactions influence balance of payments (BOP) of each county involved?
A) A person that lives in Vienna buys Mozart balls in Salzburg.
No entry

B) The U.S. subsidiary of BMW pays dividends back to its parent firm in Germany.
US debit, Germany credit-CURRENT-INCOME PART

C) An investor from Toronto buys 70 stocks of Tesla.

Canada debit, US credit-financial-portfolio inv

D) A worker in Google’s subsidiary in Dublin send EUR700 monthly to his retired parents in
Osijek.
IE debit, Croatia credit-current account-transfers
Under a fixed exchange rate system, the central bank bears the responsibility to preserve foreign exchange
rate parity by intervening in the foreign exchange market. TRUE

As of year-end 2008, when the crisis started, credit default swaps were completely unregulated. TRUE

Dealers bid (buy) at one price and ask (sell) at a slightly higher price. The difference is called spread. TRUE
When a resident buys stocks in a foreign company, that is registered as a current account transaction in the
balance of payments. FALSE

6) In the foreign exchange market, ________ seek all of their profit from exchange rate
changes while ________ seek to profit from simultaneous exchange rate differences in
different markets.
A) wholesalers; retailers
B) central banks; treasuries
C) speculators; arbitrageurs
D) dealers; brokers

According to the international Fisher Effect, if an investor purchases a five-year U.S. bond
that has an annual interest rate of 5% rather than a comparable British bond that has an
annual interest rate of 6%, then the investor must be expecting the ________ to ________
at a rate of at least 1% per year over the next 5 years.
A) British pound; appreciate
B) British pound; revalue
C) U.S. dollar; appreciate
D) U.S. dollar; depreciate

A ________ is an exchange rate quoted today for settlement at some time in the future.
A) spot rate
B) forward rate
C) currency rate
D) yield curve

The theory of ________ states that the difference in the national interest rates for securities
of similar risk and maturity should be equal to but opposite in sign to the forward rate
discount or premium for the foreign currency, except for transaction costs.
A) international Fisher Effect
B) absolute PPP
C) interest rate parity
D) the law of one price

1) Investment banks and stock brokerages have traditionally been regulated by the:
A) Federal Reserve System (FED).
B) Federal Deposit Insurance Corporation (FDIC).
C) Securities and Exchange Commission (SEC).
D) Internal Revenue Service (IRS).

2) The Glass-Steagall Act of 1933:

A) separated commercial banking activities from investment banking activities.
B) created the Federal Reserve System.
C) developed the system of commercial bank deposit insurance.
D) all of the above

3) Which of the following is NOT another term for a prime mortgage loan?
A) conventional loan
B) top-qual loan
C) conforming loan
D) All of the above are suitable terms for a prime mortgage loan.

5) Asset-backed securities (ABSs) may be securitized based on:

A) auto loans.
B) home-equity loans.
C) credit card receivables.
D) all of the above

6) A ________ is a financial intermediation device that allowed the participant to borrow

short
and lend long.
A) sub-prime loan
B) structured investment vehicle
C) non-conforming loan
D) all of the above

1) Which of the following is NOT identified by the authors as a "safe-haven" currency?

A) the euro
B) the British pound
C) the U.S. dollar
D) the Japanese yen

3) The typical TED spread, the difference between the LIBOR and the interest rate swap
index,
is typically about ________ basis points.
A) 350
B) 180
C) 120
D) 80

4) The three stages of the global credit crisis of 2009-2009 were:

A) 1. The failure of commercial and investment financial institutions, 2. the failure of specific
mortgage-backed securities, 3. a credit-induced global recession.
B) 1. The failure of specific mortgage-backed securities, 2. the failure of commercial and
investment financial institutions, and 3. a credit-induced global recession.
C) 1. The failure of commercial and investment financial institutions, 2. a credit-induced
global recession, 3. the failure of specific mortgage-backed securities credit-induced global
recession.
D) 1. The failure of specific mortgage-backed securities, 2. a credit-induced global recession,
3. failure of commercial and investment financial institutions.

1) Portfolio theory relies on combining assets with ________ return correlation exclusively
to
reduce risk.
A) highly positive
B) low
C) zero
D) none of the above

2) Future financial market regulation must include all of the following EXCEPT:
A) renewed regulatory requirements.
B) increased reporting.
C) greater transparency in pricing and valuation.
D) Regulation must include all of the above.

3) In finance, a liquid asset:

A) sells quickly.
B) sells at or near its market value.
C) both A and B
D) none of the above

5) The member nations of the European Union have relative freedom to set their own fiscal
policies EXCEPT for which of the following?
A) government spending
B) government taxation
C) government surpluses or deficits
D) government printing of the euro currency

6) When the EU moved to a single currency with the adoption of the euro, its member
states
agreed to each of the following EXCEPT:
A) a single currency.
B) control of their own money supply.
C) free movement of capital in and out of their economies.
D) In fact, the member states agreed to ALL of the above.

When the world went to a system of floating exchange rates, the Balance of Payments
became a relic of a system of fixed exchange rates and is no longer watched by serious
economic groups. False

The authors identify a tip for understanding BOP accounting. They recommend that you
"follow the cash flow." True

International debt security purchases and sales are defined as portfolio investments for
financial account purposes because by definition debt securities do not provide the buyer
with ownership or control. True

An excess of merchandise exports over merchandise imports results in a balance of trade

deficit. False

An increase in GDP should lead to a decrease in imports. False

The Bretton Woods era realized a great expansion of international trade in goods and
services. True
Under a floating exchange rate system, the government bears the responsibility to ensure
that the BOP is near zero. False

Without adjustments, the BOP should and will always balance. False
Significant amounts of United States Treasury issues are purchased by foreign investors,
therefore the U.S. must earn foreign currency to repay this debt. False

With adjustments, the BOP must be in balance but the current account need not be. True

Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored
into BOP calculations. True

In the decade since 2000, the U.S. has experienced its largest bilateral trade deficits with the
countries of China and Japan. True

If your company were to import and export textiles, the transactions would be recorded in
the current account subcategory of ________.
goods trade
services trade
current transfers
income trade

Under an international regime of fixed exchange rates, countries with a BOP ________
should consider ________ their currency while countries with a BOP ________ should
consider ________ their currency.
surplus, revaluing; deficit, devaluing
deficit, devaluing; surplus, devaluing
deficit, revaluing; surplus, revaluing
surplus, devaluing; deficit, revaluing

Portfolio investment is capital invested in activities that are ________ rather than made for
________.
profit motivated; control
long term; profit
control motivated; profit
short term; the long term

Two major concerns about FDI (foreign direct investment) are:

national defense and taxes.
who pays the taxes and who receives the taxes.
who receives the profits and taxes.
who controls the assets and who receives the profits.

When categorizing investments for the financial account component of the balance of
payments the ________ is an investment where the investor has no control whereas the
________ is an investment where the investor has control over the asset.
direct investment; indirect investment
portfolio investment; direct investment
portfolio investment; indirect investment
direct investment; portfolio investment
The COMPLETE financial account consists of which three components?
Direct investment, stock investment, and bond investment.
Direct investment, portfolio investment, and other asset investment.
Stock investment, bond investment, and mutual fund investment.
Mutual fund investment, portfolio investment, and stock investment.

Which of the following statements about the balance of payments is NOT true?
Although the BOP must always balance in theory, in practice there are substantial
imbalances as a result of statistical errors and misreporting of current account and financial
account flows.
The BOP is the summary statement of all international transactions between one country
and all other countries.
The BOP is a flow statement, summarizing all international transactions that occur across
the geographic borders over a period of time, typically a year.
All of the above are true.

Which of the following is NOT likely to occur in the quantity adjustment phase of the J-Curve
adjustment path?
Exports become relatively less expensive.
Imports become relatively more expensive.
The balance of trade gets worse.
All of the above are true.

Of the following, which is NOT a part of J-Curve adjustment path?

The exchange rate pass-through period.
The currency contract period.
The quantity adjustment period.
Each of the above is part of the J-Curve adjustment path.

The ________ of the balance of payments measures all international economic transactions
of financial assets.
capital/financial account
services account
merchandise trade account
current account

Devaluation - refers to a drop in foreign exchange value of a currency that is pegged to gold
or another currency , par value is reduced

Revaluation - an increase in the value of a currency that is set under a fixed exchange rate
regime, par value increases

Revaluation & Devaluation vs Appreciation & Depreciation - revaluation and devaluation

are used to described currency rate changes in fixed exchange rate systems while appreciation
and depreciation in floating exchange rate system

Gold Standard (1876-1913)

- countries set par value for their currency in terms of gold
-because governments agreed to buy/sell gold on demand with anyone at its own fixed parity
rate, the value of each currency in terms of gold, the exchange rates were therefore fixed
-worked until WWI which interrupted trade flows and free movement of gold thus forcing
major nations to suspend operation of the gold standard

Inter-War and WWI (1914-1944)

-during WWI currencies were allowed to fluctuate over wide ranges in terms of gold causing
changes in in exchange rate
-people were selling weak currencies short which caused them to fall further in value and the
volume of world trade didn't grow in the 20s compared to world GDP leading to Great
Depression
-1924 to WWII, exchange rates were theoretically determined by each currency's value in
terms of gold
-during WWII many main currencies lost their convertibility, but US dollar remained
convertible

Bretton Woods and IMF (1994)

-post war agreement established a US dollar based monetary system and created the IMF and
World Bank
Bretton Woods Agreement - plan called for fixed exchange rates (adjustable peg), fund of
gold and constituent currencies available to members for stabilization of their respective
currencies, IMF, and bank for financing long-term development projects, World Bank
International Monetary Fund (IMF)
-created to help countries defend their currencies against cyclical, seasonal, or random
occurrences
-assist countries having structural trade problems if they promise to take adequate steps to
correct these problems
-special drawing right is the IMF reserve asset, weighted average of 4 currencies
-help countries facing financial crises by providing massive loans

International Bank for Reconstruction and Development (World Bank)

-helped fund post-war reconstruction and has since then supported general economic
development
-all countries fixed their currencies in terms of gold but were not required to exchange their
currencies
-only the US dollar remained convertible into gold
-each country established its exchange rate vis-à-vis the US dollar and then calculated the
gold par value of their currency

Special Drawing Rights

an international reserve asset created by the IMF to supplement existing foreign exchange
reserves
-serves as a unit of account for the IMF and is also the base against which some countries peg
their exchange rates
-weighted average value of currencies of 5 IMF members having the largest exports
-individual countries hold SDRs in the form of deposits at the IMF and settle IMF
transactions through SDR transfers

Fixed Exchange Rates (1945-1973)

-heavy capital outflows of dollars became required to meet investors' and deficit needs and
eventually this overhang of dollars held by foreigners created a lack of confidence in the US'
ability to meet its obligations
-lack of confidence forced President Nixon to suspend official purchases or sales of gold and
US suffered the loss of 1/3 of its official gold reserves and value of a dollar plummeted
-exchange rates of most leading countries were allowed to float in relation to the US dollar
-end of 1971, most of the major trading currencies had appreciated vis-à-vis the US dollar,
dollar depreciated
-dollar loss its value by a lot

Floating Era (1973-1997)

Since March 1973, exchange rates have become much more volatile and less predictable than
they were during the "fixed" period
-European Monetary System

Emerging Era (1997-present)

Emerging market economics are multiplying in number and growing in complexity
-results in a growing number of emerging market currencies
IMF Classification of Currency Regimes
there is no single governing body or single official global policing authority for global
exchange of currencies
-asian financial crisis caused many countries to follow different exchange rate practices, their
"de facto" systems weren't what they had publicly committed
-1998, IMF stopped collecting classifications and then performed analysis in-home