International Finance

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1. "Bulldog" bonds are: pound sterling-denominated foreign bonds originally sold in the U.K
2. "Dragon" bonds are: dollar-denominated bonds originally sold in Asia with non-Japanese
issuers
3. "Samurai" bonds are: yen-denominated foreign bonds originally sold in Japan
4. "Yankee" bonds are: dollar-denominated foreign bonds originally sold to U.S. investors
5. . Currently, the biggest bank in the world is : Citigroup
6. A "bearer bond" is one that: possession is evidence of ownership
7. A "call market: features an agent of the exchange that accumulates a batch of orders that are
periodically executed by written or verbal auction throughout the day
8. A "Eurobond" issue is: one denominated in a particular currency but sold to investors in
national capital markets other than the country that issued the denominating currency; usually a
bearer bond; for example a Dutch borrower issuing dollar-denominated bonds to investors in the
U.K., Switzerland, and the Netherlands
9. A "foreign bond" issue is : one offered by a foreign borrower to investors in a national market
and denominated in that nation's currency; for example, a German MNC issuing dollar-
denominated bonds to U.S. investors
10. A "global bond" issue: is a very large international bond offering by a single borrower that is
simultaneously sold in several national bond markets.
11. A "good" (or ideal) international monetary system should provide: liquidity, adjustments,
and confidence.
12. A "primary" stock market is : a market where corporations issue new shares to initial investors
13. A "registered bond" is one that : shows the owner's name on the bond; the owner's name is
recorded by the issuer; the owner's name is assigned to a bond serial number recorded by the
issuer
14. A "specialist: makes a market by holding an inventory of a particular security, like IBM or Intel;
is a participant on the floor of the exchange, like the NYSE; has a designated station on the floor
of the exchange
15. A bank may establish a multinational operation for the reason of low marginal costs. The
underlying rationale being that : managerial and marketing knowledge developed at home can
be used abroad with low marginal costs
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16. A bank may establish a multinational operation for the reason of knowledge advantage. The
underlying rationale being that : the foreign bank subsidiary can draw on the parent bank's
knowledge of personal contacts and credit investigations for use in that foreign market
17. A bank may establish a multinational operation for the reason of prestige. The underlying
rationale being that : very large multinational banks have high perceived prestige, liquidity, and
deposit safety that can be used to attract clients abroad
18. A bank may establish a multinational operation for the reason of risk reduction. The
underlying rationale being that : greater stability of earnings is possible with international
diversification. Offsetting business and monetary policy cycles across nations reduces the
country-specific risk of any one nation.
19. A bank may establish a multinational operation for the reason of regulatory advantage. The
underlying rationale being that : multinational banks are often not subject to the same
regulations as domestic banks. There may be reduced need to publish adequate financial
information, lack of required deposit insurance and reserve requirements on foreign currency
deposits, and the absence of territorial restrictions
20. A bank may establish a multinational operation for the reason of retail defensive strategy.
The underlying rationale being that : multinational banking operations help a bank prevent the
erosion of its traveler's check, tourist, and foreign business markets from foreign bank
competition
21. A bank may establish a multinational operation for the reason of wholesale defensive
strategy. The underlying rationale being that : banks follow their multinational customers
abroad to prevent the erosion of their clientele to foreign banks seeking to service the
multinational's foreign subsidiaries
22. A bank may establish a multinational operation for the reason of transaction costs. The
underlying rationale being that : by maintaining foreign branches and foreign currency
balances, banks may reduce transaction costs and foreign exchange risk on currency conversion if
government controls can be circumvented.
23. A bank may establish a multinational operation for the reason of growth. The rationale
being that : growth prospects in a home nation may be limited by a market largely saturated with
the services offered by domestic banks
24. A bank may establish a multinational operation for the reason of home country information
services. The underlying rationale being that : local firms may be able to obtain from a foreign
subsidiary bank operating in their country more complete trade and financial market information
about the subsidiary's home country than they can obtain from their own domestic banks
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25. a bond market index: represents a price-weighted average of all bonds that exist
26. A booming economy with a fixed or stable nominal exchange rate: inevitably brings about an
appreciation of the real exchange rate.
27. A central bank can fix an exchange rate: only for as long as the market believes that it has the
political will to do so.
28. A CME contract on €125,000 with September delivery: is an example of a futures contract
29. A corporation that can source its products in one country, sell them in another country, and
raise the funds in a third country: is a multinational corporation.
30. A correspondent bank relationship is established when : two banks maintain deposits with one
another
31. a country experiencing a significant balance of payments surplus would be likely to: expand
imports, offering marketing opportunities for foreign enterprises, and refrain from imposing
foreign exchange restrictions.
32. A country that gives foreign aid to another country can be viewed as: importing goodwill
from the later
33. A country with a current account surplus: acquires IOUs from foreigners, thereby increasing
its net foreign wealth
34. A country's international transactions can be grouped into the following three main types:
current account, capital account, official reserve account
35. A crowd of floor traders on the NYSE : may arrive at a more favorable price for their clients
"inside" the specialist's bid and ask quotes.
36. A currency board arrangement is: a monetary regime based on an explicit legislative
commitment to exchange domestic currency for a specified foreign currency at a fixed exchange
rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal
obligation.
37. A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one
year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year
interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward
exchange rate is $1.20 = €1.00. Show how to realize a certain profit via covered interest
arbitrage. €2,000
38. A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one
year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year
interest rate is i€ = 6%. The one-year forward exchange rate is $1.20 = €1.00; what must the
spot rate be to eliminate arbitrage opportunities? $1.2471 = €1.00
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39. A currency depreciation will begin to improve the trade balance immediately: if demand for
imports and exports are elastic
40. A dealer in British pounds who thinks that the pound is about to appreciate : may want to
lower his bid price and his ask price
41. A dealer in pounds who thinks that the exchange rate is about to increase in volatility: may
want to widen his bid-ask spread
42. A depreciation will begin to improve the trade balance immediately if: imports and exports
are responsive to exchange rate changes
43. A domestic bank that becomes a multinational bank to prevent erosion by foreign banks of
the traveler's checks, touring, and foreign business market : is pursuing a retail defensive
strategy
44. A domestic bank that follows a multinational client abroad to preserve that banking
relationship : is pursuing a wholesale defensive strategy
45. A firm with concentrated ownership : tends to exist overseas but not in the U.S
46. A foreign branch bank operates like a local bank, but legally : it is a part of the parent bank ;
a branch bank is subject to both the banking regulations of its home country and the country in
which it operates
47. A foreign branch bank : operates like a local bank, but legally is a part of the parent bank ;
operates like a local bank, but legally is a part of the parent bank
48. A formal statement of IRP is :

49. A global bond issue denominated in U.S. dollars and issued by U.S. corporations: trade as
Eurobonds overseas; trade as domestic bonds in the U.S. domestic market
50. A higher U.S. interest rate (i$ ↑) relative to interest rates abroad, ceteris paribus, will result
in: a stronger dollar.
51. A limit order : is an instruction from a customer to a broker to buy or sell in at a particular price
(or better); can be a "day order"—that is the order is cancelled if not executed during that day's
trading; can be "good till cancelled
52. A liquid stock market : is one in which investors can buy and sell stocks quickly at close to the
current quoted prices
53. A market order : is an instruction from a customer to a broker to buy or sell at the best price
available when the order is received (immediately
54. A measure of "liquidity" for a stock market is : the ratio of stock market transactions over a
period of time divided by the size, or market capitalization, of the stock market
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55. A measure of liquidity for a stock market is the turnover ratio; defined as: the ratio of stock
market transactions over a period of time divided by the size, or market capitalization, of the
stock market
56. A MNC can : be a factor that increases the opportunities of the citizens of less developed
countries; be a factor that increases the opportunity set of domestic investors; increase economic
efficiency
57. A MNC may gain from its global presence by : spreading R&D expenditures and advertising
costs over their global sales; pooling global purchasing power over suppliers; utilizing their
technological and managerial know-how globally with minimum additional costs
58. A multinational firm can be defined as a firm that : incorporated in one country that has
production and sales operations in several other countries
59. A purely domestic firm sources its products, sells its products, and raises its funds
domestically : can face stiff competition from a multinational corporation that can source its
products in one country, sell them in several countries, and raise its funds in a third country; can
be more competitive than a MNC on its home turf due to superior knowledge of the local market;
can still face exchange rate risk, just like a MNC
60. A purely domestic firm that sources its products, sell its products, and raises its funds
domestically: can face stiff competition from a multinational corporation that can source its
products in one country, sell them in several countries, and raise its funds in a third country, can
be more competitive than a MNC on its home turf due to superior knowledge of the local market,
and can still face exchange rate risk
61. A recent survey of U.S. foreign exchange traders measured traders perceptions about how
fast news events that cause movements in exchange rates actually change the exchange rate.
The survey respondents claim that the bulk of the adjustment to economic announcements
regarding unemployment, trade deficits, inflation, GDP, and the Federal funds rate takes
place within : one minute
62. A representative office : is a small service facility staffed by parent bank personnel that is
designed to assist MNC clients of the parent bank in dealings with the bank's correspondents ; is a
way for the parent bank to provide its MNC clients with a level of service greater than that
provided through merely a correspondent relationship ; is a step up from a correspondent
relationship, but below a foreign branch
63. A specialist on the NYSE : is obliged to fill limit orders if they are more favorable than the
specialist's posted bid and ask quotes.
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64. A stop order is an order to buy or sell a stock once the price of the stock reaches a specified
price, known as the stop price. When the specified price is reached, your stop order
becomes : a market order.
price, known as: the stop price
price, known as the stop price. When the specified price is reached, your stop order
becomes a market order, The advantage of a stop order is that: you don't have to monitor
how a stock is performing on a daily basis
67. A stop-limit order is an order to buy or sell a stock that combines the features of a stop
order and a limit order. Once the stop price is touched in the market, the stop-limit order
becomes a limit order to buy or to sell at the limit price. Which of the following are true? In
addition, your broker-dealer may not allow you to place a stop limit order on some securities or
accept a stop limit order for OTC stocks.
68. A subsidiary bank is : a locally incorporated bank that is wholly owned by a foreign parent ; a
locally incorporated bank that is majority owned by a foreign parent
69. A true MNC, with operations in dozens of different countries : must effectively manage
foreign exchange risk
70. A U.S. based MNC with exposure to the Thai bhat would likely cross-hedge with what?
Forward contracts on the Japanese Yen
71. A U.S. trade deficit is a capital account _______ and a current account _______. Surplus;
Deficit
72. A U.S. trade surplus is a capital account ________ and a current account _________.Deficit;
surplus
73. A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year. The
one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is
i€ = 6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is
$1.20 = €1.00. Show how to realize a certain dollar profit via covered interest arbitrage.
$2,400.
74. A U.S.-based multinational bank : would not have to provide deposit insurance and meet
reserve requirements on foreign currency deposits
75. According to the "Trilemma" a country can attain only two of the following three
conditions: 1) A fixed exchange rate, (2) Free international flows of capital, (3) An
independent monetary policy. This difficulty is also known as: the incompatible trinity.
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76. According to the research in the accuracy of paid exchange rate forecasters, as a group, they
do not do a better job of forecasting the exchange rate than the forward rate does.
77. According to the research in the accuracy of paid exchange rate forecasters, you can make
more money selling forecasts than you can following forecasts.
78. According to the spot exchange microstructure, when bid-ask spreads is large, what does
that mean? The volatility of the FX market is high; The competition between dealers is light
79. According to the technical approach, what matters in exchange rate determination: is the
past behavior of exchange rates.
80. According to the theory of optimum currency areas, the relevant criterion for identifying and
designing a common currency zone is the degree of factor (i.e. capital and labor) mobility wit
81. Accounting transparency: promotes to reduce the information asymmetry between corporate
insiders and the public
82. Advantages of a fixed exchange rate include: reduction in exchange rate risk for
businesses; reduction in transactions costs; reduction in trading frictions.
83. Advantages of a flexible exchange rate include which of the following? National policy
autonomy; Easier external adjustments; The government can use monetary and fiscal policies to
pursue whatever economic goals it chooses.
84. Although IRP tends to hold, it may not hold precisely all the time: due to transactions costs,
like the bid-ask spread, as well as capital controls imposed by governments
85. Although the world economy is much more integrated today than was the case 10 or 20
years ago, a variety of barriers still hamper free movements of people, goods, services, and
capital across national boundaries. These barriers include : legal restrictions; excessive
transportation costs; information asymmetry.
86. An "international" gold standard can be said to exist when: gold alone is assured of
unrestricted coinage; there is two-way convertibility between gold and national currencies at
stable ratios.; gold may be freely exported or imported.
87. An affiliate bank is : a locally incorporated bank that is partially owned (but not controlled) by a
foreign parent
88. An all-or-none order is a limit order either to buy or to sell a security in which the broker is
directed to attempt to fill the entire amount of the order or none of it. An all-or-none order
differs from a fill-or-kill order in that : with an all-or-none order immediate execution is not
required
89. An arbitrage is best defined as : the act of simultaneously buying and selling the same or
equivalent assets or commodities for the purpose of making guaranteed profits
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90. An example of a political risk is : expropriation of assets; adverse change in tax rules.
91. An exchange-traded fund (ETF) is : a portfolio of financial assets in which shares representing
fractional ownership of the fund trade on an organized exchange
92. An Italian currency dealer has good credit and can borrow €800,000 for one year. The one-
year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ =
6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is
$1.20 = €1.00. Show how to realize a certain euro-denominated profit via covered interest
arbitrage. Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S. at i$ =
2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00. Net profit
is €2,000.
93. Another name for the incompatible trinity is the: Triffin Paradox
94. As a measure of "liquidity", generally, the higher the turnover, the greater the liquidity of a
secondary stock market
95. As a rule, when the interest rate of the foreign currency is greater than the interest rate of
the quoting currency, the outright forward rate is less than the spot exchange rate.
96. As capital markets are becoming more integrated, the goal of shareholder wealth
maximization Has been given increasing importance by managers in Europe.
97. As of 2011, gold accounted for: less than one percent of the total reserve assets held by IMF
member countries
98. As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to
prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year
forward rate that should prevail? €1.00 = $1.2379
99. As of today, the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to
prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year
forward rate that should prevail? €1.00 = $1.5845
100. Assume Poland's currency (the zloty) is worth $.17 and the Japanese yen is worth
$.008. What is the cross rate of the zloty with respect to yen? That is, how many yen equal a
zloty? $.17/$.008 = 21.25;1 zloty = 21.25 yen
101. Assume that a country is on the gold standard. In order to support unrestricted
convertibility into gold, banknotes need to be backed by a gold reserve of some minimum
stated ratio. In addition, the domestic money stock should rise and fall as gold flows in and out
of the country
102. Assume that the balance-of-payments accounts for a country are recorded correctly.
Balance on the current account = BCA = $130 billion
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Balance on the capital account = BKA = −$86 billion

Balance on the reserves account = BRA =? In a pure flexible exchange rate regime, a
country's central banks will not need to maintain official reserves. Under this regime -
bca=bka
103. At the outbreak of World War I major countries such as Great Britain, France,
Germany and Russia imposed embargoes on the export of gold.
104. Balance of payments All of the above
105. Bank dealers in conversations among themselves use a shorthand notation to quote
bid and ask forward prices in terms of forward points. This is convenient because : traders
who are looking for violations of covered interest arbitrage are less interested in the actual spot
and forward exchange rates, but are interested in the premium or discount differential measured
in forward points.
106. Banking tends to be : a low marginal cost industry
107. Banks that both perform traditional commercial banking functions and engage in
investment banking activities are often called : merchant banks
108. Because __________ do not have to meet national security regulations, name
recognition of the issuer is an extremely important factor in being able to source funds in
the international capital market Eurobonds
109. Benefits from adopting a common European currency include: reduced transaction
costs; elimination of exchange rate risk; increased price transparency that will promote Europe-
wide competition.
110. BKA stands for: balance of capital account
111. Both subsidiary and affiliate banks : operate under the banking laws of the country in
which they are incorporated
112. By far the most important international finance centers are : New York, London, and
Tokyo
113. Capital account includes : direct investment; other capital; portfolio investment
114. capital account may be divided into three categories: FDI, portfolio and other
115. central bank of united states is: Federal Reserve System
116. Companies domiciled in countries with weak investor protection can reduce agency
costs between shareholders and management: by listing their stocks in countries with stronger
investor protection
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117. Comparing "forward" and "futures" exchange contracts, we can say that: delivery
of the underlying asset is seldom made in futures contracts and delivery of the underlying asset is
usually made in forward contracts.
118. Compute the bid/ask percentage spread for Mexican peso retail transactions in
which the ask rate is $.11 and the bid rate is $.10. [($.11 - $.10)/$.11] = .091, or 9.1%
119. Consider a trader who takes a long position in a six-month forward contract on the
euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the
contract the spot exchange rate is $1.65 = €1.00. The trader has lost $6,250.
120. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter
invoiced in euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where
of course he has an account denominated in U.S. dollars) and inquire about the exchange
rate, which the bank quotes as €1.0242/$1.00. The importer accepts this price, so his bank
will _______ the importer's account in the amount of _______. debit; $500,000
121. Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter
invoiced in euros, at a cost of €160,000. The U.S. importer will contact his U.S. bank (where
of course he has an account denominated in U.S. dollars) and inquire about the exchange
rate, which the bank quotes as €0.6250/$1.00. The importer accepts this price, so his bank
will proceed to ____________ the importer's account in the amount of ____________. Debit;
$256,000
122. Consider the following spot and forward rate quotations for the Swiss franc.
S($/SFr) = 0.85; F1($/SFr) = 0.86; F2($/SFr) = 0.87; F3($/SFr) =0.88; Which of the following
is true? The Swiss franc is trading at a forward premium.
123. Consider the supply-demand framework for the British pound relative to the U.S.
dollar shown in the nearby chart. The exchange rate is currently $1.80 = £1.00. Which of
the following is correct?, At an exchange rate of $1.80 = £1.00, demand for British pounds
exceeds supply; Under a flexible exchange rate regime, the U.S. dollar will depreciate to an
exchange rate of $1.90 = £1.00.
124. Consider the supply-demand framework for the British pound relative to the U.S.
dollar shown in the nearby chart. The exchange rate is currently $1.80 = £1.00. Which of
the following is correct? To "fix" the exchange rate at $1.80 = £1.00, the Federal Reserve could
use contractionary monetary policy to shift the demand curve to the left; To "fix" the exchange
rate at $1.80 = £1.00, the U.S. government could use contractionary fiscal policy to shift the
demand curve to the left; The British Government could use fiscal or monetary policy to shift the
supply curve to the right to fix the exchange rate to $1.80 = £1.00.
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125. Continued US trade deficits coupled with foreigners' desire to diversify their
currency holdings away from US Dollars: could further diminish the position of the dollar as
the dominant reserve currency; could affect the value of U.S. dollar (e.g., through the currency
diversification decisions of Asian central banks); could lend steam to the emergence of the euro
as a credible reserve currency
126. Corporate governance can be defined as; the economic, legal, institutional framework
in which corporate control and cash flow rights are distributed among shareholders, managers and
other stake holders of the company
127. Corporate scandals at firms such as Enron, WorldCom and the Italian firm
Parmalat; show that managers might be tempted to pursue their own private interests at the
expense of shareholders
128. Corporations today are operating in an environment in which exchange rate
changes may adversely affect their competitive positions in the marketplace. This situation,
in turn, makes it necessary for many firms to: carefully manage their exchange risk exposure.;
carefully measure their exchange risk exposure
129. Correspondent bank relationships can be beneficial : because a bank can service its
MNC clients at a very low cost.; because a bank can service its MNC clients without the need to
have personnel in many different countries; because a bank can service its MNC clients without
developing its own foreign facilities to service its clients.
130. Correspondent bank services include : letters of introduction; foreign exchange
conversions
131. Covered Interest Arbitrage (CIA) activities will result in: restoring equilibrium prices
quickly
132. Credit entries in the U.S. balance of payments: result from foreign sales of U.S. goods
and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars.
133. current account is divided into four finer categories: merchandise trade, services,
factor income and unilateral transfers
134. Dealers in an OTC market : stand ready to buy at the bid and sell at the ask price; set
their own bid and ask prices; do not charge commissions
135. Decision-making for multinational corporations formulating international sourcing,
production, financing, and marketing strategies depends, primarily, on: forecasting exchange
rates as accurately as possible.
136. Deregulated financial markets and heightened competition in financial services
provided an environment for financial innovations that resulted in the introduction of
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various instruments. Examples of these innovative instruments include : currency futures and
options, foreign stock index futures and options; multicurrency bonds; international mutual funds,
country funds, exchange traded funds.
137. Deregulation of world financial markets ; provided a natural environment for financial
innovations, like currency futures and options; has promoted competition among market
participants; has encouraged developing countries such as Chile, Mexico, and Korea to liberalize
by allowing foreigners to directly invest in their financial markets
138. During the 1980s, cross-border equity investment was largely confined : to the equity
markets of developed countries
139. During the 1990s there: were three major currency crises
140. During the period between World War I and World War II, many central banks
followed a policy of sterilization of gold by matching inflows and outflows of gold
respectively with reductions and increases in domestic money and credit.
141. During the period between World War I and World War II, the political reality was
characterized by panicky flights of capital across borders.
142. During the period between World War I and World War II, the U.S. dollar emerged
as the dominant world currency, gradually replacing the British pound for the role.
143. During the period of the classical gold standard (1875-1914) there were stable
exchange rates.
144. Ecuador does not have its own national currency, circulating the U.S. dollar instead.
About how many countries do not have their own national currency? 40
145. Edge Act banks are so-called because : Senator Walter E. Edge of New Jersey
sponsored the 1919 amendment to Section 25 of the Federal Reserve Act to allow U.S. banks to
be competitive with the services foreign banks could supply their customers
146. English common law countries tend to provide a stronger protection of shareholder
rights than French civil law countries because: the former countries tend to protect property
rights than the latter
147. Eurobonds are usually: bearer bonds
148. Eurodollars refer to dollar deposits when the depository bank is located: Outside the
United States
149. Euro-medium term notes: are typically fixed-rate corporate notes issued with maturities
ranging from less than a year to about ten years
150. Factor income : consists largely of interest, dividends, and other income on foreign
investments
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151. factor income: income (interest and dividend payments) received by investors on foreign
investments in financial assets (securities)
152. FDI occurs when a firm: when an investor acquires a measure of control of a foreign
business and when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of
the voting shares of a business
153. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted
as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = 1.00. E 1.25/1.00
as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. €1.00/¥1.92
as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. €1.25/£1.00
156. Find the present value of a 2-year Treasury bond that pays a semi-annual coupon,
has a coupon rate of 6%, a yield to maturity of 5%, a par value of $1,000 when the yield to
maturity is 5%. $1,018.81
157. Find the present value of a 30-year bond that pays an annual coupon, has a coupon
rate of 6%, a yield to maturity of 5%, a par value of €1,000 when the yield to maturity is
5%. €1,153.73
158. Find the present value of a 3-year bond that pays an annual coupon, has a coupon
rate of 6%, a yield to maturity of 5%, a par value of €1,000 when the yield to maturity is
5%. €1,027.23
159. Find the yield to maturity for this floating rate note: The reset date is today;
coupons are paid annually according to the formula (LIBOR + ¼ percent); since issuance,
there has not been a change in the issuer's credit rating. The bond has ten years to maturity
and LIBOR = 3.5 percent. There is not enough information provided to make a determination
160. Following the demise of the Bretton Woods system, the IMF: created a new role for
itself, providing loans to countries facing balance-of-payments and exchange rate difficulties.
161. Following the introduction of the euro, the national central banks of the euro-12
nations: formed the ESCB, which is analogous to the Federal Reserve System in the U.S;
continue to perform important functions in their jurisdictions.
162. For a U.S. trader working in American quotes, if the forward price is higher than
the spot price : the currency is trading at a premium in the forward market
163. Foreign banks that establish subsidiary and affiliate banks in the U.S. tend to locate
in states that are major centers of financial activity ; tend to locate in the highly populous states of
New York, California, Illinois, Florida, Georgia, and Texas
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164. Foreign-owned manufacturing companies in the world's most highly developed

countries : generally are more productive and pay their workers more than do comparable
locally-owned businesses
165. Forward Parity states that: any forward premium or discount is equal to the expected
change in the exchange rate
166. Fullerton Bank quotes an ask rate of $.190 for the Peruvian currency (new sol) and
a bid rate of $.188. Determine the bid/ask percentage spread? =1.0526% or 1.05%
167. Generally speaking, a country would be more prone to asymmetric shocks: the less
diversified and more trade-dependent its economy is.
168. Generally speaking, any transaction that results in a payment to foreigners: will be
recorded as a debit with a negative sign in the US balance of payments
169. Generally speaking, liberalization of financial markets when combined with a weak,
underdeveloped domestic financial system tends to: create an environment susceptible to
currency and financial crises.
170. Generally unfavorable evidence on PPP suggests that: substantial barriers to
international commodity arbitrage exist; tariffs and quotas imposed on international trade can
explain at least some of the evidence; shipping costs can make it difficult to directly compare
commodity prices.
171. Generally, the higher the turnover ratio, the more liquid the secondary stock market,
indicating ease in trading
172. Generally, the lower the turnover ratio, the less liquid the secondary stock market,
indicating difficulty in trading
173. Global bond issues were first offered in: 1989
174. Global bond issues : can save U.S. issuers 20 basis points relative to domestic bonds, all
else equal; tend to have increased liquidity relative to Eurobonds or domestic bonds; have been
partially facilitated by rule 144A
175. Gold was officially abandoned as an international reserve asset: n the January 1976
Jamaica Agreement.
176. Good, inexpensive, and fairly reliable predictors of future exchange rates include:
today's exchange rate, as well as current forward exchange rates (e.g. the six-month forward rate
is a pretty good predictor of the spot rate that will prevail six months from today).
177. Government controlled investment funds, known as sovereign wealth funds: are
mostly domiciled in asian and middle eastern countries
178. Gresham's Law states that: bad money drives good money out of circulation.
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179. If IRP fails to hold: ressure from arbitrageurs should bring exchange rates and interest
rates back into line; it may fail to hold due to transactions costs; it may be due to government-
imposed capital controls
180. If Japan exports more than it imports, one can infer that the yen would be likely to
appreciate against other currencies
181. If a country has a current account deficit, what does it mean? It consumed more
output than it produced.
182. If a country has a current account surplus, what does it mean? It produced more
output than it consumed.
183. If a country is grappling with a major balance-of-payment difficulty, it may not be
able to expand imports from the outside world. Instead, the country may be tempted to:
impose measures to restrict imports and discourage capital outflows
184. If a firm as 10 million pounds in assets and 8 million pounds in liabilities, what
would be one way to hedge this translation exposure? Borrow 2 million pounds.
185. If a firm has 8 million pounds in assets and 10 million pounds in liabilities, one way
to hedge this translation would be what? Lend 2 million pounds.
186. If a foreign county experiences a hyperinflation, its currency will depreciate against
stable currencies.
187. If an exporter is faced with exposure to appreciating currency, what can they do to
reduce transaction exposure? Collect as late as possible.
188. If for a particular county an increase in the interest rate is more or less matched by
an expected depreciation in the local currency: traders will probably be tempted to find another
country to invest in; the interest rate increase per se will not be enough to spark capital flow into
the country
189. if interest rate rises in US while other variables remain constant; capital inflows into
the US will increase
190. If IRP fails to hold : pressure from arbitrageurs should bring exchange rates and interest
rates back into line; it may fail to hold due to transactions costs; it may be due to government-
imposed capital controls.
191. If one country is twice the size of another country and is better at making almost
everything than the benighted citizens of the smaller county, The bigger county enjoys an
absolute advantage
192. If one has agreed to buy foreign exchange forward : you have a long position in the
forward contract
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193. If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding
€/$ bid and ask prices are: €0.6623 and €0.6667
194. If the annual inflation rate is 2.5 percent in the United States and 4 percent in the
U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange
rate, assuming that PPP initially held, is: 1.0006
U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange
U.K., and the dollar depreciated against the pound by 3 percent, then the real exchange
197. If the central banks of the world chose to diversify their foreign-exchange reserves
away from the dollar and into the euro, this will have the result of a weakening in the value of
the dollar
198. If the direct exchange rate of the euro is $1.25, what is the euro's indirect exchange
rate? That is, what is the value of a dollar in euros? 1/1.25 = .8 euros
199. If the dollar depreciates against the euro, what does this do to european and
american companies? Stronger euro would help american companies who were competing with
european imports in the U.S.; Weaker dollar would help american companies who were exporting
to Europe
200. If the exchange rate follows a random walk, the future exchange rate is expected to be
the same as the current exchange rate, St = E(St+ 1).
201. If the interest rate in the U.S. is i$ = 5 percent for the next year and the interest rate
in the U.K. is i£ = 8 percent for the next year, uncovered IRP suggests that: the pound is
expected to depreciates against the dollar by about 3 pound and the dollar is expected to
appreciates against the pound by about 3 percent.
202. If the interest rate in the U.S. is i$ = 5 percent for the next year and interest rate in
the U.K. is i£ = 8 percent for the next year, uncovered IRP suggests that: the pound is
expected to depreciate against the dollar by about 3 percent and the dollar is expected to
appreciate against the pound by about 3 percent.
203. If the interest rate rises in the U.S. while other variables remain constant Capital
inflows into the U.S. will increase
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204. If the quote for a 5 year swap with annual payments is 8.5-8.6 percent, what does
this mean? Swap bank will pay annual fixed-rate dollar payments of 8.5 percent against
receiving 1 year dollar Libor.
205. If the United states imports more than it exports then: the supply of dollar is likely to
exceed the demand of the foreign exchange market, ceteris paribus, and one can infer that the
U.S. dollar would be under pressure to depreciate again other currencies
206. If the United States imports more than it exports, then: supply of dollars will exceed
demand and pressure to depreciate because the value is so high so other people don't want to buy
these goods
207. If we are a U.S. exporter faced with exposure to a depreciating currency, what can
we do to reduce transaction exposure? Collect as early as possible.
208. If we are going to receive pounds one year from now, what way can we hedge this?
Buying puts on the pound
209. If we are owed pounds in 1 year, and it is highly likely that the pound appreciated
during this time, what would we want to do? Buy calls on the pound
210. If we owe a pounds in the future, what are 2 ways we could hedge this? Buying
pound futures; Buying calls on the pound
211. If we wanted to hedge a foreign currency payable, then what would we do? Buy call
options on the foreign currency.
212. If you can make a good product at a low opportunity cost, you would be well served
to produce that good and trade for other goods
213. If you could accurately and consistently forecast exchange rates : this would be a very
handy thing as girls prefer guys with skills; you could impress your dates; you could make a great
deal of money
214. If you expect the pound to appreciate over the next year and you owe pounds, what
is one way to hedge this exposure? Paying ASAP
215. In 1963, President John Kennedy imposed the Interest Equalization Tax (IET) on
U.S. purchases of foreign securities. The IET was designed to: increase the cost of foreign
borrowing in the U.S. bond market.
216. In 2002, 24 stock markets had concentration ratios of 40 percent or more, 16 had 50
percent or more, and 6 had 60 percent or more. By comparison, in 2006, 27 stock markets
had concentration ratios of 40 percent or more, 21 had 50 percent or more, and 11 had 60
percent or more. Thus, one must conclude : that the number of equity investment opportunities
in emerging stock markets in developing countries has not been improving in recent years
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217. In 2007 the United States had a current account deficit. The current account deficit
implies that the United States: Consumed more output than it produced
218. In 2012, the United States had a current account deficit. The current account deficit
implies that the United States: consumed more output than it produced
219. In an agency market, the broker takes the client's order through the agent, who
matches it with another public order. The agent can be viewed as : a broker's broker
220. In an agency market, the broker takes the client's order through the agent, who
matches it with another public order. Names for the agent are : official broker; central broker;
a broker's broker
221. In any given year, about what percent of new international bonds are likely to be
Eurobonds rather than foreign bonds? 80%
222. In any given year, about what percent of outstanding bonds are likely to be
international rather than domestic bonds? 30%
223. In any given year, rightly 80 percent of new international bonds are likely to be :
Eurobonds
224. In contrast to many domestic bonds, which make _________ coupon payments,
coupon interest on Eurobonds is typically paid _________ semiannual; annually
225. In conversation, interbank foreign exchange traders use a shorthand abbreviation
in expressing spot currency quotations. Consider a $/£ bid-ask quote of $1.2519-$1.2523.
The currency dealer would likely quote that as _____ 19-23
The "big figure," assumed to be known to all traders is _______. 1.25
The "big figure", assumed to be known to all traders is _____. 1.90
The currency dealer would likely quote that as _____. 72-77
229. In countries like France and Germany, managers have often viewed shareholders as
one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so
forth
230. In David Ricardo's theory of comparative advantage: liberalization of international
trade will enhance the welfare of the world's citizens
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231. In general if an investment : has poor liquidity it should offer investors a liquidity
premium; can be sold fairly quickly at a fair price, it has good liquidity
232. In general, Standard & Poor's Emerging Markets Data Base classified a stock
market as "emerging" if : it is located in a low- or middle-income economy as defined by the
World Bank; its investable market capitalization is low relative to its most recent GNI figures
233. In general, the party that writes an option has ______ risk and the party that buys
an option has ______ risk. Unlimited; limited
234. In general, the price of a call _______ and the price of a put _______ as the
underlying asset price becomes less volatile. Decreases; decreases
235. In general, the price of a call _________ and the price of a put _______ as the
underlying asset price becomes more volatile. Increases; increases.
236. In mutual funds, investment in emerging foreign equity markets : represents less than
one percent of investments in U.S.-based mutual funds
237. In reference to the futures market, a "speculator": attempts to profit from a change in
the futures price
238. In terms of the types of instruments offered, the international bond market has been
much more innovative than the U.S. market
239. In the 1850s the French franc was valued by both gold and silver, under the official
French ratio which equated a gold franc to a silver franc 15½ times as heavy. At the same
time, the gold from newly discovered mines in California poured into the market,
depressing the value of gold. As a result, the franc effectively became a gold currency.
240. In the EU, there is a: low degree of fiscal integration among EU countries.
241. In the event of a default on one side of a futures trade, the clearing member stands in
for the defaulting party and will seek restitution for the defaulting party.
242. In the Interbank market, the standard size of a trade among large banks in the
major currencies is : for the U.S.-dollar equivalent of $10,000,000
243. In the latter half of the 1980's, with a strong yen, japanese firms: faced difficulty
exporting; financed a sharp increase in Japanese FDI in the United States; could better afford to
acquire U.S. assets that had become less expensive in terms of yen
244. In the long run, both exports and imports tend to be: responsive to changes in
exchange rates
245. In the short run, a currency depreciation can make a trade balance worse if: there is
no domestic producer of an import
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246. In the United States, bimetallism was adopted by the Coinage Act of 1792 and
remained a legal standard until 1873,when Congress dropped the silver dollar from the list of
coins to be minted.
247. In the years leading to the collapse of the Bretton Woods system; it became clear that
the dollar was overvalued.
248. In view of the fact that PPP is the manifestation of the law of one price applied to a
standard commodity basket, it will hold only if the prices of the constituent commodities are
equalized across countries in a given currency or if the composition of the consumption basket is
the same across countries.
249. In which market does a clearinghouse serve as a third party to all transactions?
Futures
250. In which type of market can liquidity "dry up"? A financial panic
251. In which type of policy actions by the Fed can liquidity "dry up"? Tight money
252. Indirect exchange rate quotations from the U.S. perspective are: the price of one U.S.
dollar in the foreign currency.
253. Interest Rate Parity (IRP) is best defined as: an arbitrage condition that must hold
when international financial markets are in equilibrium.
254. International banks are different from domestic banks in what way(s)? International
banks can arrange trade financing; International banks can arrange for foreign exchange
transactions; International banks can assist their clients in hedging exchange rate risk
255. International portfolio investments have boomed in recent years, as a result of: the
general relaxation of capital controls and regulation in many countries
256. International reserve assets are comprimised of: gold, foreign exchanges, special
drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF)
257. International reserve assets include "foreign exchanges". These are: foreign currency
held by a bank
258. International reserve assets include "foreign exchanges". What are these? Foreign
currency held by a country's central bank.
259. Intervention in the foreign exchange market is the process of: a central bank buying
or selling its currency in order to influence its value.
260. Investment grade ratings are in the following categories: Moody's Aaa to Baa - S&P's
AAA to BBB
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261. Investment in foreign equity markets : is no longer considered a "backwater" in the

field of Finance; became common practice in the 1980s as investors diversified their portfolios;
during the 1980s was largely confined to the developed world
262. Investors will generally accept a lower yield on ________ than on __________ of
comparable terms, making them a less costly source of funds for the issuer to service bearer
bonds; registered bonds
263. Invisible trade refers to : legal, consulting, and engineering services
264. Invisible trade: Trade in services
265. It is common practice among currency traders worldwide to both price and trade
currencies against the U.S. dollar. In fact, 2007 BIS statistics indicate that about ____
percent of currency trading in the world involves the U.S. dollar on one side of the
transaction 86%
currencies against the U.S. dollar. In fact, 2013 BIS statistics indicate that about _______ of
currency trading in the world involves the U.S. dollar on one side of the transaction. 87%
currencies against the U.S. dollar. Consider a currency dealer who makes a market in 5
currencies against the dollar. If he were to supply quotes for each currency in terms of all of
the others, how many quotes would he have to provide? 30
268. Japan has experienced large trade surpluses. Japanese investors have responded to
this by : investing heavily in U.S. and other foreign financial markets
269. J-curve effect: following a currency depreciation, a country's balance of trade may get
worse before it gets better
270. macroeconomic factors affecting international equity returns include: exchange rates
changes, interest rate differentials and changes in inflationary expectations
271. Major distinguishing features between domestic banks and international banks are :
the types of deposits they accept; the types of loans and investments they make; membership in
loan syndicates.
272. Many of the larger the larger emerging equity markets (e.g. Korea, India) : have
high turnover ratios
273. Many of the small foreign equity markets (e.g. Chile, Sri Lanka) : have poor liquidity
at present
274. Market microstructure refers to: the basic mechanics of how a marketplace operates.
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275. Merchant banks are different from traditional commercial banks in what
way(s)? Merchant banks can engage in investment banking activities
276. MNC stands for : Multinational Corporation
277. MNCs can use their global presence to: take advantage of underpriced labor services
available in certain developing countries; gain access to special R&D capabilities residing in
advanced foreign counties; boost profit margins and create shareholder value
278. Monetary policy for the countries using the euro as a currency is now conducted by:
European Central Bank.
279. More important than he absolute size of a country's balance-of-payments
disequilibrium is the nature and cause of the disequilibrium
280. Most foreign exchange transactions are for: interbank trades between international
banks or nonbank dealers.
281. Most governments at least try to make it difficult for people to cross their borders
illegally. This barrier to the free movement of labor is an example of : a market imperfection
282. Most Interbank trades are: Speculative or arbitrage transactions
283. most popular reserve currency is now the: US dollar
284. Multinational banks are often not subject to the same regulations as domestic
banks: There may be reduced need to publish adequate financial information
285. Nestlé, a well-known Swiss corporation, at one time placed restrictions on foreign
ownership of its stock. When it relaxed these restrictions, there was a major transfer of wealth
from foreign shareholders to Swiss shareholders
286. Nondollar currency transactions : are priced by looking at the price that must exist to
eliminate arbitrage
287. On January 1, 1999, an epochal event took place in the arena of international
finance when: eleven of 15 EU countries adopted a common currency called the euro.
288. On September 10, 1990, the published prices (cents on the dollar) on Latin
American bank debt was quoted as follows: Mexico 43.12; Venezuela 46.25; Chile 70.25.
Assume that the central banks of Mexico, Venezuela, and Chile redeemed their debts at 50
percent, 85 percent, and 76 percent, respectively, of face value in a debt-for-equity swap. If
the three countries had equal political risk, based purely on financial considerations, the
cost of a $40,000,000 assembly plant investment in local currency would be ranked (lowest
to highest) in dollar cost as follows: Venezuela first, Mexico second, Chile third
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289. Once capital markets are integrated, it is difficult for a country to maintain a fixed
exchange rate. Why?: The market forces may be stronger than the exchange rate intervention
that the government can muster.
290. Once the changeover to the euro was completed by July 1, 2002, the legal-tender
status of national currencies in the euro zone; was canceled, leaving the euro as the sole legal
tender in the euro zone countries.
291. One implication of the random walk hypothesis is: given the efficiency of foreign
exchange markets, it is difficult to outperform the market-based forecasts unless the forecaster
has access to private information that is not yet reflected in the current exchange rate.
292. One potential drawback of the gold standard is that: the world economy can be
subject to deflationary pressure due to the limited supply of monetary gold.
293. One unintended consequence of Sarbanes-Oxley : is that international companies are
starting to prefer to issue Yankee bonds in the private placement market in the U.S
294. Only in the _______ did world investors start to invest sizable amounts in the
emerging equity markets, as the economic growth and prospects of the developing countries
improved: 1990s
295. Open interest in currency futures contracts: tends to be greatest for the NEAR-term
contracts, and typically decreases with the term to maturity of most futures contracts.
296. operational risk refers to the risk which arises from the uncertainty about: the host's
country's policies affecting the local operations of an MNC
297. Over the last few years, turnover ratios in many emerging markets remained low
and market concentration ratios remained high, indicating : that investment opportunities in
these markets have not been improving
298. over the last several years, the US has run persistent: current account deficits
299. Price discovery in the secondary stock markets : occurs due to the competitive trading
between buyers and sellers, just like on eBay
300. Prior to the 1870s, both gold and silver were used as international means of
payment and the exchange rates among currencies were determined by either their gold or
silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French
franc is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce of silver,
and the German mark pegged to silver at 1 mark per ounce of silver. What would the
exchange rate between the U.S. dollar and German mark be under this system? 1 German
mark = $3
24
301. Prior to the 1870s, both gold and silver were used as international means of
payment and the exchange rates among currencies were determined by either their gold or
silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French
franc is pegged to gold at 90 francs per ounce and to silver at 6 francs per ounce of silver,
and the German mark pegged to silver at 1 mark per ounce of silver. What would the
exchange rate between the U.S. dollar and German mark be under this system? 1 German
mark = $2
302. Prior to the Argentine Peso Crisis: weakening of the U.S. dollar led the Argentine
government to abandon dollarization
303. Prior to the peso crisis, Mexico depended on foreign portfolio capital to finance its
economic development. This foreign capital influx: caused higher domestic inflation; led to an
overvalued peso.
304. Private placement bond issues : do not have to meet the strict information disclosure
requirements of publicly traded issues
305. Privatization is often seen as a cure for bureaucratic inefficiency and waste; some
economists estimate that privatization improves efficiency and reduces operating costs by as
much as : 20 percent
306. Privatization refers to process of : a country divesting itself of the ownership and
operation of a business venture by turning it over to the free market system
307. Privatization: has spurred a tremendous increase in cross-border investment
308. Production of goods and services has become globalized to a large extent as a result
of: multinational corporations' effects to source inputs and locate production anywhere where
costs are lower and profits higher
309. Proportionately more domestic bonds than international bonds are denominated in
the ______ and the ______ while more international bonds than domestic bonds are
denominated in the _________ and the ________. Dollar; yen; euro; pound sterling
310. Publicly traded Yankee bonds must : meet the same regulations as U.S. domestic bonds
311. Purchasers of global bonds are: mainly institutional investors to date; desirous of the
increased liquidity of the issues; have been willing to accept lower yields
312. Purchasing Power Parity (PPP): the exchange rate between currencies of two countries
should be equal to the ratio of the countries' price levels and as the purchasing power of a
currency sharply declines (due to hyperinflation) that currency will depreciate against stable
currencies
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313. Put the following in correct date order: Bretton Woods Agreement, Smithsonian
Agreement, Jamaica Agreement.
314. Put the following in correct date order: Jamaica Agreement, Plaza Agreement, Louvre
Accord
315. Recently, financial markets have become highly integrated. This development :
allows investors to diversify their portfolios internationally
316. Regarding the statistical discrepancy in the balance-of-payments accounts, there is
some evidence that financial transactions may be mainly responsible for the discrepancy, and the
sum of the balance on the capital account and the statistical discrepancy is very close to the
balance of the current account in magnitude.
317. Relative to the spot price the forward price will be : usually less than or more than the
spot price more often than it is equal to the spot price
318. Restrictions or impediments to free trade include such things as: import quotas;
costly transportation; import tariffs
319. Robert A. Mundell won the Nobel Memorial Prize in Economic Science. He was: one
of the intellectual fathers of both the new European common currency and Reagan-era Keynesian
economics.
S($/SFr) = 0.85
320. Securities sold in the United States to public investors must be registered with the
SEC, and a prospectus disclosing detailed financial information about the issuer must be
provided and made available to prospective investors. This encourages foreign borrowers
wishing to raise U.S. dollars to use: the Eurobond market
321. Selling options does what to risk? Increases risk
322. Shelf registration allows an issuer to preregister a securities issue, and then "shelve" the
securities for later sale
323. Since international banks have the facilities to trade foreign exchange, they generally
also trade foreign exchange products for their own account
324. Since its inception the euro has brought about revolutionary changes in European
finance. For example, by redenominating corporate bonds and stocks from several different
currencies into one common currency, the euro has precipitated the emergence of continent wide
capital markets in Europe that are comparable to U.S. markets in depth and liquidity.
325. Since security returns tend to have low correlations among countries: investors can
reduce risk more effectively if they diversify their portfolio holdings internationally rather than
purely domestically.
26
326. Since the balance of payments is presented as a system of double-entry bookkeeping,

every credit in the account is balanced by a matching debit and every debit in the account is
balanced by a matching credit.
327. Since the end of the fixed exchange rate system of the Smithsonian agreement:
exchange rates have been allowed to float.
328. Since the end of World War I, the dominant global currency has been the : U.S.
dollar.
329. Since the end of World War I, the U.S. dollar has played the role of the dominant
global currency, displacing the British Pound
330. Since the SDR is a "portfolio" of currencies: its value tends to be more stable than the
value of any of the individual currencies included in the SDR.
331. Six-month U.S. dollar LIBOR is currently 4.375%; your firm issued floating-rate
notes indexed to six-month U.S. dollar LIBOR plus 50 basis points. What is the amount of
the next semi-annual coupon payment per U.S. $1,000 of face value? $24.375
332. Some commodities never enter into international trade. Examples include:
nontradables, haircuts, housing
333. Special Drawing Rights (SDR) are: an artificial international reserve allotted to the
members of the International Monetary Fund (IMF), who can then use it for transactions among
themselves or with the IMF; a "portfolio" of currencies, and its value tends to be more stable than
the currencies that it is comprised of.; used in addition to gold and foreign exchanges, to make
international payments.
334. Spot foreign exchange trading : accounts for about 33 percent of all foreign exchange
trading
335. Statistical discrepancy in balance of payments accounts: arise because some
transactions (illegal transactions) occur "off the books."; arise since recordings of payments and
receipts are done at different times, in different places, possibly using different methods;
represents omitted and misreported transactions
336. Statistical discrepancy, which by definition represents errors and omissions : cannot
be calculated directly; is calculated by taking into account the balance-of-payments identity;
probably has some elements that are honest mistakes, it can't all be money laundering and drugs
337. Statistical discrepancy, which by defintion represents errors and omissions: probably
has some elements that are honest mistakes, it can't all be money laundering and drugs; cannot be
calculateddirectly.is calculated by taking into; account the balance-of-payments identity
27
338. Stetson Bank quotes a bid rate of $.784 for the Australian dollar and an ask rate of
$.80. What is the bid/ask percentage spread? (Ask rate - Bid rate) / Ask rate = ($ 0.80 - $
0.784) / $ 0.80 = 2%
339. Straight fixed-rate bond issues have: a designated maturity date at which the principal
of the bond issue is promised to be repaid. During the life of the bond, fixed coupon payments,
which are a percentage of the face value, are paid as interest to the bondholders.
340. Suppose a bank customer wishes to trade out of British pounds and into Swiss
francs. In dealer jargon, this is a currency against currency trade, and the bank will frequently
handle such a trade by selling British pounds for U.S. dollars and then buying Swiss francs with
U.S. dollars
341. Suppose a bank customer with €1,000,000 wishes to trade out of euro and into
Japanese yen. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen
exchange rate is quoted at $1.00 = ¥120. How many yen will the customer get? ¥192,000,000
342. Suppose Mexico is a major export market for your U.S.-based company and the
Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994.
This means Your company's products can be priced out of the Mexican market, as the peso price
of American imports will rise following the peso's fall.
343. Suppose Mexico is a major export market for your U.S.-based company and the
Mexican peso appreciates drastically against the U.S. dollar. This means : your firm will be
able to charge more in dollar terms while keeping peso prices stable; your domestic competitors
will enjoy a period of facing lessened price competition from Mexican imports
344. Suppose that both gold and silver are used as international means of payment and
the exchange rates among currencies are determined by either their gold or silver contents.
Suppose that the dollar was pegged to gold at $20 per ounce, the Japanese yen is pegged to
gold at 120,000 yen per ounce and to silver at 8,000 yen per ounce of silver, and the
Australian dollar is pegged to silver at $5 per ounce of silver. What would the exchange rate
between the U.S. dollar and Australian dollar be under this system? $1 U.S. = $3
345. Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the
exchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be
worth in U.S. dollars? $30.00
346. Suppose that Britain pegs the pound to gold at the market price of £6 per ounce,
and the United States pegs the dollar to gold at the market price of $36 per ounce. If the
official exchange rate between pounds and U.S. dollars is $5 = £1. Which of the following
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trades is profitable? Start with $500 and trade for £100 at the official exchange rate. Redeem the
£100 for 16 2/3 ounces of gold. Trade the gold for $600.
347. Suppose that country A and country B are both on a bimetallic standard. In country
A the ratio is 15 to one (i.e. an ounce of gold is worth 15 times as much as an ounce of silver
in that currency), while in country B the ratio is ten to one. If the free flow of capital is
allowed between countries A and B is this a sustainable framework? NO
348. Suppose that Great Britain is a major export market for your firm, a U.S.-based
MNC. If the British pound depreciates against the U.S. dollar, your firm may be priced out of
the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise;
to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the
pound price the same.
349. Suppose that the annual interest rate is 2.0 percent in the United States and 4
percent in Germany, and that the spot exchange rate is $1.60/€ and the forward exchange
rate, with one-year maturity, is $1.58/€. Assume that an arbitrager can borrow up to
$1,000,000 or €625,000. If an astute trader finds an arbitrage, what is the net cash flow in
one year? $7,000
350. Suppose that the annual interest rate is 5.0 percent in the United States and 3.5
percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange
rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to
$1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year?
$21,964.29
351. Suppose that the British pound is pegged to gold at £6 per ounce, whereas one ounce
of gold is worth €12. Under the gold standard, any misalignment of the exchange rate will
be automatically corrected by cross border flows of gold. Calculate the possible gains for
buying €1,000, if the British pound becomes undervalued and trades for €1.80. (Assume
zero shipping costs). (Hint: Gold is first purchased using the devalued British pound from
the Bank of England, then shipped to France and sold for €1,000 to the Bank of France):
£55.56
352. Suppose that the current exchange rate is £1.00 = $2.00. The indirect quote, from
the U.S. perspective is : £0.50 = $1.00
353. Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the
U.S. perspective is : €1.00 = $1.25
354. Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from
the U.S. perspective is: €0.6250 = $1.00.
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355. Suppose that the one-year interest rate is 3.0 percent in Italy, the spot exchange rate
is $1.20/€, and the one-year forward exchange rate is $1.18/€. What must the one-year
interest rate be in the United States? 1.2833%
356. Suppose that the one-year interest rate is 4.0 percent in Italy, the spot exchange rate
is $1.60/€, and the one-year forward exchange rate is $1.58/€. What must the one-year
interest rate be in the United States? 2.7%
357. Suppose that the one-year interest rate is 5.0 percent in the United States; the spot
exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€. What must the
one-year interest rate be in the euro zone to avoid arbitrage? 8.62%
358. Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5
percent in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward
exchange rate, is $1.16/€. Assume that an arbitrageur can borrow up to $1,000,000. This is
an example of an arbitrage opportunity; interest rate parity does NOT hold
359. Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5
percent in Germany, and the one-year forward exchange rate is $1.16/€. What must the spot
exchange rate be? $1.1434/€
360. Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged
to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current
market exchange rate is $1.60 per pound, how would you take advantage of this situation?
Hint: assume that you have $350 available for investment. Start with $350. Exchange the
dollars for pounds at the current rate of $1.60 per pound. Buy gold with pounds at £20 per ounce.
Convert the gold to dollars at $35 per ounce.
361. Suppose that the pound is pegged to gold at 20 per ounce and the dollar is pegged to
gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current
market exchange rate is $1.80 per pound, how would you take advantage of this situation?
Hint: assume that you have $350 available for investment. Start with $350. Buy 10 ounces of
gold with dollars at $35 per ounce. Convert the gold to 200 at 20 per ounce. Exchange the 200 for
dollars at the current rate of $1.80 per pound to get $360.
362. Suppose that the United States is on a bimetallic standard at $30 to one ounce of
gold and $2 for one ounce of silver. If new silver mines open and flood the market with
silver, Only the silver currency will circulate.
363. Suppose that you are a U.S. producer of a commodity good competing with foreign
producers. Your inputs of production are priced in dollars and you sell your output in
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dollars. If the U.S. currency depreciates against the currencies of our trading partners, your
competitive position is likely improved
364. Suppose that you are the treasurer of IBM with an extra U.S. $1,000,000 to invest
for six months. You are considering the purchase of U.S. T-bills that yield 1.810 percent
(that's a six month rate, not an annual rate by the way) and have a maturity of 26 weeks.
The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The
interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your
strategy? Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in
the forward contract.
for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a
six month rate, not an annual rate) and have a maturity of 26 weeks. The spot exchange rate
is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. What must the interest rate
in Japan (on an investment of comparable risk) be before you are willing to consider
investing there for six months? 11.991%
for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that's a
six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot
exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest
rate in Japan (on an investment of comparable risk) is 13 percent. What is your
strategy? Take $1m, translate into yen at the spot, invest in Japan, hedge with a short position in
the forward contract; 11.991%
367. Suppose that your country officially defines gold as ten times more valuable than
silver (i.e. the central bank stands ready to redeem the currency in gold and silver and the
official price of gold is ten times the official price of silver). If the market price of gold is
only eight times as much as silver. The central bank could go broke if enough arbitrageurs
attempt to take advantage of the pricing disparity.
368. Suppose the futures price is below the price predicted by IRP. What steps would
assure an arbitrage profit? Go short in the spot market, go long in the futures contract
369. Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch
Corporation, paying the U.S. shareholders cash. payment by InBev recorded as a credit
370. Suppose the McDonalds Corporation imports Canadian beef, paying for it by
transferring the funds to a New York bank account kept by the Canadian beef producer.
payment by mcdonalds will be recorded as a debit
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371. Suppose the spot ask exchange rate, Sa($|£), is $1.90 = £1.00 and the spot bid
exchange rate, Sb($|£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British
pounds and then sell them five minutes later, how much of your $10,000,000 would be
"eaten" by the bid-ask spread? $52,632
372. Suppose the U.S. dollar substantially depreciates against the Japanese yen. The
change in exchange rate: can have significant economic consequences for both U.S. and
Japanese firms; will tend to strengthen the competitive position of import-competing U.S. car
makers.
373. Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 5% APR
in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?
$1.0704/€
374. Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 3
percent APR in the U.S. and 5 percent APR in the euro zone, what is the no-arbitrage 1-
year forward rate? $1.0300/€
in the U.S. and 3% APR in the euro zone, what is the no-arbitrage 1-year forward rate?
$1.5291/€
in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward
rate? $1.4714/€
377. Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5 percent
APR in the U.S. and 2 percent APR in the U.K., what is the no-arbitrage 1-year forward
rate? 2.0588
378. Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5% APR
in the U.S. and 2% APR in the U.K., what is the no-arbitrage 1-year forward rate?
$2.0588/£
379. Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60; and €2.00
= £1.00. Starting with $1,000,000, how can you make money? Exchange $1m for £625,000 at
£1 = $1.60. Buy €1,250,000 at €2 = £1.00; trade for $1,062,500 at €1 = $.85.
380. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate
the euro-pound crossrate. €1 = £0.625
the euro-pound exchange rate. €1 = £1.60
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the euro-pound exchange rate. €1.3103 = £1.00
384. Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00.
Calculate the euro-yen exchange rate. €1 = ¥180
385. Suppose you observe the following exchange rates: €1 = $1.50; ¥120 = $1.00.
Calculate the euro-pound exchange rate. ¥133.33 = €1.00
387. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 =
$2. One year later, the stock rises to £60. You are happy with your 20 percent return on the
stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since
the pound has fallen to £1 = $0.75. This loss of value is an example of : political risk
388. Suppose your firm invests $100,000 in a project in Italy. At the time the exchange
rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian
government has expropriated your firm's assets paying only €80,000 in compensation. This
is an example of : political risk
389. Supposed the quote for a 5 year swap with annual payments is 8.5-8.6 percent. This
means what? The swap bank will receive annual fixed-rate dollar payments of 8.6 percent
against paying 1 year dollar libor.
390. Swap transactions: involve the simultaneous sale (or purchase) of spot foreign exchange
against a forward purchase (or sale) of approximately an equal amount of the foreign currency.
391. Systematic Risk: nondiversifiable risk; the risk that remains even after investors fully
diversify their portfolio holdings
392. The "J-curve effect" shows: the initial deterioration and the eventual improvement of a
country's trade balance following a currency depreciation
393. The "J-curve effect" : actually only occurs in about 40 percent of the cases according to
a study by Sebastian Edwards
394. The "world beta" measures; sensitivity of returns on a security to world market
movements
395. The $/CD spot bid-ask rates are $0.7560-$0.7625. The 3-month forward points are
12-16. Determine the $/CD 3-month forward bid-ask rates. $0.7572-$0.7641
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396. The €/$ spot exchange rate is $1.50/€ and the 120 day forward exchange rate is
1.45/€. The forward premium (discount) is: the dollar trading at a 10% discount to the euro for
delivery in 120 days.
397. The €/$ spot exchange rate is $1.50/€ and the 90-day forward premium is 10 percent.
Find the 90-day forward price. $1.5375/€
398. The advantages of a market order include the fact that : you are pretty much
guaranteed that your order will be executed; a market order typically has lower commissions than
a limit order.
399. The advent of the euro marks the first time that sovereign countries have
voluntarily given up their: Monetary independence to foster economic integration
400. The ascendance of the dollar reflects several key factors, such as: the mature and
open capital markets of the U.S. economy
401. The ascendance of the dollar the dominant global currency reflects several key
factors such as : the mature and open capital markets of the U.S. economy
402. The Asian Currency Crisis: turned out to be far more serious than the Mexican peso
crisis in terms of the extent of contagion.
403. The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF
cross exchange rate is: 1.2800=(1.60/1.25)
404. The AUD/$ spot exchange rate is AUD1.60/$ and the SF/$ is SF1.25/$. The AUD/SF
cross exchange rate is _______. 1.2800
405. The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the
identity for a country with a pure flexible exchange rate regime BCA = -BKA
406. The balance of payments records: international trade and cross border investments
407. The Bid price : is the price that a dealer stands ready to pay
408. The Bretton Woods agreement resulted in the creation of: the World Bank
409. The Bretton Woods system ended in: 1973.
410. The Bretton Woods system was named after: Bretton Woods, New Hampshire, where
the Articles of Agreement of the International Monetary Fund (IMF) were hammered out.
411. The capital account includes: all purchases and sales of assets such as stocks, bonds,
bank accounts, real estate, and businesses
412. The capital account is divided into three subcategories: direct investment, portfolio
investment, and other investment. Portfolio investment involves: investments in foreign
stocks and bonds that do not involve acquistions of control
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investment, and other investment. "Other" investment involves: bank deposits, currency
investment, trade credit and the like
investment, and other investment. Direct investment involves: acquisitions of controlling
interests in foreign businesses
415. The capital account may be divided into three categories: direct investment, portfolio
investment, and other investment
416. The central bank of the United States is : the Federal Reserve System
417. The choice between the alternative exchange rate regimes (fixed or floating) is likely
to involve a trade-off between: national monetary policy autonomy and international economic
integration.
418. The common monetary policy for the euro zone is now formulated by The European
Central Bank
419. The core of the Bretton Woods system was the; World Bank.
420. The core of the international money market is: the Eurocurrency market
421. The coupon interest on Eurobonds : is paid annually
422. the current account includes: the export and import of goods and services
423. The current account is divided into four finer categories: merchandise trade, services,
factor income, and unilateral transfers
424. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank
A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys
£45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship
with Bank B. Bank A's pound-denominated account at B will rise by £45,000
425. The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank
A's correspondent account(s) with bank B if a currency trader employed at Bank A buys
£45,000 from a currency trader at bank B for $90,000 using its correspondent relationship
with Bank B. Bank A's dollar-denominated account at B will fall by $90,000 ; Bank B's dollar-
denominated account at A will rise by $90,000; Bank A's pound-denominated account at B will
rise by £45,000; Bank B's pound-denominated account at A will fall by £45,000
426. The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank
A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys
€100,000 from a currency trader at Bank B for $150,000 using its correspondent
relationship with Bank B. Bank A's dollar-denominated account at B will fall by $150,000
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427. The current spot exchange rate is $1.45/€ and the three-month forward rate is
$1.55/€. Based upon your economic forecast, you are pretty confident that the spot exchange
rate will be $1.50/€ in three months. Assume that you would like to buy or sell €100,000.
What actions would you take to speculate in the forward market? How much will you make
if your prediction is correct? Take a short position in a forward contract on euro. If you're right
you will make $5,000.
$1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is
$1.60/€. How much have you made or lost? Lost $100
$1.50/€. Based on your analysis of the exchange rate, you are confident that the spot
exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell
€1,000,000. What actions do you need to take to speculate in the forward market? What is
the expected dollar profit from speculation? Buy €1,000,000 forward for $1.50/€
$1.50/€. Based on your analysis of the exchange rate, you are confident that the spot
exchange rate will be $1.52/€ in three months. Assume that you would like to buy or sell
€1,000,000. What actions do you need to take to speculate in the forward market? Take a
long position in a forward contract on €1,000,000 at $1.50/€.
431. the degree of home bias varies across investors where: wealthier, more experienced
and sophisticated investors are less like to exhibit home bias
432. The difference between a broker and a dealer is: Brokers bring together buyers and
sellers, but carry no inventory. Dealers stand ready to buy and sell from their inventory.
433. The difference between Foreign Direct Investment and Portfolio Investment is that:
Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as
stocks and bonds that do not involve a transfer of control.
434. The dollar-euro exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is
¥100 = $1.00. What is the euro-yen cross rate? €1.00 = ¥125
435. The Efficient Markets Hypothesis states: current asset prices (e.g., exchange rates)
fully reflect all the available and relevant information.
436. The emergence of global financial markets is due in no small part to : advances in
computer and telecommunications technology
437. The entries in the "current account" and the "capital account", combined together,
can be outlined (in alphabetic order) as: factor income; merchandise; private transfer
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438. The euro zone is remarkably comparable to the United States in terms of: population
size.
439. The euro : is the common currency of Europe; is divisible into 100 cents, just like the
U.S. dollar; may eventually have a transaction domain larger than the U.S. dollar
440. The Eurobond segment of the international bond market : is roughly four times the
size of the foreign bond segment; has considerably less regulatory hurdles than the foreign bond
segment; typically has a lower rate of interest that borrowers pay in comparison to Yankee bond
financing
441. The European Monetary System (EMS) has the chief objective(s): to establish a
"zone of monetary stability" in Europe; to coordinate exchange rate policies vis-à-vis the non-
EMS currencies.; to pave the way for the eventual European monetary union..
442. The Exchange Rate Mechanism (ERM) is: the procedure by which ERM member
countries collectively manage their exchange rates; based on a "parity-grid" system, which is a
system of par values among ERM countries.
443. The factors of production are: land, labor, capital, and entrepreneurial ability
444. The first full-fledged gold standard: was not established until 1821 in Great Britain,
when notes from the Bank of England were made fully redeemable for gold.
445. The Fisher effect states that : an increase (decrease) in the expected inflation rate in a
country will cause a proportionate increase (decrease) in the interest rate in the country
446. The Ford Motor Company recently acquired Mazda, a Japanese auto maker, and
Jaguar, a British auto maker: This is an example of cross-border M&A
447. The forward market: Involves contracting today for the future purchase of sale of
foreign exchange at a price agreed upon today.
448. The forward price : may be higher than the spot price; may be the same as the spot
price; may be less than the spot price
449. The four currencies in which the majority of domestic and international bonds are
denominated are: U.S. dollar, the euro, the pound sterling, and the yen
450. The G-7 is composed of: Canada, France, Japan, Germany, Italy, the U.K., and the
United States.
451. The gains from trade: are likely realized in the long run when workers and firms have
had the time to adjust to the new competitive environment.
452. The goal of shareholder wealth maximization: means that all business decisions and
investments that a firm makes are done for the purpose of making the owners of the firm better
off financially
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453. The gold standard still has ardent supporters who believe that it provides: an
effective hedge against price inflation
454. The growth of the Eurodollar market, which is a transnational, unregulated fund
market: was encouraged by U.S. legislation designed to stem the outflow of dollars from the
U.S.
455. The International Fisher Effect suggests that: the nominal interest rate differential
reflects the expected change in the exchange rate.
456. The international monetary system can be defined as the institutional framework
within which: international payments are made; movement of capital is accommodated;
exchange rates among currencies are determined.
457. The international monetary system went through several distinct stages of evolution.
These stages are summarized, in alphabetic order, as follows: Bimetallism; Classical gold
standard; Interwar period; Bretton Woods system; Flexible exchange rate regime.
458. The Japanese automobile company Honda decided to establish production facilities
in Ohio, mainly to Circumvent trade barriers
459. The J-curve effect received wide attention when: the British trade balance worsened
after a devaluation of the pound in 1967
460. The largest and most active financial market in the world is : the FX market
461. The link between a firm's future operating cash flows and exchange rate
fluctuations is: operating exposure.
462. The Maastricht Treaty: irrevocably fixed exchange rates among the member
currencies; commits the members of the European Union to political union as well as monetary
union; was signed and subsequently ratified by the 12 member states.
463. The main approaches to forecasting exchange rates are: Efficient market,
Fundamental, and Technical approaches
464. The main cost of European monetary union is; the loss of national monetary and
exchange rate policy independence.
465. The major legislation controlling the operation of foreign banks in the U.S. specifies
that foreign branch banks operating in the U.S. must comply with U.S. banking regulations just
like U.S. banks
466. The majority of countries got off gold in 1914 when World War I broke out
467. The market capitalization of the developed world : is about 80 percent of the market
capitalization of the entire world
38
468. The massive privatization that is currently taking place in formerly socialist
countries, will likely : eventually enhance the standard of living to these countries' citizens;
depend on private investment; increase the opportunity set facing these countries' citizens.
469. The Mexican peso crisis is significant in that: it is perhaps the first serious international
financial crisis touched off by cross-border flight of portfolio capital; selling by international
portfolio managers had a highly destabilizing, contagious effect on the world financial system; it
provides a cautionary tale that as the world's financial markets are becoming more integrated, this
type of contagious financial crisis is likely to occur more often.
470. The Mexican Peso Crisis was touched off by An unexpected announcement by the
Mexican government to devalue to peso against the dollar by 14 percent.
471. The monetary system of bimetallism is unstable. Due to the fluctuation of the
commercial value of the metals, the metal with a commercial value higher than the currency
value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law).
472. The more concentrated a national stock market is: the less opportunity a global
investor has to include shares from that country in an international diversified portfolio
473. the most important international reserve asset, comprimising 94% of the total
reserve assets held by IMF member countries is: FX
474. The most popular way for a U.S. bank to expand overseas is : branch banks
475. The moving average crossover rule: states that a crossover of the short-term moving
average above the long-term moving average signals that the foreign currency is appreciating.
476. The Nestlé Corporation, a well-known Swiss MNC, used to issue two different
classes of common stock, bearer shares and registered shares, and foreigners were allowed
to hold only : bearer shares
477. The official reserve account includes: all purchases and sales of international reserve
assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs)
478. the one word that haunts the dollar is: central bank diversification
479. The OTC market : is a dealer market; includes the NASDAQ in the U.S
480. The owners of a business are the : shareholders
481. The price of a McDonald's Big Mac sandwich: varies considerably across the world in
dollar terms.
482. The price-specie-flow mechanism will work only if governments are willing to play
by the rules of the game by letting the money stock rise and fall as gold flows in and out.
Once the government demonetizes (neutralizes) gold, the mechanism will break down. In
39
addition, the effectiveness of the mechanism depends on : the price elasticity of the demand for
imports
483. The sale of new common stock by corporations to initial investors occurs in : the
primary market
484. The sale of previously issued common stock traded between investors occurs in : the
secondary market
485. The secondary equity markets of the world serve two major purposes. They
provide: marketability and share valuation
486. The secondary stock markets: are the markets for "pre-owned" or "used" shares of
stock; provide marketability to shares; provide price discovery or share valuation
487. The SF/$ 180-day forward exchange rate is SF1.30/$ and the 180 day forward
premium is 8 percent. What is the outright spot exchange rate? SF 1.25/$
488. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is
SF1.30/$. The forward premium (discount) is: the dollar trading at an 8% premium to the
Swiss franc for delivery in 180 days.
489. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is
SF1.30/$. The forward premium (discount) is which of the following? The dollar is trading at
an 8% premium to the Swiss franc for delivery in 180 days: (1.30 - 1.25) / 1.25 = 0.04 ×
(360/180) = 0.08.
490. The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward premium is 8
percent. What is the outright 180 day forward exchange rate? SF1.30/$
491. The shorter length of time in bringing a Eurodollar bond issue to market, coupled
with the lower rate of interest that borrowers pay for Eurodollar bond financing in
comparison to Yankee bond financing, are two major reasons why the Eurobond segment
of the international bond market is roughly ________ the size of the foreign bond segment:
four times
492. The Singapore dollar—U.S. dollar (S$/$) spot exchange rate is S$1.60/$, the
Canadian dollar—U.S. dollar (CD/$) spot rate is CD1.33/$ and the S$/CD1.15. Determine
the triangular arbitrage profit that is possible if you have $1,000,000. $46,093 profit
493. The single European currency, the euro, was adopted by 11 member nations on
January 1 of what year? 1999
494. The smaller the concentration percentage, the more concentrated a market is in a few
stock issues
495. The spot market: Involves the almost-immediate purchase or sale of foreign exchange
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496. The standard size foreign exchange transactions are for: $10 million USD
497. The theory of comparative advantage: Claims that economic well-being is enhanced if
each country's citizens produce that which they have a comparative advantage in producing
relative to the citizens of other countries, and then trade production
498. The Toronto Stock exchange : is a fully automated; features electronic matching of
public orders; has continuous order flow
499. The Triffin paradox: was first proposed by Professor Robert Triffin; warned that the
gold-exchange system of the Bretton Woods agreement was programmed to collapse in the long
run.; . was indeed responsible for the eventual collapse of the dollar-based gold-exchange system
in the early 1970s.
500. The turnover ratio percentages for 27 equity markets of developed countries for the
five years beginning with 2002 were measured. Most national equity markets had very high
turnover ratios, with the great majority in excess of : 50 percent turnover per year
501. The turnover ratio percentages for 36 equity markets of emerging markets for the
five years beginning with 2002 were measured. Many of the small equity markets in each
region (e.g., Peru, Venezuela, Sri Lanka, Slovak Republic, Croatia, and Zimbabwe) have
relatively low turnover ratios, indicating poor liquidity at present
502. The U.S. Trade Deficit Is both a capital account surplus and a current account deficit
503. The ultimate guardians of shareholder interest in a corporation are the: board of
directors
504. The United States adopted the gold standard in; 1879
505. the US trade defecit: is a capital account surplus and current account deficit
506. The vast majority of new international bond offerings: make annual coupon
payments; have fixed coupon payment; have a fixed maturity
507. The vast majority of new international bond offerings; are straight fixed-rate notes
508. the vast majority of the foreign exchange reserves held by central banks are
denominated in: us dollars
509. The withholding tax on bond income was originally called the interest equalization
tax. You can thank John F. Kennedy for imposing this tax
510. The World Trade Organization, WTO, has the power to enforce the rules of
international trade
511. The world's largest debtor nation and creditor nation, respectively, are: us and japan
512. The world's largest foreign exchange trading center is: London
513. This account includes all imports and exports of goods and services. Current Account
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514. This account includes all purchases and sales of assets such as stocks, bonds, bank
accounts, real estate, and businesses. Capital Account
515. This account measures the difference between U.S. sales of assets to foreigners and
U.S. purchases of foreign assets. Capital Account
516. This involves contracting today for the future purchase of sale of foreign exchange
at a price agreed upon today. The forward market
517. Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €.
Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have
you made or lost? Lost $0.04 per € or $2,500
518. To avoid buying a stock at a price higher than you intend, you need to place
________ rather than a market order: a limit order
519. To avoid currency crisis in the face of fully integrated capital markets, a country
can have a: floating exchange rate & fixed exchange rate.
520. To pave the way for the European Monetary Union, the member countries of the
European Monetary System agreed to achieve a convergence of their economies. Which of
the following is NOT a condition of convergence: maintain its currency at a fixed exchange rate
to the ERM.
521. Today for a MNC to produce merchandise in one country on capital equipment
financed by funds raised in a number of different currencies through issuing securities to
investors in many countries and then selling the finished product to customers in yet other
countries is : not uncommon
522. Today you notice the following exchange rate quotations: *$1 is equal to 3.00
Argentine pesos *1 Argentine peso = 0.50 Canadian dollars *You need to purchase 100,000
Canadian dollars with U.S. dollars. How many U.S. dollars will you need for your
purchase? Value of AP = $.333; Value of C$ in AP = 2; Value of C$ in $ = $.666. So you need
$66,666 to purchase C$100,000
523. Transactions in currency, bank deposits and so forth: tend to be sensitive to both
changes in relative interest rates and the anticipated change in exchange rate
524. Transfer risk refers to the risk which arises from the uncertainty about: cross-border
flows capital, payment, know-how, and the like
525. Translation exposure refers to the effect that an unanticipated change in exchange
rates will have on what? The consolidated financial reports of a MNC.
42
526. U.S. banks that establish subsidiary and affiliate banks : are allowed to underwrite
securities
527. U.S. corporations : are allowed to issue bearer bonds to non-U.S. citizens
528. U.S. security regulations require Yankee bonds and U.S. corporate bonds sold to
U.S. citizens to be: registered bonds
529. Under a flexible exchange rate regime, governments can retain monetary policy
independence because the external balance will be achieved by: the exchange rate
adjustments.
530. Under a purely flexible exchange rate system: supply and demand set the exchange
rates.
531. Under the Bretton Woods system each country established a par value for its
currency in relation to the dollar. And the U.S. dollar was pegged to gold at: $35 per ounce
532. Under the Bretton Woods system, each country was responsible for maintaining its
exchange rate within 1 percent of the adopted par value by: buying or selling foreign
exchanges as necessary.
533. Under the Bretton Woods system, the U.S. dollar was the only currency that was fully
convertible to gold; other currencies were not directly convertible to gold.
534. Under the Bretton Woods system: here was an explicit set of rules about the conduct of
international monetary policies.; each country was responsible for maintaining its exchange rate
within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary.;
the U.S. dollar was the only currency that was fully convertible to gold.
535. Under the Bretton Woods system; each country established a par value for its currency
in relation to the dollar; the U.S. dollar was pegged to gold at $35 per ounce; each country was
responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying
or selling foreign exchanges as necessary.
536. under the fixed exchange regime: the combined balance on the current and capital
accounts will be equal in size, but opposite in sign, to the change in the official reserves.
537. Under the gold standard, international imbalances of payment will be corrected
automatically under the: Price-specie-flow mechanism.
538. Under the pure flexible exchange rate regime, the balance on the current and capital
accounts will be equal in side but opposite in sign
539. Under the theory of comparative advantage, liberalization of international trade
will: enhance the welfare of the world's citizens
43
540. Undoubtedly, we are now living in a world where all the major economic
functions—consumption, production, and investment : are highly globalized
541. United states is considered: a net debtor nation
542. Unlike a bond issue, in which the entire issue is brought to market at once, _______
is partially sold on a continuous basis through an issuance facility that allows the borrower
to obtain funds only as needed on a flexible basis. a Euro-medium term note issue
543. Unlike day orders, a good-til-cancelled (GTC) order is an order to buy or sell a
security at a specific or limit price that lasts until the order is completed or cancelled.
Which of the following are true? A GTC order will not be executed until the limit price has
been reached, regardless of how many days or weeks it might take; Investors often use GTC
orders to set a limit price that is far away from the current market price; Some brokerage firms
may limit the time a GTC order can remain in effect and may charge more for executing this type
of order
544. Using the table shown, what is the most current spot exchange rate shown for
British pounds? Use a direct quote from a U.S. perspective. $1.60 = £1.00
545. Using the table shown, what is the spot cross-exchange rate between pounds and
euro? Euro 1.00 = .75
546. Utah Bank's bid price for Canadian dollars is $.7938 and its ask price is $.81. What
is the bid/ask percentage spread? ($.81 - $.7938)/$.81 = .02 or 2%
547. What do we need to do when cross-hedging? Find an asset that covaries with another
asset in a predictable way.
548. What does the capital account measure? The difference between U.S. sales of assets to
foreigners and U.S. purchases of foreign assets.
549. What major dimension sets apart international finance from domestic finance?
Foreign exchange and political risks; Market imperfections; Expanded opportunity set.
550. What was significant about the Bretton Woods System? The U.S. dollar was the only
currency that was fully convertible to gold.
551. What will a firm with a highly ELASTIC demand for its products not be able to do?
They won't be able to pass increased costs following unfavorable changes in the exchange rate
without significantly lowering the quantity sold.
552. What will a firm with highly INELASTIC demand for its products be able to do? It
will be able to raise prices following unfavorable changes in the exchange rate without
significantly lowering the quantity sold
44
553. What's the difference between spot and forward market? What is the settlement day
in forward contract? The forward market involves contracting today for future purchase or sale
of FX
554. When a country must make a net payment to foreigners because of a balance-of-
payments deficit, the central bank of the country should either run down its official reserve
assets (e.g., gold, foreign exchanges, and SDRs) or borrow
anew from foreign central banks.
555. When a country's currency appreciates against the currencies of major trading
partners, what happens? The country's imports tend to rise and exports fall.
556. When a country's currency depreciates against the currencies of major trading
partners, what happens? That country's exports tend to rise and imports fall.
557. When a country's currency depreciates: exports rise and imports fall
558. When a currency trades at a discount in the forward market: the forward rate is less
than the spot rate.
559. When corporate governance breaks down: shareholders are unlikely to receive fair
returns on their investments ; managers may be tempted to enrich themselves at shareholder
expense; the board of directors is not doing its job
560. when honda, a japanese auto maker built a factory in ohio: engaged in an FDI
561. When Honda, a Japanese auto maker, built a factory in Ohio, it was engaged in
foreign direct investment
562. When individual investors become aware of overseas investment opportunities and
are willing to diversify their portfolios internationally, they benefit from an expanded
opportunity set
563. When Interest Rate Parity (IRP) does not hold: there are opportunities for covered
interest arbitrage.
564. When money can move freely across borders, policy makers must choose between:
exchange-rate stability and an independent monetary policy.
565. When money can move freely across borders, policy makers must choose between:
exchange-rate stability and inflation.
566. When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in
foreign direct investment. If Nestlé had only bought a non-controlling number of shares of
the firm, nestle would have been engaged in portfolio investment
567. When the balance-of-payments accounts are recorded correctly, the combined
balance of the current account, the capital account, and the reserves account must be: zero
45
568. When the Mexican peso collapsed in 1994, declining by 37 percent, U.S. firms that
exported to Mexico and priced in peso were adversely affected, and U.S. firms that exported to
Mexico and priced in dollars were adversely affected.
569. Which country is NOT using the euro? Sweden
570. Which factors are related to the collapse of the Argentine currency board system
and ensuing economic crisis? The lack of fiscal discipline on the part of the Argentine
government; Labor market inflexibility; Contagion from the financial crises in Russia and Brazil.
571. Which investment is likely to be the least liquid? A house in a nice part of town
572. Which investment is likely to be the most liquid? A share of publicly traded company
trading on the NYSE
573. Which is growing at a faster rate, foreign direct investment by MNCs or
international trade? FDI by MNCs
574. Which of the following are correct?

577. Which of the following are reasons why a bank may establish a multinational
operation? Low marginal and transaction costs, Home nation information services, and prestige,
and Growth and risk reduction
578. Which of the following are true? Unless you give your broker specific instructions to
the contrary, orders to buy or sell a stock are day orders
579. Which of the following is most indicative of the pressure that a country's currency
faces for depreciation or appreciation? official settlement balance
580. Which of the following would not count as a foreign-exchange reserve held by a
central bank? local currency
581. While the corporate governance problem is not confined to the United States, It can
be a much more serious problem in many other parts of the world, where legal protection of
shareholders is weak or nonexistent.
582. While there is no comprehensive theory of FDI, many existing theories emphasize:
Imperfections in product markets, capital markets, and labor markets
46
583. Why would a U.S. bank open a foreign branch bank instead of a foreign chartered
subsidiary? This form of bank organization allows the bank to be able to extend a larger loan to a
customer than a locally chartered subsidiary bank of the parent
584. Why would a U.S. bank open a foreign branch bank? Because this form of bank
organization can allow a U.S. bank to provide a fuller range of services for its MNC customers
than it can through a representative office
585. Will an arbitrageur facing the following prices be able to make money? $:
Borrowing: 5% Lending: 4.5% Bid: Spot $1.00 = €1.00 Ask: Spot $1.01 = €1.00; €:
Borrowing: 6% Lending: 5.5% Bid: Forward $0.99 = €1.00 Ask: Forward $1.00 = €1.00 :
No; the transactions costs are too high.
586. Willem Duisenberg, the first president of the European Central Bank, defined
"price stability" as an annual inflation rate of: less than but close to 2 percent."
587. With a bearer bond, possession is evidence of ownership
588. with regard to capital account: purchase=debits
sells=credit measures difference between us sales of assets to foreigners and us purchases of
foreign assets
589. With regard to the capital account : the capital account balance measures the
difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets; U.S.
sales (or exports) of assets are recorded as credits, as they result in capital inflow; U.S. purchases
(imports) of foreign assets are recorded as debits, as they lead to capital outflow
590. With regard to the current exchange rate agreement with U.S. and Germany, it is
best characterized as what? A market determined float
591. With regard to the current exchange rate arrangement between Italy and Germany,
it is best characterized as; an exchange arrangement with no separate legal tender.
592. With regard to the current exchange rate arrangement between the U.S. and the
U.K., it is best characterized as: independent floating (market determined).
593. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange
rate is quoted as $1.50 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 =
£1.00. If a bank quotes you a cross rate of £1.00 = €1.25 how can you make money? Buy euro
at $1.50/€, buy £ at €1.25/£, sell £ at $2/£.
£1.00. If a bank quotes you a cross rate of £1.00 = €1.50, how much money can an astute
trader make? no arbitrage is possible
47
£1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money?
41,666.67
£1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how can you make money? Buy
euro at $1.60/€, buy £ at €1.20/£, sell £ at $2/£
597. you will get more diversification; across countries than across industries

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48. A formal statement of IRP is :

Balance on the capital account = BKA = −$86 billion

164. Foreign-owned manufacturing companies in the world's most highly developed

261. Investment in foreign equity markets : is no longer considered a "backwater" in the

326. Since the balance of payments is presented as a system of double-entry bookkeeping,

574. Which of the following are correct?

575. Which of the following are correct?

576. Which of the following are correct?

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