FIN 535 Week 5 Midterm Exam – Strayer University New

FIN/535 Week 5 Midterm Exam – Strayer New

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Chapter 1 Through 7

Chapter 1—Multinational Financial Management: An Overview

1. The commonly accepted goal of the MNC is to:
a. maximize short-term earnings.
b. maximize shareholder wealth.
c. minimize risk.
d. A and C.
e. maximize international sales.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

2. With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____.
a. shareholder wealth; short-term earnings
b. shareholder wealth; shareholder wealth
c. short-term earnings; sales volume
d. short-term earnings; shareholder wealth

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

3. For the MNC, agency costs are typically:
a. non-existent.
b. larger than agency costs of a small purely domestic firm.
c. smaller than agency costs of a small purely domestic firm.
d. the same as agency costs of a small purely domestic firm.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

4. Which of the following could reduce agency problems for an MNC?
a. stock options as managerial compensation.
b. hostile takeover threat.
c. investor monitoring.
d. all of the above are forms of corporate control that could reduce agency problems for an MNC.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

5. The valuation of an MNC should rise when an event causes the expected cash flows from foreign to ____ and when foreign currencies denominating these cash flows are expected to ____.
a. decrease; appreciate
b. increase; appreciate
c. decrease; depreciate
d. increase; depreciate

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

6. Which of the following theories identifies specialization as a reason for international business?
a. theory of comparative advantage.
b. imperfect markets theory.
c. product cycle theory.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

7. Which of the following theories identifies the non-transferability of resources as a reason for international business?
a. theory of comparative advantage.
b. imperfect markets theory.
c. product cycle theory.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

8. Which of the following theories suggests that firms seek to penetrate new markets over time?
a. theory of comparative advantage.
b. imperfect markets theory.
c. product cycle theory.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

9. Which of the following industries would most likely take advantage of lower costs in some less developed foreign countries?
a. assembly line production.
b. specialized professional services.
c. nuclear missile planning.
d. planning for more sophisticated computer technology.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

10. Due to the risks involved in international business, firms should:
a. only consider international business in major countries.
b. maintain international business to no more than 20% of total business.
c. maintain international business to no more than 35% of total business.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

11. A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

12. Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

13. The agency costs of an MNC are likely to be lower if it:
a. scatters its subsidiaries across many foreign countries.
b. increases its volume of international business.
c. uses a centralized management style.
d. A and B.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

14. An MNC may be more exposed to agency problems if most of its shares are held by:
a. a few mutual funds
b. a widely dispersed set of individual investors
c. a few pension funds
d. all of the above would prevent agency problems

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

15. The Sarbanes-Oxley Act improves corporate governance of MNCs because it:
a. makes executives more accountable for verifying financial statements
b. eliminates stock options as a form of compensation
c. ties executive compensation to firm performance
d. places a limit on the amount of funds that managers can spend

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

16. MNCs can improve their internal control process by all of the following, except:
a. establishing a centralized data base of information
b. ensuring that all data are reported consistently among subsidiaries
c. ensuring that the MNC always borrows from countries where interest rates are lowest
d. using a system that checks internal data for unusual discrepancies

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

17. Franchising is the process by which national governments sell state owned operations to corporations and other investors.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

18. The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

19. If a publicly-traded MNC’s managers make poor decisions that reduce its value, it may encourage other firms to acquire it.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

20. Institutional investors such as mutual funds or pension funds which have large holdings of an MNC’s stock do not normally want to take control of it and therefore have no influence over management of the MNC.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

21. In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation costs than DFI.
a. higher; higher
b. higher; lower
c. lower; lower
d. lower; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

22. Which of the following is an example of direct foreign investment?
a. exporting to a country.
b. establishing licensing arrangements in a country.
c. purchasing existing companies in a country.
d. investing directly (without brokers) in foreign stocks.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

23. According to the text, a disadvantage of licensing is that:
a. it prevents a firm from importing.
b. it is difficult to ensure quality control of the production process.
c. it prevents a firm from exporting.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

24. ____ are most commonly classified as a direct foreign investment.
a. Foreign acquisitions
b. Purchases of international stocks
c. Licensing agreements
d. Exporting transactions

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

25. Imperfect markets represent conditions under which factors of production are immobile.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

26. The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

27. If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders).
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

28. The valuation of an MNC is reduced if the required return on its investments in foreign countries is reduced.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

29. Which of the following is not mentioned in the text as an additional risk resulting from international business?
a. exchange rate fluctuations.
b. political risk.
c. interest rate risk.
d. exposure to foreign economies.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

30. Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____.
a. a specialized sales or service strategy; its technology
b. its technology; a specialized sales or service strategy
c. its technology; its technology
d. a specialized sales or service strategy; a specialized sales or service strategy
e. its technology; an initial investment

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

31. Which of the following is not a way in which agency problems can be reduced through corporate control?
a. executive compensation.
b. threat of hostile takeover.
c. acquisition of a foreign subsidiary.
d. monitoring by large shareholders.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

32. The goal of a multinational corporation (MNC) is the maximization of shareholder wealth.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

33. A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

34. If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

35. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

36. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

37. A centralized management style for an MNC results in relatively high agency costs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

38. The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country’s resources.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

39. If a U.S.-based MNC focused completely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

40. The acquisition of a foreign subsidiary is commonly considered by MNCs because the cost is less expensive than establishing a new subsidiary of the same size.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

41. If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

42. If markets were perfect, then labor and other costs of production would be easily transferable.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

43. International trade:
a. is a relatively conservative approach to foreign market penetration.
b. entails minimal risk.
c. does not require large amount of investment.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

44. Assume that an American firm wants to engage in international business without major investment in the foreign country. Which method is least appropriate in this situation?
a. International Trade
b. Licensing
c. Franchising
d. Direct foreign investment

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

45. The valuation of MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

46. The MNC’s value depends on all of the following, except:
a. MNC’s required rate of return
b. Amount of MNC’s cash flows in particular currency
c. The exchange rate at which cash flows are converted to dollars
d. The value of MNC depends on all of the above factors

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

47. Which of the following is not an example of political risk?
a. Government may impose taxes on subsidiary
b. Government may impose barriers on subsidiary
c. Consumers may boycott the MNC
d. Consumers’ income levels will decrease, thus decreasing consumption.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

48. A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

49. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use Euro as their currency, this MNC is not subject to the exchange rate risk.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

50. International trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions, when compared to other methods of international business.
a. higher; lower
b. higher; higher
c. lower; higher
d. lower; lower

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

51. Assume that Boca Co. wants to expand its business to Japan, and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co?
a. Joint venture
b. Licensing
c. Partial acquisition of existing Japanese firm
d. Establishment of Japanese subsidiary

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

52. A decentralized management style of MNC results in relatively high agency costs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

53. The establishment of a new subsidiary is commonly considered by MNCs because the cost is less expensive than acquiring a foreign subsidiary of the same size.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

54. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc’s value and euro’s value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co?
a. $200,000
b. $559,500
c. $582,500
d. $393,500

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

55. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could’ve caused this decline in value?
a. A weaker Mexican economy
b. Lower Mexican interest rates
c. Depreciation of the Mexican peso
d. Appreciation of the Mexican peso.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations.
a. depreciates; appreciates
b. appreciates; appreciates
c. appreciates; depreciates
d. depreciates; depreciates

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

57. A macroeconomic perspective focuses on the financial management decisions that affect the value of MNC.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

58. An MNC will always use the same required rate of return in the valuation of foreign projects, as it would for its domestic projects.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston’s expected cash flows from domestic business are $100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.?
a. $100,000
b. $200,000
c. $160,000
d. $60,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

60. A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

61. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

62. A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary’s operations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

63. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

64. The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

65. The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

66. Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country’s resources.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

67. Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

68. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

69. International trade is the most common form of direct foreign investment (DFI).
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

70. When the parent’s home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

71. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

72. One form of an exposure to political risk is terrorism.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

73. The goal of a multinational corporation (MNC) is
a. The minimization of taxes remitted from foreign subsidiaries.
b. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.
c. The maximization of shareholder wealth.
d. The maximization of social benefits resulting from actions such as the employment of foreign managers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

74. Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because
a. Monitoring of managers located in foreign countries is more difficult.
b. Foreign subsidiary managers raised in different cultures may not follow uniform goals.
c. MNCs are relatively large.
d. All of the above
e. A and B only

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

75. Which of the following is not one of the more common methods used by MNCs to improve their internal control process?
a. Establishing a centralized database of information
b. Ensuring that all data are reported consistently among subsidiaries
c. Speeding the process by which all departments and all subsidiaries have access to the data that they need
d. Making executives more accountable for financial statements by personally verifying their accuracy
e. All of the above are common methods used by MNCs to improve their internal control process.

76. Which of the following is not mentioned in the text as a theory of international business?
a. Theory of Comparative Advantage
b. Imperfect Markets Theory
c. Product Cycle Theory
d. Globalization of Business Theory
e. All of the above are mentioned in the text as theories of international business

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

77. The most risky method(s) by which firms conduct international business is (are):
a. Franchising.
b. The acquisitions of existing operations.
c. The establishment of new subsidiaries.
d. All of the above
e. B and C only

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

78. The least risky method by which firms conduct international business is:
a. Franchising.
b. The acquisitions of existing operations.
c. International Trade.
d. The establishment of new subsidiaries.
e. Licensing

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

79. Which of the following does not constitute a form of direct foreign investment?
a. Franchising
b. International trade
c. Joint ventures
d. Acquisitions of existing operations
e. Establishment of new foreign subsidiaries

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03
NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

Chapter 2—International Flow of Funds

1. Recently, the U.S. experienced an annual balance of trade representing a ____.
a. large surplus (exceeding $100 billion)
b. small surplus
c. level of zero
d. deficit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

2. A high home inflation rate relative to other countries would ____ the home country’s current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country’s current account balance, other things equal.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

3. If a country’s government imposes a tariff on imported goods, that country’s current account balance will likely ____ (assuming no retaliation by other governments).
a. decrease
b. increase
c. remain unaffected
d. either A or C are possible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

4. ____ purchases more U.S. exports than the other countries listed here.
a. Italy
b. Spain
c. Mexico
d. Canada

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

5. An increase in the current account deficit will place ____ pressure on the home currency value, other things equal.
a. upward
b. downward
c. no
d. upward or downward (depending on the size of the deficit)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

6. If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same).
a. increase
b. have no impact on
c. reduce
d. all of the above are equally possible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

7. The International Financial Corporation was established to:
a. enhance development solely in Asia through grants.
b. enhance economic development through non-subsidized loans (at market interest rates).
c. enhance economic development through low-interest rate loans (below-market rates).
d. enhance economic development of the private sector through investment in stock of corporations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

8. The World Bank was established to:
a. enhance development solely in Asia through grants.
b. enhance economic development through non-subsidized loans (at market interest rates).
c. enhance economic development through low-interest rate loans (below-market rates).
d. enhance economic development of the private sector through investment in stock of corporations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

9. The International Development Association was established to:
a. enhance development solely in Asia through grants.
b. enhance economic development through non-subsidized loans (at market interest rates).
c. enhance economic development through low-interest rate loans (below-market rates).
d. enhance economic development of the private sector through investment in stock of corporations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

10. Which of the following would likely have the least direct influence on a country’s current account?
a. inflation.
b. national income.
c. exchange rates.
d. tariffs.
e. a tax on income earned from foreign stocks.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

11. The “J curve” effect describes:
a. the continuous long-term inverse relationship between a country’s current account balance and the country’s growth in gross national product.
b. the short-run tendency for a country’s balance of trade to deteriorate even while its currency is depreciating.
c. the tendency for exporters to initially reduce the price of goods when their own currency appreciates.
d. the reaction of a country’s currency to initially depreciate after the country’s inflation rate declines.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

12. An increase in the use of quotas is expected to:
a. reduce the country’s current account balance, if other governments do not retaliate.
b. increase the country’s current account balance, if other governments do not retaliate.
c. have no impact on the country’s current account balance unless other governments retaliate.
d. increase the volume of a country’s trade with other countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

13. The U.S. typically has a balance of trade surplus in its trade with ____.
a. China
b. Japan
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

14. The North American Free Trade Agreement (NAFTA) increased restrictions on:
a. trade between Canada and Mexico.
b. trade between Canada and the U.S.
c. direct foreign investment in Mexico by U.S. firms.
d. none of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

15. According to the text, international trade (exports plus imports combined) as a percentage of GDP is:
a. higher in the U.S. than in European countries.
b. lower in the U.S. than in European countries.
c. higher in the U.S. than in about half the European countries, and lower in the U.S. than the others.
d. about the same in the U.S. as in European countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

16. The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time.
a. increased; increased
b. increased; decreased
c. decreased; decreased
d. decreased; increased

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

17. Which of the following countries purchases the largest amount of exports by U.S. firms?
a. Mexico
b. Japan
c. Canada
d. France

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

18. The primary component of the current account is the:
a. balance of trade.
b. balance of money market flows.
c. balance of capital market flows.
d. unilateral transfers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

19. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.
a. member countries and the U.S.
b. member countries
c. member countries and European non-members
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

20. Over the last several years, international trade has generally:
a. increased for most major countries.
b. decreased for most major countries.
c. stayed about constant for most major countries.
d. increased for about half the major countries and decreased for the others.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

21. Which is not a concern about the North American Free Trade Agreement (NAFTA)?
a. its impact on U.S. inflation.
b. its impact on U.S. unemployment.
c. lower environmental standards in Mexico.
d. different health laws for workers in Mexico.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

22. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
a. increased trade restrictions outside of North America.
b. lower trade restrictions around the world.
c. uniform environmental standards around the world.
d. uniform worker health laws.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

23. Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance of trade position (increase its exports or reduce its imports).
a. It could attempt to reduce its home currency’s value.
b. The government could require firms to engage in outsourcing.
c. The government could require that its local firms pursue outsourcing.
d. All of the above are mentioned.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

24. The demand for U.S. exports tends to increase when:
a. economic growth in foreign countries decreases.
b. the currencies of foreign countries strengthen against the dollar.
c. U.S. inflation rises.
d. none of the above.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

25. “Dumping” is used in the text to represent the:
a. exporting of goods that do not meet quality standards.
b. sales of junk bonds to foreign countries.
c. removal of foreign subsidiaries by the host government.
d. exporting of goods at prices below cost.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

26. ____ is (are) income received by investors on foreign investments in financial assets (securities).
a. Portfolio income
b. Direct foreign income
c. Unilateral transfers
d. Factor income

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

27. A weak home currency may not be a perfect solution to correct a balance of trade deficit because:
a. it reduces the prices of imports paid by local companies.
b. it increases the prices of exports by local companies.
c. it prevents international trade transactions from being prearranged.
d. foreign companies may reduce the prices of their products to stay competitive.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

28. Intracompany trade makes up approximately ____ percent of all international trade.
a. 50
b. 70
c. 25
d. 13
e. 5

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

29. Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives.
a. World Bank
b. International Financial Corporation (IFC)
c. World Trade Organization (WTO)
d. International Development Association (IDA)
e. Bank for International Settlements (BIS)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

30. The World Bank’s Multilateral Investment Guarantee Agency (MIGA):
a. offers various forms of export insurance.
b. offers various forms of import insurance.
c. offers various forms of exchange rate risk insurance.
d. provides loans to developing countries.
e. offers various forms of political risk insurance.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

31. Also known as the “central banks’ central bank,” the ____ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.
a. World Bank
b. International Financial Corporation (IFC)
c. World Trade Organization
d. International Development Association (IDA)
e. Bank for International Settlements (BIS)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

32. Direct foreign investment into the U.S. represents a ____.
a. capital inflow
b. trade inflow
c. capital outflow
d. trade outflow

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

33. A balance of trade surplus indicates an excess of imports over exports.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

34. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain over time.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

35. The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

36. The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

37. The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

38. Changes in country ownership of long-term and short-term assets are measured in the balance of payments with the capital account.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

39. Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

40. The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

41. Exporting of products by one country to other countries at prices below cost is called elasticity.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

42. Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

43. The J curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

44. Portfolio investments represent transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

45. Intracompany trade represents the exporting of products by one country to other countries below cost.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

46. A tariff is a maximum limit on imports.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

47. A country’s net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

48. The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

49. A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

50. Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

51. In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China.
a. small; surplus
b. large; surplus
c. small; deficit
d. large; deficit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

52. The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the U.S., the Dominican Republic, and Central American countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

53. U.S. government officials would likely prefer that China devalue the yuan against the dollar.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

54. Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

55. Assume the U.S. has a balance of trade surplus with the country of Thor. When individuals in Thor manufacture CDs and DVDs that look almost exactly like the original product produced in the U.S. and other countries, they ____ the U.S. balance of trade surplus with Thor. This activity is called ____.
a. reduce; flipping
b. reduce; pirating
c. increase; pirating
d. increase; flipping

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

56. Japan’s annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.
a. low; small
b. high; small
c. low; large
d. high; large

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

57. Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm’s risk level.
a. more; lower
b. more; higher
c. less; lower
d. less; higher

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

58. The primary component of the capital account is the balance of trade.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

59. A balance of trade surplus indicates an excess of merchandise imports over merchandise exports.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

60. An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current account deficit and reduce Germany’s current account balance.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

61. A balance of trade deficit indicates an excess of imports over exports.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

62. The capital account reflects changes in country ownership of long-term (but not short-term) assets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

63. Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

64. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the U.K. and increase U.S. imports from the U.K.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

65. The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

66. The ____ is the difference between exports and imports.
a. balance of trade
b. balance on goods and services
c. balance of payments
d. current account
e. capital account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.03
KEY: Bloom’s: Knowledge

67. Which of the following will probably not result in an increase in a country’s current account balance (assuming everything else constant)?
a. A decrease in the country’s rate of inflation
b. A decrease in the country’s national income level
c. An increase in government restrictions in the form of tariffs or quotas
d. An appreciation of the country’s currency
e. All of the above will result in an increased current account balance.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

68. Which of the following factors probably does not directly affect a country’s capital account and its components?
a. Inflation
b. Interest rates
c. Withholding taxes on foreign income
d. Exchange rate movements
e. All of the above will directly affect a country’s capital account.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

69. The ____, an accord among 117 nations, called for lower tariffs around the world.
a. General Agreement on Tariffs and Trade (GATT)
b. North American Free Trade Agreement (NAFTA)
c. Single European Act of 1987
d. European Union Accord
e. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

70. Which of the following is not likely to represent a strategy by the government of Country X to reduce its balance of trade deficit with Country Y?
a. The government of Country X eliminates environmental restrictions.
b. The government of Country X subsidizes firms in its country to facilitate dumping.
c. The government of Country X provides tax breaks to firms in specific industries.
d. The government of Country X removes a tariff on goods imported from Country Y.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

71. Which of the following statements is not true?
a. Exporters commonly complain that they are being mistreated because the currency of their country is too weak.
b. Outsourcing affects the balance of trade because it means that a service is purchased in another country.
c. Sometimes, trade policies are used to punish countries for various actions.
d. Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

72. Which of the following would increase the current account of Country X? Country Y is Country X’s sole trading partner.
a. Inflation increases in countries X and Y by comparable amounts.
b. Country X’s and Country Y’s currencies depreciate by the same amount.
c. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on X’s exports.
d. The central banks of Country X and Country Y reduce the money supply to increase interest rates.
e. Country X imposes a quota on imports, and Country Y retaliates by imposing an identical quota on X’s exports.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.02.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

73. ____ represent aid, grants, and gifts from one country to another.
a. Transfer payments
b. Factor income
c. The balance of trade
d. The balance of payments
e. The capital account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

74. Which of the following is not a goal of the International Monetary Fund (IMF)?
a. To promote cooperation among countries on international monetary issues
b. To promote stability in exchange rates
c. To enhance a country’s long-term economic growth via the extension of structural adjustment loans
d. To promote free trade
e. To promote free mobility of capital funds across countries

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

75. According to the “J curve effect,” a weakening of the U.S. dollar relative to its trading partners’ currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.
a. decrease; increase
b. increase; decrease
c. decrease; decrease
d. increase; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

Chapter 3—International Financial Markets

1. Assume that a bank’s bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is:
a. about 4.44%.
b. about 4.26%.
c. about 4.03%.
d. about 4.17%.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

2. Assume that a bank’s bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is:
a. about 4.99%.
b. about 4.88%.
c. about 4.65%.
d. about 4.43%.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent.
a. 3 to 7
b. .01 to .03
c. 10 to 15
d. .5 to 1

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

4. ____ is not a factor that affects the bid/ask spread.
a. Order costs
b. Inventory costs
c. Volume
d. All of the above factors affect the bid/ask spread

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

5. The forward rate is the exchange rate used for immediate exchange of currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

6. The ask quote is the price for which a bank offers to sell a currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

7. According to the text, the forward rate is commonly used for:
a. hedging.
b. immediate transactions.
c. previous transactions.
d. bond transactions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90 days, it could:
a. obtain a 90-day forward purchase contract on euros.
b. obtain a 90-day forward sale contract on euros.
c. purchase euros 90 days from now at the spot rate.
d. sell euros 90 days from now at the spot rate.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:
a. obtain a 90-day forward purchase contract on Canadian dollars.
b. obtain a 90-day forward sale contract on Canadian dollars.
c. purchase Canadian dollars 90 days from now at the spot rate.
d. sell Canadian dollars 90 days from now at the spot rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

10. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is:
a. about .3621 Canadian dollars.
b. about .3977 Canadian dollars.
c. about 2.36 Canadian dollars.
d. about 2.51 Canadian dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

11. Which of the following is not true with respect to spot market liquidity?
a. The more willing buyers and sellers there are, the more liquid a market is.
b. The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
c. A currency’s liquidity affects the ease with which an MNC can obtain or sell that currency.
d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

12. Forward markets for currencies of developing countries are:
a. prohibited.
b. less liquid than markets for developed countries.
c. more liquid than markets for developed countries.
d. only available for use by government agencies.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

13. A forward contract can be used to lock in the ____ of a specified currency for a future point in time.
a. purchase price
b. sale price
c. A or B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

14. The forward market:
a. for euros is very illiquid.
b. for Eastern European countries is very liquid.
c. does not exist for some currencies.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

15. ____ is not a bank characteristic important to customers in need of foreign exchange.
a. Quote competitiveness
b. Speed of execution
c. Forecasting advice
d. Advice about current market conditions
e. All of the above are important bank characteristics to customers in need of foreign exchange.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

16. The Basel II accord is focused on eliminating inconsistencies in ____ across countries.
a. capital requirements
b. deposit rates
c. deposit insurance
d. bank failure policies

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

17. The international money market primarily concentrates on:
a. short-term lending (one year or less).
b. medium-term lending.
c. long-term lending.
d. placing bonds with investors.
e. placing newly issued stock in foreign markets.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

18. The international credit market primarily concentrates on:
a. short-term lending (less than one year).
b. medium-term lending.
c. long-term lending.
d. providing an exchange of foreign currencies for firms who need them.
e. placing newly issued stock in foreign markets.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

19. The main participants in the international money market are:
a. consumers.
b. small firms.
c. large corporations.
d. small European firms needing European currencies for international trade.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

20. LIBOR is:
a. the interest rate commonly charged for loans between banks.
b. the average inflation rate in European countries.
c. the maximum loan rate ceiling on loans in the international money market.
d. the maximum deposit rate ceiling on deposits in the international money market.
e. the maximum interest rate offered on bonds that are issued in London.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

21. A syndicated loan:
a. represents a loan by a single bank to a syndicate of corporations.
b. represents a loan by a single bank to a syndicate of country governments.
c. represents a direct loan by a syndicate of oil-producing exporters to a less developed country.
d. represents a loan by a group of banks to a borrower.
e. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

22. The international money market is primarily served by:
a. the governments of European countries, which directly intervene in foreign currency markets.
b. government agencies such as the International Monetary Fund that enhance development of countries.
c. several large banks that accept deposits and provide loans in various currencies.
d. small banks that convert foreign currency for tourists and business visitors.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

23. International money market transactions normally represent:
a. the equivalent of $1 million or more.
b. the equivalent of $1,000 to $10,000.
c. the equivalent of between $10,000 and $100,000.
d. the equivalent of between $100,000 and $200,000.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

24. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

25. From 1944 to 1971, the exchange rate between any two currencies was typically:
a. fixed within narrow boundaries.
b. floating, but subject to central bank intervention.
c. floating, and not subject to central bank intervention.
d. nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

26. As a result of the Smithsonian Agreement, the U.S. dollar was:
a. the currency to be used by all countries as a medium of exchange for international trade.
b. forced to be freely floating relative to all currencies without any boundaries.
c. devalued relative to major currencies.
d. revalued (upward) relative to major currencies.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

27. According to the text, the average foreign exchange trading around the world ____ per day.
a. equals about $200 billion
b. equals about $400 billion
c. equals about $700 billion
d. exceeds $1 trillion

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

28. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.
a. depreciate; buying
b. depreciate; selling
c. appreciate; selling
d. appreciate; buying

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

29. The bid-ask spread on an exchange rate can be used to directly determine:
a. how an exchange rate will change.
b. the transaction cost of foreign exchange.
c. the forward premium.
d. the currency option premium.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

30. Futures contracts are typically ____; forward contracts are typically ____.
a. sold on an exchange; sold on an exchange
b. offered by commercial banks; sold on an exchange
c. sold on an exchange; offered by commercial banks
d. offered by commercial banks; offered by commercial banks

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

31. Eurobonds:
a. are usually issued in bearer form.
b. typically carry several protective covenants.
c. cannot contain call provisions.
d. A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

32. Which of the following is true?
a. Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
b. U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
c. U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries.
d. A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

33. Eurobonds:
a. can be issued only by European firms.
b. can be sold only to European investors.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

34. Which currency is used the most to denominate Eurobonds?
a. the British pound.
b. the Japanese yen.
c. the U.S. dollar.
d. the Swiss franc.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

35. When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be based on the:
a. closing prices in the U.S. during the previous day.
b. closing prices in Canada during the previous day.
c. prevailing prices in locations where the foreign exchange markets have been open.
d. officially set by central banks before the U.S. market opens.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

36. The U.S. dollar is not ever used as a medium of exchange in:
a. industrialized countries outside the U.S.
b. in any Latin American countries.
c. in Eastern European countries where foreign exchange restrictions exist.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

37. Which of the following is not true regarding the Bretton Woods Agreement?
a. It called for fixed exchange rates between currencies.
b. Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels.
c. The agreement lasted from 1944 until 1971.
d. Each country used gold to back its currency.
e. All of the above are true regarding the Bretton Woods Agreement.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?
a. 73.75.
b. 125.
c. 1.69.
d. 0.014.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

39. The existence of imperfect markets has prevented the internationalization of financial markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

40. Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

41. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

42. The Single European Act prevented a trend toward increased globalization in the banking industry.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

43. A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

44. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

45. The strike price is also known as the premium price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

46. The interest rate commonly charged for loans between banks is called the cross rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

47. The Bretton Woods Agreement is an agreement to standardize banks’ capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

48. The Basel Accord is an agreement among the major European countries to make regulations more uniform across European countries and to reduce taxes on goods traded between these countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

49. A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

50. Eurobonds are certificates representing bundles of stock.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

51. A share of the ADR of a Dutch firm represents one share of that firm’s stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.
a. $13.64
b. $15.00
c. $16.50
d. 16.50 euros
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

52. The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____.
a. 48.90
b. 146.70
c. 55.21
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

53. If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

54. If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

55. The preferences of corporations and governments to borrow in foreign currencies and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

56. Large commercial banks play a major role in the international money market by accepting short-term deposits in large amounts (such as the equivalent of $1 million or more) and in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

57. The term “eurobor” is widely used to reflect the interbank offer rate on euros.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

58. The term “eurobor” is widely used to reflect the total amount of euros borrowed by the firms in Europe per month to finance their growth.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

59. Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

60. In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

61. Global regulations require that shareholders in all countries have the same rights wherever there are stock markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

62. Shareholders have more voting power in some countries than others.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

63. Shareholders can have influence on a wider variety of management issues in some countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

64. The legal protection of shareholders is the same among countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

65. Shareholders in some countries may have more power to effectively sue publicly-traded firms if their executives or directors commit financial fraud.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

66. In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

67. The government enforcement of securities laws varies among countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

68. The degree of financial information that must be provided by public companies is the same among countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

69. In general, stock markets allow for more price efficiency and attract more investors when they have all of the following except:
a. more voting rights for shareholders.
b. more legal protection.
c. more enforcement of the laws.
d. less stringent accounting requirements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

70. In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

71. If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds.
a. derivative
b. long-term credit
c. money
d. foreign exchange

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

72. The strike price on a currency option is also known as an exercise price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

73. Assume that the bank’s bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000?
a. 12,600
b. 775,194
c. 793,651
d. 12,900

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

74. When receiving quotations on a currency’s exchange rate, the bank’s bid quote is the rate at which the bank is willing to sell currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

75. An obligation to purchase a specific amount of currency at a future point in time is called a:
a. call option
b. spot contract
c. put option
d. forward contract
e. both B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

76. Which of the following is not a method that can be used to invest internationally?
a. Investment in MNC stocks
b. American depository receipts (ADRs)
c. World Equity benchmark Shares (WEBS)
d. International mutual funds
e. All of the above are methods that can be used to invest internationally.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

77. The interest rate in developing countries is usually very low.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

78. Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is
a. .01
b. 118
c. 1.18
d. .0087

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

79. When obtaining a loan, the risk premium paid above LIBOR depends on the:
a. risk-free interest rate of the borrower.
b. credit risk of the borrower.
c. borrower’s stock price.
d. lender’s stock price.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

80. The largest global exchange is:
a. NASDAQ
b. Tokyo Stock Exchange
c. NYSE Euronext
d. London Stock Exchange

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

81. Which of the following is not true about syndicated loans?
a. A borrower that receives a syndicated loan incurs various fees besides the interest rate.
b. The loans are only denominated in U.S. dollars.
c. The loans are provided by a group of banks to a borrower.
d. The loans are usually formed in 6 weeks or less.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

82. The interest rate on the syndicated loan depends on the:
a. currency denominating the loan.
b. maturity of the loan.
c. creditworthiness of the borrower.
d. interbank lending rate.
e. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

83. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this situation:
a. Buy dollars forward
b. Sell dollars forward
c. Purchase call option
d. Purchase put option

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

84. Certificates representing bundles of stock of non-U.S. firms are called:
a. Eurobonds
b. ADRs
c. FRNs
d. Eurobor

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

85. Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars?
a. 10
b. 13.28
c. 30.12
d. 39.84

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

86. Which of the following is not true regarding ADRs?
a. ADRs are denominated in the currency of the stock’s home country.
b. ADRs enable U.S. investors to avoid cross-border transactions
c. ADRs allow non-U.S. firms to tap into U.S. market for funds.
d. ADRs sometimes allow for arbitrage opportunities.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

87. The more intense the competition for the traded currency, the larger the bid/ask spread.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

88. Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

89. At any given point in time, a bank’s bid quote will be greater than its ask quote.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

90. An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

91. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

92. The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

93. The international money market is frequently accessed by MNCs for short-term investment and financing decisions, while longer term financing decisions are made in the international credit market or the international bond market and in international stock markets.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.06
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

94. Which of the following is not a possible bid/ask quotation for the Barbados dollar?
a. $.50/$.51
b. $.49/$.50
c. $.52/$.51
d. $.51/$.52
e. All of the above are possible bid/ask quotations.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

95. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward?
a. $44,500
b. $45,000
c. $526 million
d. $47,500
e. $556 million

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

96. Which of the following is probably not an example of the use of forward contracts by an MNC?
a. Hedging pound payables by selling pounds forward
b. Hedging peso receivables by selling pesos forward
c. Hedging yen payables by purchasing yen forward
d. Hedging peso payables by purchasing pesos forward
e. All of the above are examples of using forward contracts.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

97. A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation.
a. direct; indirect
b. indirect; direct
c. direct; direct
d. indirect; indirect
e. cannot be answered without more information

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

98. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$.
a. direct; 142.86
b. indirect; 142.86
c. indirect; 150
d. direct; 150
e. indirect; 0

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

99. Which of the following is not true regarding electronic communications networks (ECNs)?
a. They have a visible trading floor.
b. Trades are executed by a computer network.
c. They have been created in many countries to match orders between buyers and sellers.
d. They allow investors to place orders on their computers.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

100. Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables?
a. Purchase pounds forward
b. Buy a pound futures contract
c. Buy a pound put option
d. Buy a pound call option

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

101. Futures contracts are sold on exchanges and are consequently ____ than forward contracts, which can be ____ to satisfy an MNC’s needs.
a. more standardized; standardized
b. more standardized; custom-tailored
c. more custom-tailored; standardized
d. more custom-tailored; custom-tailored
e. less standardized; custom-tailored

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

102. An MNC’s short-term financing decisions are satisfied in the ____ market, while its medium debt financing decisions are satisfied in the ____ market.
a. international money; international credit
b. international money; international bond
c. international credit; international money
d. international bond; international credit
e. international money; international stock

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

Chapter 4—Exchange Rate Determination

1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%.
a. depreciated; 5.80
b. depreciated; 4.00
c. appreciated; 5.80
d. appreciated; 4.00

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

2. If a currency’s spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.
a. liquid; highly sensitive
b. illiquid; insensitive
c. illiquid; highly sensitive
d. none of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

3. ____ is not a factor that causes currency supply and demand schedules to change.
a. Relative inflation rates
b. Relative interest rates
c. Relative income levels
d. Expectations
e. All of the above are factors that cause currency supply and demand schedules to change.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.
a. increase; appreciate
b. increase; depreciate
c. decrease; depreciate
d. decrease; appreciate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.
a. reduce; increase
b. increase; reduce
c. reduce; reduce
d. increase; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

6. Investors from Germany, the United States, and the U.K. frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.
a. fewer; depreciate
b. fewer; appreciate
c. more; depreciate
d. more; appreciate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

7. When the “real” interest rate is relatively low in a given country, then the currency of that country is typically expected to be:
a. weak, since the country’s quoted interest rate would be high relative to the inflation rate.
b. strong, since the country’s quoted interest rate would be low relative to the inflation rate.
c. strong, since the country’s quoted interest rate would be high relative to the inflation rate.
d. weak, since the country’s quoted interest rate would be low relative to the inflation rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

8. Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound.
a. upward; downward
b. upward; upward
c. downward; upward
d. downward; downward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

9. In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

10. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply:

Currency Lending Rate Borrowing Rate
Dollars 7.10% 7.50%
New Zealand dollar (NZ$) 6.80% 7.25%

Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank’s forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?
a. $521,325.
b. $500,520.
c. $104,262.
d. $413,419.
e. $208,044.

11. Assume the following information regarding U.S. and European annualized interest rates:

Currency Lending Rate Borrowing Rate
U.S. Dollar ($) 6.73% 7.20%
Euro (€) 6.80% 7.28%

Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank’s dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?
a. $579,845.
b. $583,800.
c. $588,200.
d. $584,245.
e. $980,245.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.04.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

12. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:
a. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
b. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
c. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
d. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
e. U.S. demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

13. Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates stay the same. This would likely cause:
a. the Swiss demand for dollars to decrease and the dollar will depreciate against the pound.
b. the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss franc.
c. the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.
d. the Swiss demand for dollars to decrease and the dollar will appreciate against the pound.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

14. The real interest rate adjusts the nominal interest rate for:
a. exchange rate movements.
b. income growth.
c. inflation.
d. government controls.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

15. If U.S. inflation suddenly increased while European inflation stayed the same, there would be:
a. an increased U.S. demand for euros and an increased supply of euros for sale.
b. a decreased U.S. demand for euros and an increased supply of euros for sale.
c. a decreased U.S. demand for euros and a decreased supply of euros for sale.
d. an increased U.S. demand for euros and a decreased supply of euros for sale.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

16. If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:
a. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
b. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
c. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
d. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

17. If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.
a. interest rate differentials; interest rate differentials
b. inflation and interest rate differentials; interest rate differentials
c. income and interest rate differentials; inflation differentials
d. interest rate differentials; inflation and income differentials
e. inflation and income differentials; interest rate differentials

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

18. If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar.
a. upward
b. downward
c. either upward or downward (depending on the degree of the increase in Australian inflation)
d. none of the above; there will be no impact

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

19. Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:
a. an increased demand for British pounds.
b. a decrease in the demand for British pounds.
c. an increase in the supply of British pounds for sale.
d. a decrease in the supply of British pounds for sale.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

20. The exchange rates of smaller countries are very stable because the market for their currency is very liquid.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

21. The phrase “the dollar was mixed in trading” means that:
a. the dollar was strong in some periods and weak in other periods over the last month.
b. the volume of trading was very high in some periods and low in other periods.
c. the dollar was involved in some currency transactions, but not others.
d. the dollar strengthened against some currencies and weakened against others.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

22. Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.
a. increase; increase
b. increase; decline
c. decline; decline
d. decline; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

23. Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal.
a. increase; U.S. dollar
b. increase; nondollar currencies
c. decrease; nondollar currencies
d. decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

24. Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.
a. increase; U.S. dollar
b. increase; nondollar currencies
c. decrease; nondollar currencies
d. decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

25. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.
a. increase; U.S. dollar
b. increase; nondollar currencies
c. decrease; nondollar currencies
d. decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

26. Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal.
a. increase; U.S. dollar
b. increase; nondollar currencies
c. decrease; nondollar currencies
d. decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

27. Assume that the U.S. experiences a significant decline in income, while Japan’s income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.)
a. upward
b. downward
c. no
d. upward and downward (offsetting)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

28. News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.
a. upward; only after the U.S. inflation surges
b. downward; only after the U.S. inflation surges
c. upward; immediately
d. downward; immediately

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

29. Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.
a. increase; increase
b. increase; decline
c. decline; decline
d. decline; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

30. Assume that Japan places a strict quota on goods imported from the U.S. and the U.S. places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____.
a. increase; increase
b. increase; decline
c. decline; decline
d. decline; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

31. Which of the following is not mentioned in the text as a factor affecting exchange rates?
a. relative interest rates.
b. relative inflation rates.
c. government controls.
d. expectations.
e. all of the above are mentioned in the text as factors affecting exchange rates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

32. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency’s equilibrium value.
a. decrease; increase; upward
b. decrease; decrease; upward
c. increase; decrease; downward
d. decrease; increase; downward
e. increase; decrease; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

33. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency’s equilibrium value.
a. increase; decrease; downward
b. decrease; increase; upward
c. increase; decrease; upward
d. decrease; increase; downward
e. increase; increase; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

34. An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

35. When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

36. Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

37. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

38. The main effect of interest rate movements on exchange rates is through their effect on international trade.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

39. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X’s currency more than the exchange rate of Country Y’s currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

40. Increases in relative income in one country vs. another result in an increase in the first country’s currency value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

41. Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

42. Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

43. The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

44. Liquidity of a currency can affect the extent to which speculation can impact the currency’s value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

45. Forecasting a currency’s future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency’s value.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

46. The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

47. Movements of foreign currencies tend to be more volatile for shorter time horizons.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

48. If a currency’s spot market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.
a. liquid; highly sensitive
b. illiquid; insensitive
c. liquid; insensitive
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

49. The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?
a. $1.365
b. $1.235
c. $1.330
d. $1.30

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

50. Government controls can only affect the supply of a given currency for sale and not the demand.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

51. If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

52. Assume that the income levels in U.K. start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of British pound. Also, assume that U.S. interest rates rise, while the British pound remains unchanged. This will place ____ pressure on the value of British pound.
a. downward; downward
b. upward; downward
c. upward; upward
d. downward; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

53. If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed’s action is called ____ intervention.
a. appreciate; direct
b. depreciate; direct
c. appreciate; indirect
d. depreciate; indirect

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

54. Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that total dollar value of trade transactions between these two countries is very large. Now assume that Mexico’s inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.
a. downward; more
b. upward; more
c. downward; less
d. upward; less

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

55. If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar.
a. appreciate
b. depreciate
c. remain unchanged
d. cannot be determined from the information provided.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

56. If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the U.S. and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.
a. yen; dollars
b. yen; yen
c. dollars; yen
d. dollars; dollars

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

57. British investors frequently invest in the U.S. or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.
a. increase; downward
b. decrease; upward
c. increase; upward
d. decrease; downward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

58. The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:
a. U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
b. U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
c. U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a surplus of francs in the foreign exchange market.
d. U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a surplus of Swiss francs in the foreign exchange market.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

59. Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

60. Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.
a. increase; increase; increase
b. decrease; increase; decrease
c. remain unchanged; increase; decrease
d. remain unchanged; increase; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

61. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y’s currency more than the exchange rate of Country X’s currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

62. Assume that U.S. inflation is expected to surge in the near future. The expectation of surge in inflation will most likely place ____ pressure on U.S. dollar immediately.
a. upward
b. downward
c. no
d. cannot be determined

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

63. When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

64. Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

65. The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

66. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

67. If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

68. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in financial flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X’s currency more than the exchange rate of Country Y’s currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

69. Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.
a. less; even minor
b. less; only large
c. more; even minor
d. more; only large
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

70. Which of the following is not mentioned in the text as a factor affecting exchange rates?
a. Relative interest rates
b. Relative inflation rates
c. Government controls
d. Expectations
e. All of the above are mentioned in the text as factors affecting exchange rates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

71. Which of the following events would most likely result in an appreciation of the U.S. dollar?
a. U.S. inflation is very high.
b. The Fed indicates that it will raise U.S. interest rates.
c. Future U.S. interest rates are expected to decline.
d. Japan is expected to increase interest rates in the near future.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

72. Which of the following interactions will likely have the least effect on the dollar’s value? Assume everything else is held constant.
a. A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates
b. A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest rates
c. An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates
d. An increase in Singapore’s inflation accompanied by an increase in real U.S. interest rates
e. An increase in Singapore’s interest rates accompanied by an increase in U.S. inflation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

73. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency’s equilibrium value.
a. decrease; increase; upward
b. decrease; decrease; upward
c. increase; decrease; downward
d. decrease; increase; downward
e. increase; decrease; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

74. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency’s equilibrium value.
a. increase; decrease; downward
b. decrease; increase; upward
c. increase; decrease; upward
d. decrease; increase; downward
e. increase; increase; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

Chapter 5—Currency Derivatives

1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?
a. purchase Canadian dollars forward.
b. purchase Canadian dollar futures contracts.
c. purchase Canadian dollar put options.
d. purchase Canadian dollar call options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

2. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros.
a. 224,000
b. 220,000
c. 200,000
d. 230,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.
a. discount; 1.9
b. discount; 1.8
c. premium; 1.9
d. premium; 1.8

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?
a. 1.9 percent discount.
b. 1.9 percent premium.
c. 7.6 percent premium.
d. 7.6 percent discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:
a. convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today’s forward rate.
b. convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate.
c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today’s forward rate.
d. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Analysis

6. In the U.S., the typical currency futures contract is based on a currency value in terms of:
a. euros.
b. U.S. dollars.
c. British pounds.
d. Canadian dollars.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

7. Currency futures contracts sold on an exchange:
a. contain a commitment to the owner, and are standardized.
b. contain a commitment to the owner, and can be tailored to the desire of the owner.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
d. contain a right but not a commitment to the owner, and are standardized.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

8. Currency options sold through an options exchange:
a. contain a commitment to the owner, and are standardized.
b. contain a commitment to the owner, and can be tailored to the desire of the owner.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
d. contain a right but not a commitment to the owner, and are standardized.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

9. Currency options are commonly traded through the ____ system.
a. robot
b. Euro
c. GLOBEX
d. Scope

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

10. Forward contracts:
a. contain a commitment to the owner, and are standardized.
b. contain a commitment to the owner, and can be tailored to the desire of the owner.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
d. contain a right but not a commitment to the owner, and are standardized.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

11. Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
a. purchase a call option on francs.
b. sell a futures contract on francs.
c. obtain a forward contract to purchase francs forward.
d. all of the above are appropriate strategies for the scenario described.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

12. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
a. purchase a call option on francs.
b. obtain a forward contract to purchase francs forward.
c. sell a futures contract on francs.
d. all of the above are appropriate strategies for the scenario described.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Analysis

13. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.
a. selling; selling
b. selling; purchasing
c. purchasing; purchasing
d. purchasing; selling

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

14. When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part.
a. call options; put options
b. futures contracts; call options
c. forward contracts; futures contracts
d. o; forward contracts

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

15. The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things equal.
a. greater; lower
b. greater; greater
c. lower; greater
d. lower; lower

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

16. When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.
a. less; narrower
b. more; narrower
c. more; wider
d. less; wider

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

17. The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal.
a. greater; greater
b. greater; lower
c. lower; lower
d. lower; greater

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

18. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is:
a. $1,562.50.
b. −$1,562.50.
c. −$1,250.00.
d. −$625.00.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

19. Which of the following is true?
a. The futures market is primarily used by speculators while the forward market is primarily used for hedging.
b. The futures market is primarily used for hedging while the forward market is primarily used for speculating.
c. The futures market and the forward market are primarily used for speculating.
d. The futures market and the forward market are primarily used for hedging.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

20. Which of the following is true?
a. Most forward contracts between firms and banks are for speculative purposes.
b. Most future contracts represent a conservative approach by firms to hedge foreign trade.
c. The forward contracts offered by banks have maturities for only four possible dates in the future.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.
a. buy a euro call and buy a euro put
b. buy a euro call and sell a euro put
c. sell a euro call and sell a euro put
d. sell a euro call and buy a euro put

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

22. If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.
a. purchasing; selling
b. purchasing; purchasing
c. selling; selling
d. selling; purchasing

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Analysis

23. Which of the following is correct?
a. The longer the time to maturity, the less the value of a currency call option, other things equal.
b. The longer the time to maturity, the less the value of a currency put option, other things equal.
c. The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal.
d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

24. Research has found that the options market is:
a. efficient before controlling for transaction costs.
b. efficient after controlling for transaction costs.
c. highly inefficient.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

25. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:
a. definitely be above the 180-day forward rate.
b. definitely be below the 180-day forward rate.
c. be about the same as the 180-day forward rate.
d. none of the above; there is no relation between the futures and forward prices.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

26. Assume that a currency’s spot and future prices are the same, and the currency’s interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency’s spot rate and ____ the currency’s futures price.
a. put upward pressure on; put upward pressure on
b. put downward pressure on; put upward pressure on
c. put upward pressure on; put downward pressure on
d. put downward pressure on; put downward pressure on

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

27. A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:
a. buying an identical futures contract.
b. selling an identical futures contract.
c. buying a futures contract with a different settlement date.
d. selling a futures contract for a different amount of currency.
e. purchasing a put option contract in the same currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

28. If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period.
a. increase slightly
b. decrease substantially
c. increase substantially
d. stay the same

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:
a. selling futures in francs.
b. buying futures in francs.
c. buying franc put options.
d. buying franc call options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

30. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
a. $6,875,000.
b. $7,250,000.
c. $7,000,000.
d. $6,500,000.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

31. If you purchase a straddle on euros, this implies that you:
a. finance the purchase of a call option by selling a put option in the euros.
b. finance the purchase of a call option by selling a call option in the euros.
c. finance the purchase of a put option by selling a put option in the euros.
d. finance the purchase of a put option by selling a call option in the euros.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

32. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)
a. $1.63; $1.63
b. $1.63; $1.60
c. $1.63; $1.57
d. $1.57; $1.63
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is:
a. 0 percent.
b. 25 percent.
c. 50 percent.
d. 150 percent.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:
a. −$.03.
b. −$.02.
c. −$.01.
d. $.02.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

35. You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:
a. −$.03.
b. −$.02.
c. −$.01.
d. $.02.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

36. You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is:
a. −$.02.
b. −$.01.
c. $.01.
d. $.02.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

37. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:
a. −$.08.
b. −$.03.
c. $.05.
d. $.08.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

38. European currency options can be exercised ____; American currency options can be exercised ____.
a. any time up to the expiration date; any time up to the expiration date
b. any time up to the expiration date; only on the expiration date
c. only on the expiration date; only on the expiration date
d. only on the expiration date; any time up to the expiration date

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports.
a. sell yen put options
b. buy yen call options
c. buy futures contracts on yen
d. sell futures contracts on yen

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

40. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as:
a. in the money.
b. out of the money.
c. at the money.
d. at a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

41. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:
a. in the money.
b. out of the money.
c. at the money.
d. at a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

42. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?
a. forward contracts.
b. futures contracts.
c. non-deliverable forward contracts.
d. options.
e. all of the above are instruments used to cover foreign currency positions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

43. When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures.
a. sell; sell
b. buy; sell
c. sell; buy
d. buy; buy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

44. When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency.
a. buy; buy
b. sell; buy
c. buy; sell
d. buy; buy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

45. Which of the following would result in a profit of a euro futures contract when the euro depreciates?
a. buy a euro futures contract; sell a futures contract after the euro has depreciated.
b. sell a euro futures contract; buy a futures contract after the euro has depreciated.
c. buy a euro futures contract; buy an additional futures contract after the euro has depreciated.
d. none of the above would result in a profit when the euro depreciates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

46. Which of the following is not true regarding options?
a. Options are traded on exchanges, never over-the-counter.
b. Similar to futures contracts, margin requirements are normally imposed on option traders.
c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.
d. Currency options can be classified as either put or call options.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?
a. $74,000.
b. $84,000.
c. $75,000.
d. $85,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?
a. $33,600.
b. $46,900.
c. $44,100.
d. $36,400.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

49. Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?
a. no; −$0.01.
b. yes; $0.01.
c. yes; −$0.01.
d. yes; $0.03.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

50. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option’s maturity turns out to be $1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts rationally)?
a. −$0.01.
b. $0.01.
c. −$0.04.
d. $0.04.
e. −$0.03.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

51. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht’s closing exchange rate (in $) quoted by Thailand’s central bank in 90 days. The baht’s spot rate today is $.02. If the rate quoted by Thailand’s central bank on August 1 is $.022, Johnson will ____ $____.
a. pay; 20,000
b. be paid; 20,000
c. pay; 2,000
d. be paid; 2,000
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

52. If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.
a. selling; buying; buying
b. buying; selling; buying
c. selling; buying; selling
d. buying; buying; buying

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

53. A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.
a. spot and exercise; exercise
b. spot and exercise; spot
c. exercise and spot; exercise
d. exercise and spot; spot

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

54. A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.
a. spot and exercise; exercise
b. spot and exercise; spot
c. exercise and spot; exercise
d. exercise and spot; spot

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____.
a. premium; about 6%
b. discount; about 6%
c. discount; about 6.45%
d. premium; about 6.45%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis.
a. discount; 11.11%
b. premium; 11.11%
c. premium; 10.81%
d. discount; 10.81%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

57. Which of the following are most commonly traded on an exchange?
a. forward contracts.
b. futures contracts.
c. currencies
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

58. Conditional currency options are:
a. options that do not require premiums.
b. options where the premiums are canceled if a trigger level is reached.
c. options that allow the buyer to decide what currency the option will be settled in.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

59. Which of the following is true regarding the options markets?
a. Hedgers and speculators both attempt to lower risk.
b. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
c. Hedgers and speculators are both necessary in order for the market to be liquid.
d. all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

60. The premium of a currency put option will increase if:
a. the volatility of the underlying asset goes up.
b. the time to maturity goes up.
c. the spot rate declines.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

61. Which of the following is true of options?
a. The writer decides whether the option will be exercised.
b. The writer pays the buyer the option premium.
c. The buyer decides if the option will be exercised.
d. More than one of these.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

62. The purchase of a currency put option would be appropriate for which of the following?
a. Investors who expect to buy a foreign bond in one month.
b. Corporations who expect to buy foreign currency to finance foreign subsidiaries.
c. Corporations who expect to collect on a foreign account receivable in one month.
d. all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

63. If you have bought the right to sell, you are a:
a. call writer.
b. put buyer.
c. futures buyer.
d. put writer.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

64. If you have a position where you might be obligated to buy Euros, you are:
a. a call writer.
b. a put writer.
c. a put buyer.
d. a futures seller.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

65. Which of the following is true for futures, but not for forwards?
a. actual delivery.
b. no transactions costs.
c. self regulation.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

66. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?
a. $44,500.
b. $45,000.
c. $526 million.
d. $47,500.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%.
a. discount; −4.07
b. premium; 4.07
c. discount; −4.08
d. premium; 4.08
e. premium; 3.40

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

68. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

69. The price of a futures contract will generally vary significantly from that of a forward contract.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

70. If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

71. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

72. If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

73. Since futures contracts are traded on an exchange, the exchange will always take the “other side” of the transaction in terms of accepting the credit risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

74. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

75. Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

76. The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

77. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

78. The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

79. Due to put-call parity, we can use the same formula to price calls and puts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

80. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

81. If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

82. Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

83. If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

84. Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They are intended to minimize credit risk associated with futures contracts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

85. A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

86. The highest amount a buyer of a call or a put option can lose is the exercise price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

87. A straddle is a speculative strategy that represents the purchase of both a call and a put.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

88. A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

89. An option writer is the seller of a call or a put option.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

90. The forward premium is the price specified in a call or put option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

91. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

92. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

93. Forward contracts are the best technique for managing exposure arising from project bidding.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

94. The currency futures markets are regulated by the International Monetary Fund.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

95. It is possible to have an opportunity loss when using futures to hedge.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

96. Margin is used in the forward market to mitigate default risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

97. There are no transactions costs associated with trading futures or options.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

98. Futures and options are available for crossrates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

99. Options can be traded on an exchange or over the counter.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

100. The writer of an uncovered call can experience a loss limited to the option premium.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

101. American style options can be exercised any time up to maturity.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

102. If a currency put option is out of the money, then the present exchange rate is less than the strike price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

103. As mentioned in the text, the most common maturities for forward rates are:
a. one, three, six, and twelve months.
b. one, three, six, and twelve years.
c. two, three, and five years.
d. two, three, and five weeks.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

104. Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

105. The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?
a. 7.46% premium
b. 7.46% discount
c. 7.75% premium
d. 7.75% discount

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

106. The annualized forward premium on the euro is 7%. What is the 90-day forward rate on the euro if the spot rate today is $1.25?
a. $1.27
b. $1.34
c. $1.16
d. $1.23

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

107. The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at $.011. The forward ____ is ____ percent.
a. discount; 18.18
b. premium; 18.18
c. discount; 15.38
d. premium; 15.38

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

108. The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound?
a. $1.52
b. $1.61
c. $1.37
d. $1.46

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

109. The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?
a. $1.28
b. $1.30
c. $1.42
d. $1.16

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

110. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)
a. $1.30; $1.30
b. $1.34; $1.30
c. $1.30; $1.34
d. $1.34; $1.34

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

111. If you have a position where you might be obligated to sell pounds, you are:
a. a call writer.
b. a call buyer.
c. a put writer.
d. a put buyer.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

112. If you have bought a right to buy foreign currency, you are:
a. a call writer.
b. a call buyer.
c. a put writer.
d. a put buyer.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

113. The premium on a pound put option is $.04. The spot rate and the exercise price is $1.52. The spot rate at the time of this option expiration is expected to be $1.51. The speculators could profit by:
a. writing a put option.
b. buying a put option.
c. buying a call option
d. writing a call option and buying a call option simultaneously.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

114. A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:
a. in the money.
b. out of the money.
c. at the money.
d. at a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

115. A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange rate is $.89. This put option can be referred to as:
a. in the money.
b. out of the money.
c. at the money.
d. at a discount.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

116. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?
a. buy a put option and receive $150,000.
b. sell pounds forward and receive $155,000.
c. sell a call option and receive $156,000.
d. sell a put option and receive $157,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

117. J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?
a. purchase euro put options.
b. sell euros forward.
c. sell euro futures contracts.
d. sell euro put options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

118. The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be.
a. higher; less
b. higher; more
c. lower; less
d. lower; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

119. The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be.
a. higher; less
b. higher; more
c. lower; less
d. lower; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

120. On January 1st, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm informed Madison Co. that it won’t be able to fulfill that order. The Japanese yen spot rate on February 1st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its existing contract Madison Co. will negotiate a forward contract to ____ for the date of April 1st and the profit/loss generated from this transaction is a ____ U.S. dollars.
a. sell yen; gain of $60,000
b. sell yen; loss of $60,000
c. buy yen; gain of $30,000
d. to buy yen; loss of $30,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

121. Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that exercise price of call and put options are the same. The most appropriate method for speculation is ____and it may be achieved by ____.
a. straddle; purchase put option and purchase call option.
b. strangle; purchase put option and sell call option.
c. strangle; sell put option and sell put option.
d. straddle; sell put option and buy call option.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Analysis

122. Which of the following does not represent the risk from using forward contracts?
a. if a forward contract is used to hedge receivables, and the spot exchange rate at the expiration of contract exceeds the contract price.
b. if a forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of contract is lower than the contract price.
c. if a forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of contract is lower than the contract price.
d. if a forward contract is used to hedge payables or receivables and the amount to be received or paid is cancelled.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

123. The writer of a put option has a right, but not obligation, to buy the underlying currency from the option buyer.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

124. A straddle can only be achieved if the exercise prices of put and call options are the same.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

125. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign payables. To do so, the MNC can either sell the foreign currency forward or sell futures.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

126. Hedgers should buy calls if they are hedging an expected outflow of foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

127. If a currency’s forward rate exhibits a discount, the currency is forced to appreciate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

128. If a currency’s forward rate exhibits a premium, that currency is forced to depreciate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

129. If a currency call option is in the money, then the present exchange rate exceeds the strike price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

130. If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

131. If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

132. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

133. Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

134. Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

135. A speculator in futures contracts expecting the value of a foreign currency to depreciate would likely sell futures contracts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

136. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

137. A currency call option grants the right to sell a specific currency at a designated price within a specific time period.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

138. Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are often used by MNCs to hedge foreign currency payables.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

139. When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

140. Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

141. Both call and put option premiums are affected by the level of the existing spot rate relative to the strike price, the length of time before the expiration date, and the potential variability of the currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

142. A straddle represents the purchase of either two call or two put options at the same exercise price.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

143. A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

144. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

145. The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

146. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

147. An advantage of a short straddle is that it provides the option writer with income from two separate sources.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

148. The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

149. With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

150. A forward rate for a currency is said to exhibit a discount if
a. the forward rate exceeds the existing spot rate.
b. the forward rate is less than the existing spot rate.
c. the forward rate exceeds the expected future spot rate.
d. the forward rate is less than the expected future spot rate.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

151. If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $____.
a. 1.50
b. 1.47
c. 1.55
d. 1.46
e. None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

152. Which of the following is not true regarding futures contracts?
a. Unlike forward contracts, they are generally traded on an exchange.
b. Futures contracts are standardized with respect to delivery date and size of the contract.
c. There is an active over-the-counter market for currency futures contracts.
d. Currency futures can be used by speculators who attempt to profit from exchange rate movements.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

153. When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate.
a. upward; downward
b. upward; upward
c. downward; upward
d. downward; downward

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

154. Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.
a. 39,062.50
b. 100,000
c. 48,000
d. 87,062.50

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

155. Which of the following would result in a profit of a futures contract when the underlying currency depreciates?
a. Buy a futures contract; sell a futures contract after the currency has depreciated
b. Sell a futures contract; buy a futures contract after the currency has depreciated
c. Buy a futures contract; buy an additional futures contract after the currency has depreciated
d. None of the above would result in a profit when the underlying currency of the futures contract depreciates.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

156. Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures.
a. buy; buy
b. sell; sell
c. buy; sell
d. sell; buy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

157. Which of the following is not true regarding options?
a. Options are traded on exchanges, never over-the-counter.
b. Similar to futures contracts, margin requirements are normally imposed on option traders.
c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.
d. Currency options can be classified as either put or call options.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

158. When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____.
a. out of the money; in the money
b. out of the money; out of the money
c. in the money; in the money
d. in the money; out of the money

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Knowledge

159. When a currency call option is classified as “in the money,” this indicates that
a. the spot rate of the currency is less than the exercise price of the option.
b. the spot rate of the currency is greater than the exercise price of the option.
c. the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid.
d. the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

160. A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts rationally?
a. $33,600
b. $46,900
c. $44,100
d. $36,400

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

161. Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea’s profit or loss per unit?
a. $0.03
b. $0.05
c. $0.01
d. $0.04

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Application

162. Which of the following is not true regarding options?
a. The buyer of a call option has the right to buy the currency at the strike price.
b. The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised.
c. The buyer of a put option has the right to sell the currency at the strike price.
d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

163. If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.
a. selling; buying; buying
b. buying; selling; buying
c. selling; buying; selling
d. buying; buying; buying

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10
KEY: Bloom’s: Comprehension

Chapter 6—Government Influence on Exchange Rates

1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:
a. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
b. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
c. sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene.
d. sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

2. A weak dollar is normally expected to cause:
a. high unemployment and high inflation in the U.S.
b. high unemployment and low inflation in the U.S.
c. low unemployment and low inflation in the U.S.
d. low unemployment and high inflation in the U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

3. A strong dollar is normally expected to cause:
a. high unemployment and high inflation in the U.S.
b. high unemployment and low inflation in the U.S.
c. low unemployment and low inflation in the U.S.
d. low unemployment and high inflation in the U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

4. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:
a. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
b. sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
c. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
d. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

5. Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system.
a. floating rate; fixed rate
b. floating rate; floating rate
c. fixed rate; fixed rate
d. fixed rate; floating rate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

6. A primary result of the Bretton Woods Agreement was:
a. the establishment of the European Monetary System (EMS).
b. establishing specific rules for when tariffs and quotas could be imposed by governments.
c. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
d. establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

7. A primary result of the Smithsonian Agreement was:
a. the establishment of the European Monetary System (EMS).
b. establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values.
c. establishing specific rules for when tariffs and quotas could be imposed by governments.
d. establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

8. Under a fixed exchange rate system:
a. a foreign exchange market does not exist.
b. central bank intervention in the foreign exchange market is not necessary.
c. central bank intervention in the foreign exchange market is often necessary.
d. central bank intervention in the foreign exchange market is not allowed.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar’s value should ____ the U.S. demand for products produced by major foreign countries.
a. weakening; increase
b. weakening; decrease
c. strengthening; increase
d. strengthening; decrease

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

10. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:
a. pegged system.
b. fixed system.
c. managed float system.
d. crawling peg system.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

11. The interest rate of a country with a currency board:
a. is less stable than it would be without a currency board.
b. is typically below the interest rate of the currency to which it is tied.
c. will move in tandem with the interest rate of the currency to which it is tied.
d. is completely independent of the interest rate of the currency to which it is tied.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

12. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.
a. more; more
b. less; less
c. more; less
d. less; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

13. Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A’s currency floats against Country B’s currency, and that Country C’s currency is pegged to B’s. If A’s currency depreciates against B, then A’s exports to C should ____, and A’s imports from C should ____.
a. decrease; increase
b. decrease; decrease
c. increase; decrease
d. increase; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

14. Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:
a. pegged intervention.
b. indirect intervention.
c. nonsterilized intervention.
d. sterilized intervention.
e. A and D

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

15. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:
a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
b. exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

16. Which of the following is an example of direct intervention in foreign exchange markets?
a. lowering interest rates.
b. increasing the inflation rate.
c. exchanging dollars for foreign currency.
d. imposing barriers on international trade.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

17. A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.
a. upward; upward
b. downward; upward
c. upward; downward
d. downward; downward

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

18. The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar’s value is expected to:
a. remain stable.
b. strengthen.
c. weaken.
d. none of the above will have an impact on inflation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

19. A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices.
a. upward; downward; upward
b. upward; downward; downward
c. upward; upward; downward
d. downward; upward; upward
e. downward; downward; upward

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

20. The euro is the currency:
a. adopted in all western European countries as of 1999.
b. adopted in all eastern European countries as of 1999.
c. adopted in all European countries as of 1999.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

21. The euro has not been adopted by:
a. Slovenia.
b. the U.K.
c. Germany.
d. France.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

22. The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.
a. Latin American
b. European
c. Asian
d. North American

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

23. Countries that have adopted the euro must agree on a single ____ policy.
a. monetary
b. fiscal
c. worker compensation
d. foreign relations

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

24. Countries that have adopted the euro tend to have very similar ____.
a. interest rates
b. inflation rates
c. income tax rates
d. budget deficits

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

25. The risk-free interest rates among countries that have adopted the euro should:
a. not necessarily be similar to risk-free rates in other countries.
b. equal the U.S. risk-free rate.
c. equal the risk-free rates in other European countries.
d. equal the risk-free rates in Asian countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

26. Which of the following is true regarding the euro?
a. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
b. It allows for more consistent economic conditions across countries.
c. It prevents each country from conducting its own monetary policy.
d. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

27. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?
a. Weaken the dollar
b. Strengthen the dollar
c. Buy dollars with foreign currency in the foreign exchange market
d. Implement a tight monetary policy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

28. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?
a. Sell dollars for foreign currency
b. Buy dollars with foreign currency
c. Lower interest rates
d. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

29. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.
a. buy; sell
b. sell; buy
c. buy; buy
d. sell; sell

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

30. As foreign exchange activity has grown, a given degree of central bank intervention has become:
a. more effective.
b. more frequent.
c. less effective.
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

31. When using indirect intervention, a central bank is likely to focus on:
a. inflation.
b. interest rates.
c. income levels.
d. expectations of future exchange rates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

32. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?
a. Thailand.
b. Indonesia.
c. Russia.
d. China.
e. Malaysia.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

33. Which of the following is not true regarding Thailand?
a. Thailand was one of the slowest growing countries before the Asian crisis.
b. High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand’s local interest rate.
c. Thailand’s baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors.
d. Thai banks provided many loans that were very risky in their attempt to make use of all of their funds.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

34. China’s yuan is presently:
a. allowed to fluctuate freely without any central bank intervention.
b. allowed to fluctuate but with central bank intervention.
c. pegged to the dollar.
d. pegged to the euro.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

35. During the period 1944-1971, the U.S. used a ____ system.
a. euro exchange rate
b. fixed
c. dirty float
d. flexible

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

36. Which of the following are examples of currency controls?
a. import restrictions.
b. prohibition of remittance of funds.
c. ceilings on granting credit to foreign firms.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

37. From a financial management perspective, which of the following is true regarding the introduction of the Euro?
a. U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros.
b. The euro is pegged to all other European currencies.
c. Transactions costs decline for MNCs that conduct transactions within Europe.
d. The euro replaced the British pound.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

38. Which of the following countries have not adopted the euro?
a. Germany
b. Italy
c. Switzerland
d. France

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

39. Which of the following are true about the Southeast Asian currency crisis?
a. It was preceded by several years of large capital inflows to Asia.
b. It was preceded by a five-year recession in Asia.
c. Asian interest rates declined during the crisis.
d. Asian exchange rates were pegged to the Japanese yen to resolve the crisis.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

40. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

41. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

42. Under the system known as the “dirty” float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

43. Under a pegged exchange rate system, the home currency’s value is pegged to a foreign currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

44. A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

45. The European countries conforming to the euro are completely insulated from movements in the euro’s value with respect to other currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

46. The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

47. The Asian crisis is generally believed to have started in Japan.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

48. A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on private enterprise than the governments of other Asian countries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

49. Currency devaluation can boost a country’s exports, but currency revaluation can increase foreign competition.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

50. Market forces are the determinant of exchange rates in a freely floating exchange rate system.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

51. If a government wishes to stimulate its economy in the form of increased foreign demand for its country’s products, it could attempt to weaken its currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

52. In a sterilized exchange rate arrangement, a country’s home currency value is pegged to a foreign currency or to some unit of account.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.03
KEY: Bloom’s: Knowledge

53. The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

54. The Fed’s indirect method of intervention is to trade dollars for or against other currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

55. China is commonly criticized for keeping the yuan’s value at superficially high levels.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

56. The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

57. Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

58. The euro is pegged to other currencies of European countries that have not adopted the euro.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

59. The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

60. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

61. A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

62. An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

63. All European countries now use the euro as their currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

64. A country with a currency board does not have control over its local interest rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

65. Dollarization refers to the replacement of local currency with U.S. dollars.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

66. A country with fixed exchange rates often faces constraints on growth.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

67. The Bretton Woods Agreement called for the establishment of a single European currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

68. The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

69. A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only change if the country’s government breaks the peg and sets a new exchange rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

70. If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency before the peg is broken.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

71. Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

72. Which one of the following is a disadvantage of a fixed exchange rate system:
a. Importers are insulated from the risk that the currency will appreciate over time.
b. Management of an MNC is less difficult.
c. The government might change the value of the currency.
d. Exporters are insulated from the risk that the currency will depreciate over time.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

73. The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.
a. 2.25
b. 6
c. 10
d. 8

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

74. Which of the following did not occur as a result of Bretton Woods Agreement?
a. Each currency was valued in terms of gold.
b. Values of all currencies were fixed with respect to each other.
c. Currencies were allowed to fluctuate no more than 1% above or below the initially set rates.
d. The United States experienced no balance-of-trade deficits.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

75. Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.
a. upward; reduce; unchanged
b. upward; increase; higher
c. downward; reduce; unchanged
d. downward; increase; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

76. Which one is not a disadvantage of a freely floating exchange rate system?
a. It can adversely affect a country that has high unemployment.
b. It can adversely affect a country that has high inflation.
c. The government may intervene to change the value of a given currency.
d. The exchange rate risk is high and may be costly to manage.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

77. A “dirty” float represents a system of:
a. freely floating exchange rates.
b. fixed exchange rates.
c. floating exchange rates, but the central bank can manipulate the currency.
d. fixed exchange rates, but the central bank can manipulate the currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

78. If a U.S. firm plans to frequently purchases goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

79. If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

80. The European Central Bank is located in:
a. London.
b. Denmark.
c. Luxembourg.
d. Frankfurt.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

81. Which of the following is not true regarding the eurozone?
a. Members cannot set unique monetary policy individually.
b. Members cannot apply their own fiscal policies.
c. Members have to agree on the ideal monetary policy.
d. Its creation allowed for greater political union among its members.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

83. Which of the following is not a reason for devaluation of a currency?
a. high inflation.
b. to reduce balance-of-trade deficit.
c. to decrease the amount of imports.
d. high unemployment.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

84. Which of the following is the most likely reason for revaluation of a currency?
a. To reduce inflation.
b. To stimulate the local economy.
c. To increase the amount of exports.
d. To increase balance-of-trade surplus.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

85. To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.
a. buy; sell
b. sell; sell
c. sell; buy
d. buy; sell

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

86. The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

87. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:
a. exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
b. exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
c. exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
d. exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros.
a. inward shift in demand for; outward shift in supply of
b. inward shift in demand for; inward shift in supply of
c. outward shift in supply of; outward shift in demand for
d. outward shift in supply of; inward shift in demand for

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

89. If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the value of dollar will ____ and the economy may ____.
a. increases; appreciate; weaken
b. decreases; appreciate; weaken
c. increases; depreciate; strengthen
d. decreases; appreciate; strengthen

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

90. A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

91. A common way to reduce inflation is to weaken the value of the domestic currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention.
a. purchase yen put options
b. sell yen futures contracts
c. purchase yen call options
d. buy U.S. Treasury bonds

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

93. If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.
a. purchase euro put options
b. purchase euro futures contracts
c. purchase yen call options
d. sell U.S. Treasury bonds

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

94. If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

95. A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices.
a. downward; upward; upward
b. downward; downward; upward
c. upward; upward; downward
d. upward; downward; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

96. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.
a. more; more
b. more; less
c. less; less
d. less; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

97. If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

98. One of the best-known pegged exchange rate arrangements that was established by several European countries in April 1972 and was difficult to maintain is called the:
a. European Monetary System (EMS).
b. snake agreement.
c. Maastricht Treaty.
d. European Union.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

99. Direct intervention is usually more effective than indirect intervention.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

101. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

102. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

103. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

104. Under the system known as the “dirty” float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

105. In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

106. Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

107. Using indirect intervention, the Fed attempts to affect the dollar’s value indirectly by influencing the factors that determine it, such as interest rates.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

108. While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

109. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from a strong home currency.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

110. Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

111. Which of the following is not true regarding the Mexican peso crisis?
a. Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been.
b. Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico.
c. In December of 1994, the central bank of Mexico allowed the peso to float freely.
d. The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico’s debt securities.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

112. Which of the following is true regarding the euro?
a. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
b. It allows for more consistent economic conditions across countries.
c. It prevents each country from conducting its own monetary policy.
d. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

113. Among the reasons for government intervention are:
a. to smooth exchange rate movement.
b. to establish implicit exchange rate boundaries.
c. to respond to temporary disturbances.
d. all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

114. Which of the following is not true regarding government intervention?
a. Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies.
b. Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting the money supply.
c. Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury markets.
d. Under indirect intervention, the Fed would attempt to affect the dollar’s value by indirectly influencing the factors that determine it, such as interest rates.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would
a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

116. Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would
a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

117. Which of the following is an appropriate form of indirect intervention?
a. To strengthen the dollar, the Fed increases the money supply to lower interest rates.
b. To weaken the dollar, the Fed reduces the money supply to increase interest rates.
c. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.
d. To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

Chapter 7—International Arbitrage and Interest Rate Parity

1. Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

2. Due to ____, market forces should realign the spot rate of a currency among banks.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

3. Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

4. If interest rate parity exists, then ____ is not feasible.
a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

5. In which case will locational arbitrage most likely be feasible?
a. One bank’s ask price for a currency is greater than another bank’s bid price for the currency.
b. One bank’s bid price for a currency is greater than another bank’s ask price for the currency.
c. One bank’s ask price for a currency is less than another bank’s ask price for the currency.
d. One bank’s bid price for a currency is less than another bank’s bid price for the currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

6. When using ____, funds are not tied up for any length of time.
a. covered interest arbitrage
b. locational arbitrage
c. triangular arbitrage
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

7. When using ____, funds are typically tied up for a significant period of time.
a. covered interest arbitrage
b. locational arbitrage
c. triangular arbitrage
d. B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

8. Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:
a. should exhibit a discount.
b. should exhibit a premium.
c. should be zero (i.e., it should equal its spot rate).
d. B or C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

9. If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound’s spot rate, then:
a. U.S. investors could possibly benefit from covered interest arbitrage.
b. British investors could possibly benefit from covered interest arbitrage.
c. neither U.S. nor British investors could benefit from covered interest arbitrage.
d. A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

10. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
a. U.S. investors could possibly benefit from covered interest arbitrage.
b. British investors could possibly benefit from covered interest arbitrage.
c. neither U.S. nor British investors could benefit from covered interest arbitrage.
d. A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

11. Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?
a. downward pressure on the euro’s spot rate.
b. downward pressure on the euro’s forward rate.
c. downward pressure on the U.S. interest rate.
d. upward pressure on the euro’s interest rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?
a. upward pressure on the Swiss franc’s spot rate.
b. upward pressure on the U.S. interest rate.
c. downward pressure on the Swiss interest rate.
d. upward pressure on the Swiss franc’s forward rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

13. Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?
a. spot rate of peso increases; forward rate of peso decreases.
b. spot rate of peso decreases; forward rate of peso increases.
c. spot rate of peso decreases; forward rate of peso decreases.
d. spot rate of peso increases; forward rate of peso increases.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

14. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
a. $15,385.
b. $15,625.
c. $22,136.
d. $31,250.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

15. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:
a. larger will be the forward discount of the foreign currency.
b. larger will be the forward premium of the foreign currency.
c. smaller will be the forward premium of the foreign currency.
d. smaller will be the forward discount of the foreign currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

16. Assume the following information:

You have $1,000,000 to invest:
Current spot rate of pound = $1.30
90-day forward rate of pound = $1.28
3-month deposit rate in U.S. = 3%
3-month deposit rate in Great Britain = 4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?
a. $1,024,000.
b. $1,030,000.
c. $1,040,000.
d. $1,034,000.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

17. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:
a. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.
b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.
c. U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S.
d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

18. Assume the following information:

U.S. investors have $1,000,000 to invest:
1-year deposit rate offered on U.S. dollars = 12%
1-year deposit rate offered on Singapore dollars = 10%
1-year forward rate of Singapore dollars = $.412
Spot rate of Singapore dollar = $.400

Given this information:
a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
b. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

19. Assume the following information:

Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One-year forward rate of the New Zealand dollar = $.42
Annual interest rate on New Zealand dollars = 8%
Annual interest rate on U.S. dollars = 9%

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.
a. about 11.97
b. about 9.63
c. about 11.12
d. about 11.64
e. about 10.63

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

20. Assume the following bid and ask rates of the pound for two banks as shown below:

Bid Ask
Bank A $1.41 $1.42
Bank B $1.39 $1.40

As locational arbitrage occurs:
a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.
b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.
c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.
d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

21. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
a. $11,764.
b. −$11,964.
c. $36,585.
d. $24,390.
e. $18,219.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

22. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:
a. larger will be the forward discount of the foreign currency.
b. larger will be the forward premium of the foreign currency.
c. smaller will be the forward premium of the foreign currency.
d. smaller will be the forward discount of the foreign currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

23. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.
a. appreciate; depreciate
b. depreciate; appreciate
c. depreciate; depreciate
d. appreciate; appreciate
e. remain stable; appreciate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

24. Assume the following information:

Spot rate today of Swiss franc = $.60
1-year forward rate as of today for Swiss franc = $.63
Expected spot rate 1 year from now = $.64
Rate on 1-year deposits denominated in Swiss francs = 7%
Rate on 1-year deposits denominated in U.S. dollars = 9%

From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.
a. 5.00
b. 12.35
c. 15.50
d. 14.13
e. 11.22

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

25. Assume the following information for a bank quoting on spot exchange rates:

Exchange rate of Singapore dollar in U.S. $ = $.32
Exchange rate of pound in U.S. $ = $1.50
Exchange rate of pound in Singapore dollars = S$4.50

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

26. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?
a. 2.0.
b. 2.40.
c. .80.
d. .50.
e. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

27. Assume that the euro’s interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?
a. Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage.
b. Americans who invest in the U.S. earn the same rate of return as Germans who attempt covered interest arbitrage.
c. Americans who invest in the U.S. earn the same rate of return as Germans who invest in Germany
d. A and B
e. None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

28. Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:
a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland.
b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.
c. A and B
d. none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

29. Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound’s spot rate, and ____ pressure on the pound’s forward rate.
a. downward; downward
b. downward; upward
c. upward; downward
d. upward; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

30. Assume that interest rate parity holds, and the euro’s interest rate is 9% while the U.S. interest rate is 12%. Then the euro’s interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro’s forward ____ will ____ in order to maintain interest rate parity.
a. discount; increase
b. discount; decrease
c. premium; increase
d. premium; decrease

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

31. Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
a. $7,067.
b. $8,556.
c. $10,114.
d. $12,238.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

32. Assume the following information:

You have $1,000,000 to invest:
Current spot rate of pound = $1.60
90-day forward rate of pound = $1.57
3-month deposit rate in U.S. = 3%
3-month deposit rate in U.K. = 4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?
a. $1,020,500.
b. $1,045,600.
c. $1,073,330.
d. $1,094,230.
e. $1,116,250.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

33. Assume the following information:

U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks = 12%
1-year deposit rate offered on Swiss francs = 10%
1-year forward rate of Swiss francs = $.62
Spot rate of Swiss franc = $.60

Given this information:
a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
b. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

34. Assume the following information:

Current spot rate of Australian dollar = $.64
Forecasted spot rate of Australian dollar 1 year from now = $.59
1-year forward rate of Australian dollar = $.62
Annual interest rate for Australian dollar deposit = 9%
Annual interest rate in the U.S. = 6%

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.
a. about 6.00
b. about 9.00
c. about 7.33
d. about 8.14
e. about 5.59

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

35. Assume the following bid and ask rates of the pound for two banks as shown below:

Bid Ask
Bank C $1.61 $1.63
Bank D $1.58 $1.60

As locational arbitrage occurs:
a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase.
b. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease.
c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease.
d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

36. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?
a. $10,003.
b. $12,063.
c. $14,441.
d. $16,393.
e. $18,219.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

37. Assume the following information for a bank quoting on spot exchange rates:

Exchange rate of Singapore dollar in U.S. $ = $.60
Exchange rate of pound in U.S. $ = $1.50
Exchange rate of pound in Singapore dollars = S$2.6

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?
a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?
a. $2,041,667.
b. $9,804.
c. $500.
d. $1,639.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

39. Which of the following is an example of triangular arbitrage initiation?
a. buying a currency at one bank’s ask and selling at another bank’s bid, which is higher than the former bank’s ask.
b. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20.
c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.
d. converting funds to a foreign currency and investing the funds overseas.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?
a. A$39.93.
b. A$25,043.48.
c. A$553.00.
d. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

41. National Bank quotes the following for the British pound and the New Zealand dollar:

Quoted Bid Price Quoted Ask Price
Value of a British pound (£) in $ $1.61 $1.62
Value of a New Zealand dollar (NZ$) in $ $.55 $.56
Value of a British pound in
New Zealand dollars NZ$2.95 NZ$2.96

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?
a. $77.64.
b. $197.53.
c. $15.43.
d. $111.80.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

42. Assume the following information:

You have $900,000 to invest:
Current spot rate of Australian dollar (A$) = $.62
180-day forward rate of the Australian dollar = $.64
180-day interest rate in the U.S. = 3.5%
180-day interest rate in Australia = 3.0%

If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?
a. $56,903.
b. $61,548.
c. $27,000.
d. $31,500.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

43. Assume the following information:

You have $400,000 to invest:
Current spot rate of Sudanese dinar (SDD) = $.00570
90-day forward rate of the dinar = $.00569
90-day interest rate in the U.S. = 4.0%
90-day interest rate in Sudan = 4.2%

If you conduct covered interest arbitrage, what amount will you have after 90 days?
a. $416,000.00.
b. $416,800.00.
c. $424,242.86.
d. $416,068.77.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

Exhibit 7-1
Assume the following information:

You have $300,000 to invest:
The spot bid rate for the euro (€) is $1.08
The spot ask quote for the euro is $1.10
The 180-day forward rate (bid) of the euro is $1.08
The 180-day forward rate (ask) of the euro is $1.10
The 180-day interest rate in the U.S. is 6%
The 180-day interest rate in Europe is 8%

44. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days?
a. $318,109.10.
b. $330,000.00.
c. $312,218.20.
d. $323,888.90.
e. none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

45. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?
a. 7.96%; feasible
b. 6.04%; feasible
c. 6.04%; not feasible
d. 4.07%; not feasible
e. 10.00%; feasible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

46. According to interest rate parity (IRP):
a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.
b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.
c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.
d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

47. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso’s forward ____ will ____.
a. premium; increase
b. discount; decrease
c. discount; increase
d. premium; decrease

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

48. If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

49. For locational arbitrage to be possible, one bank’s ask rate must be higher than another bank’s bid rate for a currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

50. Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank’s ask rate and would decrease the other bank’s bid rate.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

51. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

52. The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro’s forward rate should exhibit a premium of about 3%.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

53. Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

54. Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage.
a. True
b. False

PTS: 1 DIF: Moderate
OBJ: INFM.MADU.15.07.01 NAT: BUSPROG.INFM.MADU.15.03
STA: DISC.INFM.MADU.15.02 KEY: Bloom’s: Knowledge

55. Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

56. To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

57. If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

58. If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

59. Forward rates are driven by the government rather than market forces.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

60. The foreign exchange market is an over-the-counter market.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

61. The yield curve of every country has its own unique shape.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.03
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

62. Assume the following information:

U.S. investors have $1,000,000 to invest:
1-year deposit rate offered by U.S. banks = 10%
1-year deposit rate offered on British pounds = 13.5%
1-year forward rate of Swiss francs = $1.26
Spot rate of Swiss franc = $1.30

Given this information:
a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
b. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

63. If quoted exchange rates are the same across different locations, then ____ is not feasible.
a. triangular arbitrage
b. covered interest arbitrage
c. locational arbitrage
d. A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

64. Points above the IRP line represent situations where:
a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.
b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.
c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.
d. covered interest arbitrage is not feasible for neither domestic nor foreign investors.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

65. Points below the IRP line represent situations where:
a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.
b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.
c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.
d. covered interest arbitrage is not feasible for neither domestic nor foreign investors.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

66. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?
a. transaction costs.
b. political risk.
c. differential tax laws.
d. all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

67. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.
a. discount; 2.73
b. premium; 2.73
c. discount; 3.65
d. premium; 3.65

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

68. Assume the following information:

Exchange rate of Japanese yen in U.S. $ = $.011
Exchange rate of euro in U.S. $ = $1.40
Exchange rate of euro in Japanese yen = 140 yen

What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?
a. $100,000
b. −$90,909
c. 10%
d. −9.09%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

69. Assume the following information:

Quoted Bid Price Quoted Ask Price
Value of an Australian dollar (A$) in $ $0.67 $0.69
Value of Mexican peso in $ $.074 $.077
Value of an Australian dollar in
Mexican pesos 8.2 8.5

Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy?
a. $6,133
b. $2,368
c. $6,518
d. $13,711

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

70. The interest rate on yen is 7%. The interest rate in the U.S. is 9%. The yen’s forward rate should exhibit a premium of about 2%.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

71. The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

72. Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the pound should exhibit a premium of about 1%.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

73. If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

74. For locational arbitrage to be possible, one bank’s ask rate must be higher than another bank’s bid rate for a currency.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

75. Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

76. Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank’s ask rate and would decrease the other bank’s bid rate.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

77. Locational arbitrage explains why prices among banks at different locations will not normally differ by a significant amount.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

78. Cross exchange rates are used to determine the relationship between the dollar and two nondollar currencies.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

79. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

80. The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

81. If interest rate parity exists, then the rate of return achieved from covered interest arbitrage should be equal to the interest rate available in the foreign country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

82. Interest rate parity (IRP) states that the foreign currency’s forward rate premium or discount is roughly equal to the interest rate differential between the U.S. and the foreign country.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

83. The interest rate in South Africa is 8%. The interest rate in the U.S. is 5%. The South African forward rate should exhibit a premium of about 3%.
a. True
b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

84. The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension

85. For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor’s perspective, but is possible from a foreign investor’s perspective.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

86. If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

87. If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.
a. True
b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

88. Which of the following is not mentioned in the text as a form of international arbitrage?
a. Locational arbitrage
b. Triangular arbitrage
c. Transactional arbitrage
d. Covered interest arbitrage
e. All of the above are mentioned in the text as forms of international arbitrage.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

89. Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?
a. $2,041,667
b. $9,804
c. $500
d. $1,639

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

90. American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:
a. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.
b. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.
c. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.
d. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.
e. Locational arbitrage is not possible in this case.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Knowledge

91. Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs’ actions, the following adjustments must take place.
a. One bank’s ask price will rise and the other bank’s bid price will fall.
b. One bank’s ask price will fall and the other bank’s bid price will rise.
c. One bank’s bid/ask spread will widen and the other bank’s bid/ask spread will fall.
d. A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

92. Which of the following is an example of triangular arbitrage initiation?
a. Buying a currency at one bank’s ask and selling at another bank’s bid, which is higher than the former bank’s ask.
b. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20.
c. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.
d. Converting funds to a foreign currency and investing the funds overseas.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

93. Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?
a. $6,053.27
b. $5,030.45
c. $6,090.13
d. Triangular arbitrage is not possible in this case.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

94. National Bank quotes the following for the British pound and the New Zealand dollar:

Quoted Bid Price Quoted Ask Price
Value of a British pound (£) in $ $1.61 $1.62
Value of a New Zealand dollar (NZ$) in $ $0.55 $0.56
Value of a British pound in
New Zealand dollars NZ$2.95 NZ$2.96

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?
a. $77.64
b. $197.53
c. $15.43
d. $111.80

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Application

95. Which of the following is not true regarding covered interest arbitrage?
a. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
b. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk.
c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.
d. If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically.
e. All of the above are true regarding covered interest arbitrage.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

96. Which of the following is not true regarding covered interest arbitrage?
a. Covered interest arbitrage is a reason for observing interest rate parity (IRP).
b. If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country.
c. When interest rate parity holds, covered interest arbitrage is not possible.
d. When interest rate disparity exists, covered interest arbitrage may not be profitable.
e. All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Analysis

97. Which of the following is not true regarding interest rate parity (IRP)?
a. When interest rate parity holds, covered interest arbitrage is not possible.
b. When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country’s currency should exhibit a discount.
c. When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country’s currency should exhibit a premium.
d. When covered interest arbitrage is not feasible, interest rate parity must hold.
e. All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02
NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02
KEY: Bloom’s: Comprehension