Chapter 3—International Financial Markets

1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread
is:
a. about 4.44%.
b. about 4.26%.
c. about 4.03%.
d. about 4.17%.
ANS: B
SOLUTION: Bid-ask percentage spread = ($.47  $.45)/$.47 = 4.26%

PTS: 1

2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage
spread is:
a. about 4.99%.
b. about 4.88%.
c. about 4.65%.
d. about 4.43%.
ANS: C
SOLUTION: Bid-ask percentage spread = ($.0043  $.0041)/$.0043 = 4.65%

PTS: 1

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

4. ____ is not a factor that affects the bid/ask spread.

a. Order costs
b. Inventory costs
c. Volume
d. All of the above factors affect the bid/ask spread
ANS: D PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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 7. According to the text, the forward rate is commonly used for:
a. hedging.
b. immediate transactions.
c. previous transactions.
d. bond transactions.
ANS: A PTS: 1

8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90
days, it could:
a. obtain a 90-day forward purchase contract on euros.
b. obtain a 90-day forward sale contract on euros.
c. purchase euros 90 days from now at the spot rate.
d. sell euros 90 days from now at the spot rate.
ANS: B PTS: 1

9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90
days to make payment on imports from Canada, it could:
a. obtain a 90-day forward purchase contract on Canadian dollars.
b. obtain a 90-day forward sale contract on Canadian dollars.
c. purchase Canadian dollars 90 days from now at the spot rate.
d. sell Canadian dollars 90 days from now at the spot rate.
ANS: A PTS: 1

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

PTS: 1

11. Which of the following is not true with respect to spot market liquidity?
a. The more willing buyers and sellers there are, the more liquid a market is.
b. The spot markets for heavily traded currencies such as the Japanese yen are very liquid.
c. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.
d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a
reasonable exchange rate.
ANS: D PTS: 1

12. Forward markets for currencies of developing countries are:

a. prohibited.
b. less liquid than markets for developed countries.
c. more liquid than markets for developed countries.
d. only available for use by government agencies.
ANS: B PTS: 1

13. A forward contract can be used to lock in the ____ of a specified currency for a future point in time.

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 a. purchase price
b. sale price
c. A or B
d. none of the above
ANS: C PTS: 1

14. The forward market:

a. for euros is very illiquid.
b. for Eastern European countries is very liquid.
c. does not exist for some currencies.
d. none of the above
ANS: C PTS: 1

15. ____ is not a bank characteristic important to customers in need of foreign exchange.
a. Quote competitiveness
b. Speed of execution
c. Forecasting advice
d. Advice about current market conditions
e. All of the above are important bank characteristics to customers in need of foreign
exchange.
ANS: E PTS: 1

16. The Basel II accord is focused on eliminating inconsistencies in ____ across countries.
a. capital requirements
b. deposit rates
c. deposit insurance
d. bank failure policies
ANS: A PTS: 1

17. The international money market primarily concentrates on:

a. short-term lending (one year or less).
b. medium-term lending.
c. long-term lending.
d. placing bonds with investors.
e. placing newly issued stock in foreign markets.
ANS: A PTS: 1

18. The international credit market primarily concentrates on:

a. short-term lending (less than one year).
b. medium-term lending.
c. long-term lending.
d. providing an exchange of foreign currencies for firms who need them.
e. placing newly issued stock in foreign markets.
ANS: B PTS: 1

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.

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 ANS: C PTS: 1

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.
ANS: A PTS: 1

21. A syndicated loan:

a. represents a loan by a single bank to a syndicate of corporations.
b. represents a loan by a single bank to a syndicate of country governments.
c. represents a direct loan by a syndicate of oil-producing exporters to a less developed
country.
d. represents a loan by a group of banks to a borrower.
e. A and B
ANS: D PTS: 1

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.
ANS: C PTS: 1

23. International money market transactions normally represent:

a. the equivalent of $1 million or more.
b. the equivalent of $1,000 to $10,000.
c. the equivalent of between $10,000 and $100,000.
d. the equivalent of between $100,000 and $200,000.
ANS: A PTS: 1

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

ANS: F PTS: 1

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.
ANS: A PTS: 1

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

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 a. the currency to be used by all countries as a medium of exchange for international trade.
b. forced to be freely floating relative to all currencies without any boundaries.
c. devalued relative to major currencies.
d. revalued (upward) relative to major currencies.
ANS: C PTS: 1

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

28. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and
spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the
yen, it would likely wish to hedge. It could hedge by ____ dollars forward.
a. depreciate; buying
b. depreciate; selling
c. appreciate; selling
d. appreciate; buying
ANS: B PTS: 1

29. The bid-ask spread on an exchange rate can be used to directly determine:
a. how an exchange rate will change.
b. the transaction cost of foreign exchange.
c. the forward premium.
d. the currency option premium.
ANS: B PTS: 1

30. Futures contracts are typically ____; forward contracts are typically ____.
a. sold on an exchange; sold on an exchange
b. offered by commercial banks; sold on an exchange
c. sold on an exchange; offered by commercial banks
d. offered by commercial banks; offered by commercial banks
ANS: C PTS: 1

31. Eurobonds:
a. are usually issued in bearer form.
b. typically carry several protective covenants.
c. cannot contain call provisions.
d. A and B
ANS: A PTS: 1

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

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 ANS: C PTS: 1

33. Eurobonds:
a. can be issued only by European firms.
b. can be sold only to European investors.
c. A and B
d. none of the above
ANS: D PTS: 1

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.
ANS: C PTS: 1

35. When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations
will be based on the:
a. closing prices in the U.S. during the previous day.
b. closing prices in Canada during the previous day.
c. prevailing prices in locations where the foreign exchange markets have been open.
d. officially set by central banks before the U.S. market opens.
ANS: C PTS: 1

36. The U.S. dollar is not ever used as a medium of exchange in:
a. industrialized countries outside the U.S.
b. in any Latin American countries.
c. in Eastern European countries where foreign exchange restrictions exist.
d. none of the above
ANS: D PTS: 1

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

38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in
Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?
a. 73.75.
b. 125.
c. 1.69.
d. 0.014.
e. none of the above
ANS: D
SOLUTION: ($.008/$.59) = F$.014/¥

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 PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

45. The strike price is also known as the premium price.

a. True
b. False

ANS: F PTS: 1

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

ANS: F PTS: 1

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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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

50. Eurobonds are certificates representing bundles of stock.

a. True
b. False

ANS: F PTS: 1

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

PTS: 1

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

PTS: 1

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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

ANS: T PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: T PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

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 b. False

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: T PTS: 1

64. The legal protection of shareholders is the same among countries.

a. True
b. False

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: T PTS: 1

67. The government enforcement of securities laws varies among countries.

a. True
b. False

ANS: T PTS: 1

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

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 ANS: F PTS: 1

69. In general, stock markets allow for more price efficiency and attract more investors when they have all of
the following except:
a. more voting rights for shareholders.
b. more legal protection.
c. more enforcement of the laws.
d. less stringent accounting requirements.
ANS: D PTS: 1

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

ANS: F PTS: 1

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
ANS: B PTS: 1

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

ANS: T PTS: 1

73. Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican
pesos, what is the amount of pesos that you need to purchase $100,000?
a. 12,600
b. 775,194
c. 793,651
d. 12,900
ANS: C PTS: 1

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

ANS: F PTS: 1

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

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 ANS: D PTS: 1

76. Which of the following is not a method that can be used to invest internationally?
a. Investment in MNC stocks
b. American depository receipts (ADRs)
c. World Equity benchmark Shares (WEBS)
d. International mutual funds
e. All of the above are methods that can be used to invest internationally.
ANS: E PTS: 1

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

a. True
b. False

ANS: F PTS: 1

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

79. When obtaining a loan, the risk premium paid above LIBOR depends on the:
a. risk-free interest rate of the borrower.
b. credit risk of the borrower.
c. borrower's stock price.
d. lender's stock price.
ANS: B PTS: 1

80. The largest global exchange is:

a. NASDAQ
b. Tokyo Stock Exchange
c. NYSE Euronext
d. London Stock Exchange
ANS: C PTS: 1

81. Which of the following is not true about syndicated loans?

a. A borrower that receives a syndicated loan incurs various fees besides the interest rate.
b. The loans are only denominated in U.S. dollars.
c. The loans are provided by a group of banks to a borrower.
d. The loans are usually formed in 6 weeks or less.
ANS: B PTS: 1

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.

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 ANS: E PTS: 1

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
ANS: C PTS: 1

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

a. Eurobonds
b. ADRs
c. FRNs
d. Eurobor
ANS: B PTS: 1

85. Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible
into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore
dollars?
a. 10
b. 13.28
c. 30.12
d. 39.84
ANS: A PTS: 1

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

a. ADRs are denominated in the currency of the stock's home country.
b. ADRs enable U.S. investors to avoid cross-border transactions
c. ADRs allow non-U.S. firms to tap into U.S. market for funds.
d. ADRs sometimes allow for arbitrage opportunities.
ANS: A PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: F PTS: 1

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

ANS: T PTS: 1

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

ANS: T PTS: 1

94. Which of the following is not a possible bid/ask quotation for the Barbados dollar?
a. $.50/$.51
b. $.49/$.50
c. $.52/$.51
d. $.51/$.52
e. All of the above are possible bid/ask quotations.
ANS: C PTS: 1

95. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your
position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward
rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for
the 5,000,000 yen 60 days from now if you sell yen forward?
a. $44,500
b. $45,000
c. $526 million
d. $47,500
e. $556 million
ANS: D PTS: 1

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

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 c. Hedging yen payables by purchasing yen forward
d. Hedging peso payables by purchasing pesos forward
e. All of the above are examples of using forward contracts.
ANS: A PTS: 1

97. A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a
quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____
quotation.
a. direct; indirect
b. indirect; direct
c. direct; direct
d. indirect; indirect
e. cannot be answered without more information
ANS: A PTS: 1

98. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of
yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$.
a. direct; 142.86
b. indirect; 142.86
c. indirect; 150
d. direct; 150
e. indirect; 0
ANS: B PTS: 1

99. Which of the following is not true regarding electronic communications networks (ECNs)?
a. They have a visible trading floor.
b. Trades are executed by a computer network.
c. They have been created in many countries to match orders between buyers and sellers.
d. They allow investors to place orders on their computers.
e. All of the above are true.
ANS: A PTS: 1

100. Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British
pound payables?
a. Purchase pounds forward
b. Buy a pound futures contract
c. Buy a pound put option
d. Buy a pound call option
ANS: C PTS: 1

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
ANS: B PTS: 1

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102. An MNC's short-term financing decisions are satisfied in the ____ market, while its medium debt
financing decisions are satisfied in the ____ market.
a. international money; international credit
b. international money; international bond
c. international credit; international money
d. international bond; international credit
e. international money; international stock
ANS: A PTS: 1

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