Financial Systems and Regulation
Textbook Exam Questions
Course Introduction
This course provides an in-depth exploration of financial systems and the regulatory frameworks that govern them. Students will examine the structure and functions of financial institutions, markets, and instruments, as well as the roles of central banks and regulatory agencies. The course covers the evolution of financial regulation, the rationale for oversight, and the impact of regulations on market stability, efficiency, and innovation. Key topics include prudential regulation, systemic risk, compliance requirements, international regulatory standards, and recent developments in financial technology and their regulatory implications. Through case studies and real-world examples, students will gain insights into contemporary challenges and reforms shaping the global financial landscape.
Recommended Textbook
Foundations of Financial Markets and Institutions 4th Edition by Frank J. Fabozzi
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Page 2
Chapter 1: Introduction
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Q1) The three economic functions of financial markets are: to improve the price discovery process; to lessen liquidity; and, to reduce the cost of transacting.
A)True
B)False
Answer: False
Q2) A principal economic function to transfer funds from those who have ________ to invest to those who need funds to invest in ________.
A) deficit funds; tangible assets.
B) surplus funds; intangible assets.
C) deficit funds; intangible assets.
D) surplus funds; tangible assets.
Answer: D
Q3) Financial assets have two principal economic functions. One function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets.
A)True
B)False
Answer: True
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Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
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Q1) There is no universally accepted definition to describe the 9,000 privately pooled investment entities in the United States called ________ that invest more than $1.3 trillion in assets.
A) derivative funds
B) option funds
C) hedge funds
D) asset/liability funds
Answer: C
Q2) Liquidity risk in the context of settlement risk means that the counterparty can eventually meet its obligation, but not at the due date.
A)True
B)False
Answer: True
Q3) Funding liquidity risk is the risk that the financial institution will be unable to obtain funding to obtain cash flow necessary to satisfy its obligations.
A)True
B)False
Answer: True
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Chapter 3: Depository Institutions: Activities and Characteristics
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Q1) Contrast the differences and similarities between savings banks and S&Ls. Answer: Savings banks are institutions similar to, although much older than, S&Ls. They can be either mutually owned (in which case they are called mutual savings banks) or stockholder owned. While conversion of mutual to corporate structure was made easier by the Garn-St. Germain Act, most savings banks are of the mutual form. Only 16 states in the eastern portion of the U.S. charter savings banks. In 1978, Congress permitted the chartering of federal savings banks. Although the total deposits at savings banks are less than those at S&Ls, savings banks are typically larger institutions. Asset structures of savings banks and S&Ls are similar. The principal assets of savings banks are residential mortgages. Because states have permitted more portfolio diversification than was permitted by federal regulators of S&Ls, savings bank portfolios weathered funding risk far better than S&Ls. Included in savings bank portfolios are corporate bonds, Treasury and government agency securities, municipal securities, common stock, and consumer loans. The principal source of funds for savings banks is deposits. Typically, the ratio of deposits to total assets is greater for savings banks than for S&Ls. Savings banks offer the same types of deposit accounts as S&Ls. Deposits can be insured by either the Bank Insurance Fund or Savings Association Insurance Fund.
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Chapter 4: The US Federal Reserve and the Creation of Money
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Q1) There is widespread agreement that the central bank should be independent of the government so that decisions of the central bank will not be influenced for long-term business purposes such as pursuing a monetary policy to expand the economy but at the expense of inflation.
A)True
B)False
Q2) If the Fed thinks the dollar's value is ________ and a foreign currency's is too low, it can purchase some of the foreign currency with its own supply of dollars.
A) excessively undervalued
B) a fair value
C) too high
D) too low
Q3) In a reverse repo (also known as a matched sale or a matched sale-purchase transaction), the Fed sells securities and makes a commitment to buy them back at a higher price later.
A)True
B)False
Q4) Describe the Federal Reserve System and its important feature.
Q5) Describe the meaning of the word money.
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Chapter 5: Monetary Policy in the United States
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Q1) During the early 1990s, what did the Fed succeed in doing?
A) The Fed successfully reduced rates across the maturity spectrum.
B) The fed funds rate rose to 13%, and the yield on 10-year government bonds was also high, touching 15.72% in December 1993.
C) It succeeded in aiding an economic expansion that unfortunately caused a rising civilian unemployment rate.
D) It spearheaded an economic recession with a falling real GDP.
Q2) A "weak" dollar contributes to inflation, as U.S. buyers pay more for the many goods they do import.
A)True
B)False
Q3) Inflation in advanced economies is ________ the result of excessive demand due to monetary or fiscal policy.
A) never
B) seldom (if ever)
C) frequently
D) always
Q4) Discuss two problems that the Fed has in implementing monetary policy.
Q5) Identify and briefly describe three of the major goals of Fed policy.
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Chapter 6: Insurance Companies
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Q1) In regards to the Gramm-Leach-Bliley Act (GLB), which of the below statements is FALSE?
A) The GLB removed the 50-year-old "anti-affiliation restrictions" among commercial banks, investment banks, and insurance companies.
B) The GLB is asserted to be a reason for the accelerated demutualization of insurance companies.
C) The GLB prevented a single organization from having complete control over the sources of corporate funding.
D) The GLB has facilitated and accelerated affiliations among these three types of institutions.
Q2) The complication in determining the value of liabilities arises because the insurance company has committed to make payments at some time in the future, and those payments are recorded as contingent liabilities on its financial statement.
A)True B)False
Q3) Contrast the fundamental difference between an insurance company and a bread manufacturer.
Q4) Explain how insurance companies are regulated and rated?
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Chapter 7: Investment Companies and Exchange Traded Funds
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Q1) Explain what is meant by an index fund. In your answer contrast it with an active fund.
Q2) Suppose that a mutual fund with 10 million shares outstanding has a portfolio with a market value of $430 million and liabilities of $30 million.
A) $20
B) $40
C) $60
D) $80
Q3) Mutual funds be included in different investment vehicles. Given an example and in your example discuss a nonqualified vehicle and the inclusion of a retirement plan and an education plan.
Q4) Fund companies and distribution companies have developed new outlets for selling mutual funds and expanded their traditional sales channels. The changes that occurred are evident in the rising share of sales through ________.
A) direct sales to investors and intermediaries.
B) third parties and sales through brokers.
C) direct sales to investors and sales through brokers.
D) third parties and intermediaries.
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Chapter 8: Pension Funds
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Q1) The Pension Protection Act of 2006 (PPA) contains two major parts. Describe these two parts.
Q2) The aggregate asset mix of the 1,000 top defined-benefit and defined-contribution pension plans as of September 30, 2007, indicate that the asset allocations for corporate and public defined-benefit plans are very similar, with approximately ________ of their assets in U.S. stocks and bonds.
A) 65%
B) 60%
C) 55%
D) 50%
Q3) ERISA established fiduciary standards for pension fund trustees, managers, and advisors. Specifically, all parties responsible for the management of a pension fund are guided by the judgment of what is called a "wild man" in seeking to determine which investments are proper.
A)True
B)False
Q4) Explain the "prudent man" concept.
Q5) Explain the difference between a defined-benefit pension plan and a defined-contribution pension plan.
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Chapter 9: Properties and Pricing of Financial Assets
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Q1) The price of a complex asset is the sum of the prices of its component parts.
A)True
B)False
Q2) The ________, the greater the probability of the market maker ________ in excess of a stated bound between the time of buying and reselling the financial asset.
A) greater the variability; incurring a loss
B) lesser the variability; incurring a loss
C) lesser the variability; incurring a large gain
D) greater the variability; incurring no loss or gain
Q3) The appropriate ________ can often be approximated as the sum of rewards for the various risks an asset poses to its buyer.
A) reward premium
B) discount rate
C) risk premium
D) coupon rate
Q4) Explain the difference between modified duration and effective duration. In your also give an example of when the difference can be dramatic.
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11
Chapter 10: The Level and Structure of Interest Rates
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Q1) Consider an 20-year bond with a coupon rate of 8% and a par value of $1,000. The cash flow for this bond is ________ every six months for the first 39 semi-annual periods and then ________ for the last (or 40th) six-month period.
A) $1,040; $40
B) $40; $1,040
C) $80; $1,080
D) $80; $1,000
Q2) The relationship between the swap rate and maturity of a swap is called the maturity rate yield curve, or more commonly referred to as the maturity curve.
A)True
B)False
Q3) Explain what is meant by the liquidity effect.
Q4) Treasury securities are used to develop the benchmark interest rates. There are two categories of U.S. Treasury securities: ________.
A) discount and coupon securities.
B) discount and coupon stocks.
C) interest rate and coupon securities.
D) discount and compound securities.
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Chapter 11: The Term Structure of Interest Rates
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Q1) What is the basic principle underlying bootstrapping? Explain how to compute the spot rate for a theoretical 1.5-year zero-coupon Treasury.
Q2) For a flat yield curve, the yields are identical for each maturity.
A)True
B)False
Q3) The correct way to think about bonds A and B is not as bonds but as packages of
A) coupon payments.
B) separate bond instruments.
C) zero-coupons without payments.
D) zero-coupon instruments.
Q4) Ilmanen investigated the effect of the behavior of ________ using historical average returns on U.S. Treasury securities.
A) the bond risk premium
B) the convexity bias
C) market's expectations
D) different maturities
Q5) Describe the three generic shapes that have appeared for the U.S. Treasury yield curve with some frequency over time.
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Chapter 12: Risk/Return and Asset Pricing Models
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Q1) A problem with a portfolio return computation is: ________.
A) the underlying assumption is that all cash payments and inflows are made and received at the beginning of the period
B) we have to rely on the formula that is able to adjust portfolio returns with the same time horizon.
C) if two investments have the same return, but one investment makes a cash payment early and the other late, the one with early payment will be overstated
D) we cannot rely on the formula to compare return on a one-month investment with that on a 10-year return portfolio.
Q2) An important implication of asset returns following a stable Paretian distribution is that the standard deviation is ________.
A) normal.
B) infinite.
C) brief.
D) stable.
Q3) Supporters of the APT model argue that it has several major advantages over the CAPM or the multifactor CAPM. Describe two of these advantages.
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Chapter 13: Primary Markets and the Underwriting of Securities
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Q1) The mechanics of a bought deal are that ________.
A) the lead manager or a group of managers offers a potential issuer of debt securities a firm bid to purchase an undetermined amount of the securities with an interest (coupon) rate and maturity to be announced later.
B) the issuer is given a month or more to accept or reject the bid.
C) if the bid is rejected, the underwriting firm has bought the deal.
D) the underwriter can sell the securities to other investment banking firms for distribution to their clients and/or distribute the securities to its clients.
Q2) Underwriting activities are regulated by the ________.
A) Initial Public Offerings Market (IPOM).
B) Securities and Exchange Commission (SEC).
C) Investment Banking Industry (IBI).
D) Federal Bureau of Investigation (FBI).
Q3) In addition to the number of rights and the subscription price, there are two other elements of a rights offering that are important. Name and briefly describe these two elements.
Q4) What is the waiting period? What do underwriters do during the waiting period?
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Chapter 14: Secondary Markets
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Q1) The key distinction between a primary market and a secondary market is that, in the secondary market, ________.
A) funds flow from the seller of the asset to the buyer.
B) the issuer of the asset receives funds from the buyer.
C) funds flow from the buyer of the asset to the seller.
D) the existing issue changes hands in the primary market.
Q2) In the United States, secondary trading of common stock occurs in a number of trading locations. Describe these locations.
Q3) Secondary markets hurt investors by providing liquidity.
A)True
B)False
Q4) Primary markets help the issuer of securities to track their values and required returns.
A)True
B)False
Q5) A perfect market is free of transactions costs and any impediment to the interaction of supply and demand for the commodity. Economists refer to these various costs and impediments as frictions. In regards to financial markets, describe four of impediments or frictions.
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Chapter 15: Treasury and Agency Securities Markets
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Q1) ________, there is a regular calendar of offering where all winning bidders are awarded securities at the highest yield accepted by the government (i.e., the stop-out yield).
A) In the regular calendar auction/Dutch-style auction system
B) In the regular calendar auction/minimum-price offering system
C) In the ad hoc auction system
D) In a tap system
Q2) Financial theory tells us that the theoretical value of a Treasury security should be equal to the present value of the cash flow where each cash flow is discounted at the appropriate theoretical spot rate.
A)True
B)False
Q3) If the rate on the repo is 6.5% and the rate on the reverse repo is 6.55%, the dealer firm is borrowing at 6.5% and lending at 6.55%, locking in a spread of 0.55% (fifty-five basis points).
A)True
B)False
Q4) Illustrate the process of stripping.
Q5) Describe two types of government-chartered entities.
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Chapter 16: Municipal Securities Markets
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Q1) Tax-backed debt includes ________.
A) general obligation debt.
B) appropriation-backed obligations.
C) debt obligations supported by public credit enhancement programs.
D) All of these
Q2) From an investor's perspective, the attractiveness of municipal securities is due to their ________.
A) tax treatment at the federal income tax level.
B) exemption from capital gains federal income tax level.
C) exemption from capital gains at the state income tax level.
D) All of these
Q3) A revenue bond is issued for either project or enterprise financings where the bond issuer pledges the revenues generated by the project that is financed to the bondholders.
A)True
B)False
Q4) The Municipal Securities Rulemaking Board (MSRB) has no enforcement or inspection authority.
A)True
B)False
Page 18
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Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) If the price at a future date ________ the purchase price, then there is a
A) less than; capital gain
B) less than; a taxable gain
C) exceeds; capital loss
D) exceeds; capital gain
Q2) Explicit trading costs include impact costs, timing costs, and opportunity costs.
A)True
B)False
Q3) The Internal Revenue Code defines short-term as a holding period of one year or less. If a capital gain is classified as a short-term capital gain, it is taxed as ordinary income at the investor's regular income tax rate.
A)True
B)False
Q4) There are two major components of transaction costs: explicit costs and implicit costs.
A)True
B)False
Q5) Name and describe the three different forms of pricing efficiency.
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Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) Exchanges have usually been mutual organizations with memberships or "seats". Adopting a new technology ________.
A) may benefit the customers of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization.
B) may benefit the customers of an exchange by increasing the transaction costs but also increase the value of access privileges and seats of a membership organization..
C) may benefit the customers of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization.,
D) may benefit the members of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization...
Q2) A fundamental difference between U.S. and international exchanges involves ________.
A) their method of trading.
B) their market structure.
C) the nature of the exchanges' business organizations.
D) All of these
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Chapter 19: Markets for Corporate Senior Instruments: I
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Q1) Which of the below statements is FALSE?
A) A corporation that wants an MTN program will file a shelf registration with the SEC for the offering of securities.
B) A unique characteristic of medium-term notes is that they are continuously offered to investors at a single point in time by an agent of the issuer.
C) MTNs created when the issuer simultaneously transacts in the derivative markets are called structured notes.
D) A structured note is a medium-term note in which the issuer couples its offering with a position in a derivative instrument in order to create instruments with more interesting risk/return characteristics.
Q2) A tax-oriented lease effectively allows the lessee to obtain a financing at less cost than by bank borrowing.
A)True
B)False
Q3) Describe a medium-term note. In your answer comment on its maturity and registration.
Q4) What is Eurocommerical paper? Describe two ways in which it differs from U.S. commercial paper.
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Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) Which of the below statements is TRUE?
A) Fixed-rate securities are attractive to some institutional investors because they allow them to buy an asset with an income stream that closely matches the floating nature of the income of some of their liabilities.
B) The lowest-grade bonds are designated by Moody's by the symbol Aaa and by the other three rating systems by the symbol AAA.
C) Frequently, the ability of an issuer to make interest and principal payments is seriously and unexpectedly changed by a natural or industrial accident or some regulatory change.
D) Each rating agency periodically publishes a table showing the upgrade and downgrade history of the issues that it rated.
Q2) The Eurobond sector of the global bond market includes bonds with a number of distinguishing features. Name three of these features.
Q3) Common stock is a class of stock in which the dividend rate is typically a fixed percentage of par or face value.
A)True
B)False
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Chapter 21: The Markets for Bank Obligations
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Q1) Some federal funds transactions require the use of a broker.
A)True
B)False
Q2) ________ is an interest rate that changes periodically in accordance with a predetermined formula that indicates the spread (or margin) above some index at which the rate will reset periodically.
A) A fixed-rate CD
B) An Eurodollar CD
C) A floating-rate CD
D) A domestic CD
Q3) CD yields are lower than yields on Treasury securities of the same maturity.
A)True
B)False
Q4) The maturities for the Eurodollar CD range from overnight to five years.
A)True
B)False
Q5) The effective fed funds rate is the rate least often cited for the fed funds market. A)True
B)False
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Chapter 22: The Residential Mortgage Market
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Q1) In regards the risks associated with mortgage origination, price risk refers to the adverse effects on the value of the pipeline if mortgage rates in the market rise.
A)True
B)False
Q2) Because of prepayments, the investor is uncertain about the cash flows that will be realized from investing in a residential mortgage loan.
A)True
B)False
Q3) The LTV has proven to be a good predictor of default: the ________ the LTV, the ________ the likelihood of default.
A) higher; lesser
B) higher; greater
C) lower; greater
D) None of these
Q4) Homeowners seldom repay all or part of their mortgage balance prior to the scheduled maturity date.
A)True
B)False
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Chapter 23: Mortgage-Backed Securities Market
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Q1) Describe "excess spread" as a from of credit enhancement.
Q2) ________ is created by redistributing the cash flow (________) to the different tranches based on a set of payment rules.
A) An LBO; prepayment and principal
B) A CMO; interest and principal
C) A WAC; interest and prepayment
D) A PSA; interest and principal
Q3) In terms of market size, the agency mortgage-backed security market is the ________.
A) smallest sector of the U.S. investment-grade market
B) largest sector of the U.S. investment-grade market
C) smallest sector of the U.S. noninvestment-grade market
D) largest sector of the U.S. noninvestment-grade market
Q4) There are public issuers of mortgage pass-through securities that are explicitly or implicitly guaranteed by the U.S. government; these securities are called nonagency pass-through securities.
A)True
B)False
Q5) What does the creation of a CMO accomplish? Briefly explain.
Q6) What is an IO?
Page 25
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Chapter 24: Market for Commercial Mortgage Loans and Commercial
Mortgage-Backed Securities
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Q1) What is a prepayment lockout?
Q2) CMBS are backed by either newly originated or seasoned commercial mortgage loans.
A)True
B)False
Q3) If there is a default on a commercial mortgage loan, the lender looks to the proceeds from the ________ for repayment and has ________ to the borrower for any unpaid balance.
A) sale of the property; no recourse
B) sale of the property; little recourse
C) purchase of the property; no recourse
D) sale of the property; recourse
Q4) ________ are predetermined penalties that must be paid by the borrower if the borrower wishes to refinance.
A) defeasance
B) Prepayment penalty points
C) prepayment lockout
D) None of these
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Q5) As with a nonagency RMBS, a servicer is required. Name three responsibilities of a servicer.
Chapter 25: Market for Asset-Backed Securities
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Q1) In creating the various bond classes (or tranches) in a securitization, there will be rules for distribution of principal and interest. In regards to the transaction structure of an ABS, which of the below statements is FALSE?
A) The transaction structure of an ABS is designed to create bond classes with investment characteristics that are less attractive to institutional investors.
B) In creating the various bond classes (or tranches) in a securitization, there will be rules for distribution of principal and interest.
C) Credit enhancement levels are determined relative to a specific rating desired by the seller/servicer for a security by each rating agency.
D) Typically in a securitization, there are at least two classes of bondholders: senior bond classes and subordinate bond classes.
Q2) The assets that are securitized can have a fixed rate or a floating rate, which in turn impacts the structure in terms of the coupon rate for the bonds issued. Illustrate this.
Q3) All loans must be serviced. What does servicing involve? What is the servicer responsible for?
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Chapter 26: Financial Futures Markets
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Q1) In regards to interest rate futures contracts, which of the below statements is FALSE?
A) Interest rate futures contracts can be classified by the maturity of their underlying security.
B) Short-term interest rate futures contracts have an underlying security that matures in less than one year.
C) The maturity of the underlying security of long-term futures contracts exceeds one year.
D) A few of the major financial markets outside the United States have similar futures contracts in which the underlying security is a fixed-income security issued by the central government.
Q2) A futures contract is an agreement between a buyer and a seller in which the buyer agrees to take delivery of something at the futures price at the settlement date and the seller agrees to make delivery.
A)True
B)False
Q3) Describe a Eurodollar futures contract. Illustrate the minimum price fluctuation for this contract.
Q4) What is a forward contract? How does it differ from a futures contract?
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Chapter 27: Options Markets
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Q1) ________ can be used to ________ against a decline in the price of the ________ instrument.
A) A call option; hedge; underlying
B) A put option; hedge; underlying
C) A call option; speculate; primary
D) A put option; speculate; secondary
Q2) One distinction between futures and options contracts is that ________ to an option contract ________ to transact at a later date.
A) one party; is not obligated
B) both parties; are not obligated
C) one party; is obligated
D) both parties; are obligated
Q3) The date after which an option is void is called the ________.
A) termination date.
B) maturity date.
C) cessation date.
D) expiration period.
Q4) Comment on the differences between futures and options contracts.
Q5) Differentiate between a call option and a put option.
Q6) Describe and summarize the meaning of the four option positions.
Page 29
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Chapter 28: Pricing of Futures and Options Contracts
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Q1) All other factors equal, the ________ the expected volatility (as measured by ________) of the price of the underlying asset, the more an investor would be willing to pay for the option, and the more an option writer would demand for it.
A) lower; the variance
B) lower; the standard deviation
C) greater; beta
D) greater; the standard deviation
Q2) To determine the value of the ________, H, we must know C and Cd. These two values are equal to the difference between the price of the asset and the strike price in the two possible states.
A) put option
B) call option
C) hedge ratio
D) payoff ratio
Q3) According to the arbitrage arguments, what information determines the equilibrium or theoretical futures price?
Q4) To determine the value of the hedge ratio, H, what two values must we know? What are these values equal to?
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Chapter 29: The Applications of Futures and Options
Contracts
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Q1) Interest rate options or options on interest rate futures can be used by investors and issuers to speculate on adverse interest rate movements but still benefit from a favorable interest rate movement.
A)True
B)False
Q2) Market participants can use interest rate futures to control interest rate movements, speculate on a portfolio's risk exposure to interest rate changes, hedge against adverse interest rate movements, and enhance returns when futures are mispriced.
A)True
B)False
Q3) Because futures are highly leveraged and transactions costs are less than in the cash market, market participants can alter their risk exposure to a market (stock or bond) less efficiently in the futures market.
A)True
B)False
Q4) A long hedge is also known as a buy hedge. A)True
B)False
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Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
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Q1) An future rate swap is an agreement whereby two counterparties agree to exchange periodic interest payments based on a notional principal amount.
A)True
B)False
Q2) Which of the below statements is FALSE?
A) The buyer of an FRA benefits if the reference rate increases and the seller benefits if the reference rate decreases.
B) In a futures contract, the buyer benefits from a rising rate while the seller benefits from a falling rate.
C) In the case of an FRA, the underlying is a rate with the buyer gaining if the rate increases and losing if the rate decreases.
D) In a futures contract the underlying is a fixed-income instrument.
Q3) In addition to the generic swap structure where one party pays fixed and the other floating, there are swaps with varying notional principal amounts, basis swaps (floating payments made by both parties), constant maturity swaps, swaptions, and forward start swaps.
A)True
B)False
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Chapter 31: Market for Credit Risk Transfer Vehicles: Credit
Derivatives and Collateralized Debt Obligations
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Q1) In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.
A) a minimum amount.
B) a maximum amount.
C) an interest-free amount.
D) a perfect amount.
Q2) The payment by the credit protection seller if a credit event occurs may ________.
A) not be a predetermined fixed amount.
B) be determined by the decline in value of the reference entity.
C) be determined by the increase in value of the reference obligation.
D) be determined by the decline in value of the reference obligation.
Q3) The long maturity of CLNs reflects the desire of investors to take a credit view for such a time period.
A)True
B)False
Q4) Unlike a single-name credit default swap, the preferred settlement term for a basket default swap is cash settlement. Describe this cash settlement in terms of the termination value.
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Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
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Q1) Members of the EMU are said to be part of "Euroland" or the "euro zone" because the euro became the only legal currency.
A)True
B)False
Q2) A key factor affecting the expectation of changes in a country's exchange rate with another currency is the relative ________ of the two countries.
A) known inflation rate
B) known purchasing power
C) expected inflation rate
D) expected risk-free rate
Q3) To qualify as a participating country in the EMU requires that a country satisfy certain economic standards. Describe these standards. Have they been achieved?
Q4) Dealers in the foreign exchange market realize revenue from commissions charged on foreign exchange transactions.
A)True
B)False
Q5) What is the spot (or cash) exchange rate market? Are exchange rates free to float?
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