Foreign Exchange Markets
Test Bank
Course Introduction
Foreign Exchange Markets explores the structure, function, and operation of global currency markets. The course covers the mechanisms of foreign exchange trading, the determination of exchange rates, and the factors affecting currency values, such as macroeconomic indicators, geopolitical events, and monetary policy. Students examine spot and forward markets, currency derivatives, and the role of arbitrage and speculation. Practical aspects such as risk management, hedging strategies, and the impact of exchange rates on international business and investment decisions are also discussed, providing students with a comprehensive understanding of how foreign exchange markets influence the global economy.
Recommended Textbook
International Financial Management 2nd Edition by Geert J Bekaert
Available Study Resources on Quizplus
21 Chapters
665 Verified Questions
665 Flashcards
Source URL: https://quizplus.com/study-set/389
Page 2
Chapter 1: Globalization and the Multinational Corporation
Available Study Resources on Quizplus for this Chatper
33 Verified Questions
33 Flashcards
Source URL: https://quizplus.com/quiz/6776
Sample Questions
Q1) What is the name of the international organization that was founded to ensure the stability of the international system of payments and exchange rates among national currencies?
A) The International Monetary Fund
B) The World Bank
C) The World Trade Organization
D) The International Finance Corporation
Answer: A
Q2) How can financial globalization be blamed for the loss of fiscal autonomy to a nation?
Answer: The loss of fiscal autonomy is often seen as another by-product of globalization of financial markets.In particular,multinational corporations,hedge fund managers,and institutional investors become more mobile as globalization increases making capital "footloose" and subsequently,some would say,the loss of a nation's fiscal autonomy since these groups can move funds to avoid taxation.
Q3) Institutional investors play important roles in financial markets.Explain.
Answer: Institutional investors such as insurance companies,retirement funds,and mutual funds have the ability to help determine security prices,the cost of equity and debt.
To view all questions and flashcards with answers, click on the resource link above.
Page 3
Chapter 2: The Foreign Exchange Market
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6787
Sample Questions
Q1) What do the market makers in the currency markets provide?
A) insurance against default by the buyers
B) solvency
C) stability
D) liquidity
Answer: D
Q2) When transactions are conducted on the spot currency markets,________ business day(s)is(are)allowed for contract settlement.
A) one
B) two
C) five
D) ten
Answer: B
Q3) The fourth decimal place in a dealer's quote in the trade jargon is known as the A) pip.
B) round trip.
C) spread.
D) haircut.
Answer: A
To view all questions and flashcards with answers, click on the resource link above.
Page 4
Chapter 3: Forward Markets and Transaction Exchange Risk
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6790
Sample Questions
Q1) One important purpose of the forward markets for foreign exchange allows global traders to protect themselves by ________.
A) hedging
B) arbitraging
C) speculating
D) preventing default
Answer: A
Q2) What is a forward-forward swap?
Answer: A forward-forward swap involves either the purchase of foreign currency at a short maturity forward against the sale of the same amount of foreign currency at a longer maturity forward,or the sale of foreign currency at the short maturity forward against the purchase of the same amount of foreign currency at a longer maturity forward.
Q3) What is meant by the conditional future spot rate?
A) the forward rate
B) the forecasted future spot rate
C) the conditional variance of the probability distribution of future spot rates
D) the conditional mean of the probability distribution of future spot rates
Answer: D
To view all questions and flashcards with answers, click on the resource link above.
Page 5
Chapter 4: The Balance of Payments
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6791
Sample Questions
Q1) The sale of American computers to the Spanish government shows up as
A) a debit on the official reserves account.
B) a credit on the official reserves account.
C) a credit on the trade account.
D) a debit on the current account.
Q2) Into what subcategory in the current account do you find the export and import of education,insurance,consulting,telecommunications,royalties on films,etc?
A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services
Q3) Tourism would show up on the
A) merchandise account.
B) current account.
C) capital account.
D) A and C.
Q4) Explain the double-entry system of the balance of payments.
Q5) What represents a credit to the investment income account of the balance of payments?
To view all questions and flashcards with answers, click on the resource link above. Page 6
Chapter 5: Exchange Rate Systems
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6792
Sample Questions
Q1) What is the most likely outcome if a central bank suddenly prints a large amount of new money?
A) no change in the inflation rate
B) higher inflation
C) recession
D) prosperity
Q2) Identify the most important components of the official international reserves of a central bank?
Q3) In the ________ exchange rate system,the currency has limited flexibility and the rate is kept within a fixed band.
A) currency board
B) floating exchange rate
C) target zone
D) pegged exchange rate system
Q4) Why are pegged exchange rates often overvalued and difficult to governments to maintain?
Q5) Describe the Bretton Woods currency system?
Q6) What is the relationship of currency risk in a floating exchange rate system to the future exchange rate changes?
Page 7
To view all questions and flashcards with answers, click on the resource link above.
Chapter 6: Interest Rate Parity
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/6793
Sample Questions
Q1) Given an example of how a money market hedge is constructed?
Q2) If volatility in foreign exchange markets,what is the relationship to the bid-ask spread?
Q3) When the possibility exists that the government of a nation may impose some form of exchange controls or tax on foreign investment,the risk is known as ________ risk.
A) political
B) exchange controls
C) business risk
D) government
Q4) If the underlying transaction gives you a liability,denominated in foreign currency,the general principal behind a money market hedge states you need an equivalent ________ in the money market to provide a hedge.
A) liability
B) asset
C) forward contract
D) foreign bank account
Q5) Identify an external currency market and how it operates?
Q6) Explain the bid-ask spread in the external currency market?
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Speculation and Risk in the Foreign Exchange
Market
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6794
Sample Questions
Q1) What does the "carry trade" term mean?
A) Borrow in the domestic currency to earn only the higher yield of the dollar implied by the regression.
B) Borrow in the foreign currency to earn only the expected capital appreciation of the dollar implied by the regression.
C) Borrow in the domestic currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the regression.
D) Borrow in the foreign currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the regression.
Q2) To determine the risk premium associated with an asset's expected return,two components of the return are usually cited,only the first,the covariance of the asset's return with the market portfolio,is used,because ________.
A) the risk associated with the asset depends on the market risk
B) it is the only part of the asset's expected return that has risk
C) the risk of the second component can be diversified away
D) the market risk is the most difficult to calculate
Q3) What is the main determinant of the volatility of forward market returns?
To view all questions and flashcards with answers, click on the resource link above.
Page 9
Chapter 8: Purchasing Power Parity and Real Exchange
Rates
Available Study Resources on Quizplus for this Chatper
33 Verified Questions
33 Flashcards
Source URL: https://quizplus.com/quiz/6795
Sample Questions
Q1) If people expect that their future purchasing power will decline,what will happen to the exchange rate today?
Q2) The version of purchasing power parity that states the exchange rates will adjust to equalize the internal and external purchasing power of a currency is known as the
A) relative purchasing power parity
B) equilibrium purchasing power parity
C) absolute purchasing power parity
D) real exchange rate equilibrium
Q3) Under what conditions could the law of one price be violated?
Q4) All of the following options are some of the factors that cause deviations from absolute PPP EXCEPT:
A) transaction costs.
B) non-traded goods.
C) balance of payments.
D) changes in relative prices.
Q5) What effects do deviations from the law of one price have on absolute purchasing power parity?
Q6) Explain what is meant by the real exchange rate?
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Measuring and Managing Real Exchange Risk
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6796
Sample Questions
Q1) The development of what marketing strategy helps in situations of real exchange risk because consumers will not switch to competitors' products that enjoy a temporary pricing benefit from a favorable fluctuation in the exchange rate?
A) market entry decisions
B) the frequency of price adjustments
C) brand loyalty
D) pricing policy
Q2) Why is the pass-through from changes in exchange rates to changes in the prices of products not one-for-one?
Q3) Another name for operating exposure is ________ exposure.
A) translation
B) sovereign risk
C) accounting
D) economic
Q4) When would be the best time for a firm to enter a foreign market as an exporter?
A) given a change in real exchange rates, when foreign currencies are weak
B) given a change in real exchange rates, when foreign currencies are strong
C) given no change in real exchange rates, when foreign currencies are weak
D) given no change in real exchange rates, when foreign currencies are strong
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Exchange Rate Determination and Forecasting
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6777
Sample Questions
Q1) Describe how the macroeconomic fundamental,money supply,affects exchange rates.
Q2) A higher nominal interest rate in one country indicates the fact that the country's currency was expected to ________.
A) appreciate
B) evaluate
C) devalue
D) depreciate
Q3) The following three conditions together with the Fisher Hypothesis refer to as the international parity conditions EXCEPT:
A) covered interest rate parity.
B) nominal interest rate parity.
C) purchasing power parity.
D) uncovered interest rate parity.
Q4) A summary statistical measure frequently used when forecasting exchange rates is known as the
A) standard deviation.
B) mean.
C) mean absolute error.
D) mode.
To view all questions and flashcards with answers, click on the resource link above. Page 12
Chapter 11: International Debt Financing
Available Study Resources on Quizplus for this Chatper
33 Verified Questions
33 Flashcards
Source URL: https://quizplus.com/quiz/6778
Sample Questions
Q1) How has Basel II affected the capital charge of a loan to another bank and a loan to a large MNC?
Q2) Which type of bond is denominated in one or more currencies but is traded in external markets outside the borders of the countries issuing the currencies?
A) international bond
B) domestic bond
C) Eurobond
D) foreign bond
Q3) How is the final payment made for a dual-currency bond?
Q4) Which one of the two main segments of the international bond market has the least local regulation? Why?
Q5) What are the major features of the proposed Basel III?
Q6) Which of the following represent liabilities to a bank?
A) deposits it accepts from its customers and securities it buys
B) deposits it accepts from its customers, the borrowing it does in security markets and its equity capital
C) the borrowing it does in security markets and the loans it provides
D) loans to customers
Q7) What are the three main sources of financing for any firm?
Page 13
To view all questions and flashcards with answers, click on the resource link above.
Chapter 12: International Equity Financing
Available Study Resources on Quizplus for this Chatper
31 Verified Questions
31 Flashcards
Source URL: https://quizplus.com/quiz/6779
Sample Questions
Q1) Which one of the following stock markets was almost 40% of the world's stock market capitalization at the end of 2005?
A) the United Kingdom
B) the United States
C) France
D) Japan
Q2) ________,unlike ADRs,can trade across many markets and settle in the currency of each market.
A) Global registered shares
B) Global depository receipts
C) Euro equities
D) Cross-listed stock
Q3) When a firm issues shares in multiple foreign markets,sometimes simultaneously with distribution in the domestic market,the issue is part of the
A) external equity market.
B) Euro-equity market.
C) depositary receipt market.
D) emerging market.
Q4) What is distinguishes a public from a banker's bourse?
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: International Capital Market Equilibrium
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6780
Sample Questions
Q1) What are some benefits of a portfolio that is internationally diversified?
Q2) When a country unexpectedly opens its capital markets to the world economy,the real interest rate in the country should ________ dramatically.
A) rise
B) fall
C) segment
D) stabilize
Q3) There has been a gradual increase in the correlations between the ________ that may be related to increased economic and financial integration.
A) NAFTA countries
B) Southeast Asian countries
C) Sub-Saharan countries
D) G7
Q4) What is the name for the process that allows inward and outward foreign equity investment?
A) equity market liberalization
B) market segmentation
C) market liberalization
D) market integration
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Country and Political Risk
Available Study Resources on Quizplus for this Chatper
31 Verified Questions
31 Flashcards
Source URL: https://quizplus.com/quiz/6781
Sample Questions
Q1) ________ is the risk that a government action will negatively affect a company's cash flows.
A) Political risk
B) Economic risk
C) Social risk
D) Expropriation
Q2) Which one of the following actions represents the most extreme form of political risk to a multinational firm?
A) expropriation
B) embargo
C) currency controls
D) protective tariffs
Q3) Which one of the following is a method to minimize the chance that political risk events will adversely affect the firm?
A) focus on the long term
B) rely on common available supplies
C) use local resources
D) refuse to bargain with the government
Q4) What are some indicators of country health?
To view all questions and flashcards with answers, click on the resource link above. Page 16
Chapter 15: International Capital Budgeting
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6782
Sample Questions
Q1) Which one of the following would most likely be caused by the financial side effects of a project?
A) the costs of financial distress
B) subsequent new projects
C) cannibalization of exports
D) an end to licensing revenues to the parent
Q2) Issuing equity to raise capital is expensive because in addition to the compensation the financial intermediary requires,there will also be an expense as a result of the
A) government taxes on the equity raise.
B) foreign exchange rate change.
C) fees charged by the Securities and Exchange Commission.
D) underwriting discount.
Q3) If projects are mutually exclusive,the project with the ________ should be accepted by the firm.
A) lowest ANPV
B) highest ANPV
C) highest return
D) lowest tax burden
Q4) Based on their computation what is the difference between EBIT and NOPLAT?
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Additional Topics in International Capital Budgeting
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6783
Sample Questions
Q1) As an international financial analyst,you inform your superiors that the domestic currency discount rate can be used to do capital budgeting for a foreign project? Explain why.
Q2) What is the name of the approach that discounts the after-tax free cash flows to stockholders at the required rate of return on the equity to derive the value of a project?
A) weighted average cost of capital
B) flow-to-equity
C) adjusted net present value
D) unlevered cash flow
Q3) ________ occurs when managers refuse to take on low-risk projects because too much of the value from the project would accrue to the creditors.
A) Financial distress
B) A lack of plowback
C) Cannabilization of exports
D) Underinvestment
Q4) Explain what is meant by the weighted average cost of capital?
Q5) Explain how equity is a residual claimant in the flow-to-equity approach to capital budgeting?
18
To view all questions and flashcards with answers, click on the resource link above.
Chapter 17: Risk Management and the Foreign Currency
Hedging Decision
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6784
Sample Questions
Q1) Suppose that the value of a firm increases when the euro strengthens relative to the dollar,an appropriate hedge would be to
A) find another currency that is highly correlated to sell forward.
B) buy euros forward.
C) liquidate euro liabilities.
D) convert some of the firm's debt into euros.
Q2) According to the Wharton/CIBC Survey of 1998 on hedging,only when a firm is sufficiently large to overcome the fixed costs of hedging does the firm
A) create an international division responsible for hedging.
B) institute tax shelters using hedging devices.
C) institute a hedging policy.
D) hold only the cash manager responsible for hedging.
Q3) ________ are financial contracts whose values depend on the values of some underlying asset price.
A) Margin calls
B) Derivative securities
C) Tax codes
D) Tax shields
Q4) Why is hedging considered a cost center and not a profit center?
Page 19
To view all questions and flashcards with answers, click on the resource link above.
Chapter 18: Financing International Trade
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6785
Sample Questions
Q1) What is the name of the company that purchases the accounts receivable of other firms?
A) shipping company
B) common carrier
C) export factor
D) insurance carrier
Q2) What are four different methods by which an exporter can accept payment from an importer? List them in increasing order of risk to the importer.
Q3) If a bank accepts a ________ draft,it may become a ________.
A) time, banker's acceptance
B) sight, banker's acceptance
C) time, trade acceptance
D) sight, trade acceptance
Q4) What are the advantages of a documentary credit to an exporter and an importer?
Q5) In which of the two forms of payment does the exporter not give up control of the merchandise until paid: a documents against payment collection or a documents against acceptance collection?
Q6) What is a banker's acceptance? How is one created? Whose liability is it?
Q7) What is the purpose of marine insurance?
Page 20
To view all questions and flashcards with answers, click on the resource link above.
Chapter 19: Managing Net Working Capital
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6786
Sample Questions
Q1) When the parent lends to an affiliate in order to circumvent blocked fund policies of governments in affiliate countries,a financial intermediary is often used such as a(n)________.
A) eurobank
B) investment bank
C) netting center
D) international bank
Q2) The prices a multinational affiliate may charge another affiliate when selling inputs or services to them are known as ________.
A) royalties
B) transfer prices
C) fees
D) dividends
Q3) Which one of the following methods would the U.S.Internal Revenue Service accept to establish an arm's length price?
A) the comparable controlled price method
B) the wholesale price method
C) in-house price method
D) the comparable profits method
To view all questions and flashcards with answers, click on the resource link above.
Page 21
Chapter 20: Foreign Currency Futures and Options
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/6788
Sample Questions
Q1) The last traded futures price in which case appointed traders in the pit establish the value of the futures price by consensus is know as the A) settle price.
B) maintenance margin.
C) open interest.
D) initial margin.
Q2) The difference between the current spot price and the futures price is known as the A) spread.
B) barrier.
C) basis.
D) open interest.
Q3) Which one of the following is an advantage to the investor of a currency futures contract as compared to a forward contract?
A) more flexibility in contract size
B) more liquidity when the investor wishes to sell the contract
C) more currencies available
D) more payment dates
Q4) What effects does "marking to market" have on futures contracts?
To view all questions and flashcards with answers, click on the resource link above.
Page 22
Chapter 21: Interest Rates and Foreign Currency Swaps
Available Study Resources on Quizplus for this Chatper
31 Verified Questions
31 Flashcards
Source URL: https://quizplus.com/quiz/6789
Sample Questions
Q1) A currency swap is equivalent to a
A) currency option, with the exercise price equal to the current spot rate.
B) longdated forward foreign exchange contract, where the forward rate is the current spot rate.
C) interest rate swap, where the basis is the differential between the fixed and floating interest rates.
D) short term currency futures contract.
Q2) What are some factors that underlie the economic benefits of swaps?
Q3) What is the name of the clause in a back-to-back loan that stipulates that if one party defaults on a payment,the other party can withhold corresponding payments?
A) right of offset
B) topping-off
C) all-in-cost
D) with-recourse
Q4) Swaps are primarily of value because they permit firms to A) tap new capital markets.
B) reduce risks.
C) reduce taxes.
D) both A and B
To view all questions and flashcards with answers, click on the resource link above. Page 23