Multinational Business Finance 14th Edition By David K. Eiteman - Test Bank

Multinational Business Finance 14th Edition By David K. Eiteman – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Multinational Business Finance, 14e (Eiteman)

Chapter 5   The Foreign Exchange Market

 

5.1   Functions of the Foreign Exchange Market

 

1) Which of the following is NOT true regarding the market for foreign exchange?

1. A) The market provides the physical and institutional structure through which the money of one country is exchanged for another.
2. B) The rate of exchange is determined in the market.
3. C) Foreign exchange transactions are physically completed in the foreign exchange market.
4. D) All of the above are true.

Answer:  D

Diff: 1

L.O.:  5.1 Functions of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

2) A/An ________ is an agreement between a buyer and seller that a fixed amount of one currency will be delivered at a specified rate for some other currency.

1. A) Eurodollar transaction
2. B) import/export exchange
3. C) foreign exchange transaction
4. D) interbank market transaction

Answer:  C

Diff: 1

L.O.:  5.1 Functions of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

3) The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes.

1. A) futures market
2. B) federal open market
3. C) foreign exchange market
4. D) LIBOR

Answer:  C

Diff: 1

L.O.:  5.1 Functions of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

 

4) Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?

1. A) the transfer of purchasing power between countries
2. B) obtaining or providing credit for international trade transactions
3. C) minimizing the risks of exchange rate changes
4. D) All of the above were identified as functions of the foreign exchange market.

Answer:  D

Diff: 1

L.O.:  5.1 Functions of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

5) Business firms in countries with exchange controls, for example, China (mainland), often must surrender foreign exchange earned from exports to the central bank at the daily fixing price.

Answer:  TRUE

Diff: 1

L.O.:  5.1 Functions of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

6) The foreign exchange market provides the physical and institutional structure through which three typical functions are accomplish. List and explain three functions of the foreign exchange market.

Answer:  The foreign exchange market is the mechanism by which participants transfer purchasing power between countries by exchanging money, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes. 1) The transfer of purchasing power is necessary because international trade and capital trans-actions normally involve parties living in countries with different national currencies. Usually each party wants to deal in its own currency, but the trade or capital transaction can be in-voiced in only one currency. Hence, one party must deal in a foreign currency. 2) Because the movement of goods between countries takes time, inventory in transit must be financed. The foreign exchange market provides a source of credit. Specialized instruments, such as bankers’ acceptances and letters of credit are available to finance international trade. 3) The foreign exchange market provides “hedging” facilities for transferring foreign exchange risk to someone else more willing to carry risk.

Diff: 1

L.O.:  5.1 Functions of the Foreign Exchange Market

Skill:  Conceptual

AACSB:  Application of knowledge

 

 

5.2   Market Participants

 

1) While trading in foreign exchange takes place worldwide, the major currency trading centers are located in:

1. A) London, New York, and Tokyo.
2. B) New York, Zurich, and Bahrain.
3. C) Paris, Frankfurt, and London.
4. D) Los Angeles, New York, and London.

Answer:  A

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

2) The authors identify two tiers of foreign exchange markets:

1. A) bank and nonbank foreign exchange.
2. B) commercial and investment transactions.
3. C) interbank and client markets.
4. D) client and retail market.

Answer:  C

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

3) It is characteristic of foreign exchange dealers to:

1. A) bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale.
2. B) act as market makers, willing to buy and sell the currencies in which they specialize.
3. C) trade only with clients in the retail market and never operate in the wholesale market for foreign exchange.
4. D) All of the above are characteristics of foreign exchange dealers.

Answer:  B

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

 

4) Which of the following may be participants in the foreign exchange markets?

1. A) bank and nonbank foreign exchange dealers
2. B) central banks and treasuries
3. C) speculators and arbitrageurs
4. D) all of the above

Answer:  D

Diff: 1

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

5) ________ seek to profit from trading in the market itself rather than having the foreign exchange transaction being incidental to the execution of a commercial or investment transaction.

1. A) Speculators and arbitrageurs
2. B) Foreign exchange brokers
3. C) Central banks
4. D) Treasuries

Answer:  A

Diff: 1

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

6) In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets.

1. A) wholesalers; retailers
2. B) central banks; treasuries
3. C) speculators; arbitrageurs
4. D) dealers; brokers

Answer:  C

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

7) Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase.

1. A) central banks; treasuries
2. B) dealers; brokers
3. C) brokers; dealers
4. D) speculators; arbitrageurs

Answer:  B

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

8) ________ are agents who facilitate trading between dealers without themselves becoming principals in the transaction.

1. A) Central banks
2. B) Foreign exchange brokers
3. C) Arbitrageurs
4. D) Foreign exchange dealers

Answer:  B

Diff: 1

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

9) Because the market for foreign exchange is worldwide, the volume of foreign exchange currency transactions is level throughout the 24-hour day.

Answer:  FALSE

Diff: 1

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

10) Foreign exchange markets are a relatively recent phenomenon, beginning with the agreement at Bretton Woods.

Answer:  FALSE

Diff: 1

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Conceptual

AACSB:  Application of knowledge

 

 

11) Dealers in foreign exchange departments at large international banks act as market makers and maintain inventories of the securities in which they specialize.

Answer:  TRUE

Diff: 1

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

12) Currency trading lacks profitability for large commercial and investment banks but is maintained as a service for corporate and institutional customers.

Answer:  FALSE

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

13) The primary motive of foreign exchange activities by most central banks is profit.

Answer:  FALSE

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

14) Banks, and a few nonbank foreign exchange dealers, operate ONLY in the interbank markets.

Answer:  FALSE

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

15) Dealers in the foreign exchange departments of large international banks often function as “market makers.” Such dealers stand willing at all times to buy and sell those currencies in which they specialize and thus maintain an “inventory” position in those currencies.

Answer:  TRUE

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

16) Currency trading is a service center rather than a profit center for commercial and investment banks.

Answer:  FALSE

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

17) For individuals and firms involved in the import and export of goods and services ,using the foreign exchange market is necessary, but incidental, to their underlying commercial or investment purpose.

Answer:  TRUE

Diff: 2

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

18) Most transactions in the interbank foreign exchange trading are primarily conducted via telecommunication techniques and little is conducted face-to-face.

Answer:  TRUE

Diff: 1

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

19) What are some of the reasons central banks and treasuries enter the foreign exchange markets, and in what important ways are they different from other foreign exchange participants?

Answer:  Central banks and treasuries enter the foreign exchange market to acquire/spend their own foreign exchange reserves and to influence the price at which their own currency is traded. Unlike other market participants, they are not profit oriented. Instead, they may willingly take a loss if they think it is in their best national interest.

Diff: 3

L.O.:  5.2 Structure of the Foreign Exchange Market

Skill:  Conceptual

AACSB:  Application of knowledge

 

5.3   Transactions in the Foreign Exchange Market

 

1) ________ are NOT one of the three categories reported for foreign exchange.

1. A) Spot transactions
2. B) Swap transactions
3. C) Strip transactions
4. D) Futures transactions

Answer:  C

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

 

2) A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange.

1. A) spot
2. B) forward
3. C) futures
4. D) none of the above

Answer:  A

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

3) A ________ transaction in the foreign exchange market requires delivery of foreign exchange at some future date.

1. A) spot
2. B) forward
3. C) swap
4. D) currency

Answer:  B

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

4) A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________.

1. A) buying dollars forward; buying pounds forward
2. B) selling pounds forward; selling dollars forward
3. C) selling pounds forward; buying dollars forward
4. D) selling dollars forward; buying pounds forward

Answer:  C

Diff: 2

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Conceptual

AACSB:  Application of knowledge

 

 

5) A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market.

1. A) “forward against spot”
2. B) “forspot”
3. C) “repurchase agreement”
4. D) “spot against forward”

Answer:  D

Diff: 2

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

6) The ________ is a derivative forward contract that was created in the 1990s. It has the same characteristics and documentation requirements as traditional forward contracts except that they are only settled in U.S. dollars and the foreign currency involved in the transaction is not delivered.

1. A) nondeliverable forward
2. B) dollar only forward
3. C) virtual forward
4. D) internet forward

Answer:  A

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

7) Which of the following is NOT true regarding nondeliverable forward (NDF) contracts?

1. A) NDFs are used primarily for emerging market currencies.
2. B) Pricing of NDFs reflects basic interest rate differentials plus an additional premium charged for dollar settlement.
3. C) NDFs can only be traded by central banks.
4. D) All of the above are true.

Answer:  C

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Conceptual

AACSB:  Application of knowledge

 

 

8) A ________ transaction in the interbank market is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

1. A) spot
2. B) forward-forward
3. C) swap
4. D) futures

Answer:  C

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

9) A spot transaction in the interbank market for foreign exchange would typically involve a two-day delay in the actual delivery of the currencies, while such a transaction between a bank and its commercial customer would not necessarily involve a two-day wait.

Answer:  TRUE

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

10) Nondeliverable Forwards were originally envisioned as a method of currency speculation, but it is now estimated that 70% of NDFs are trading for hedging purposes.

Answer:  FALSE

Diff: 2

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

11) In general, NDF markets normally develop for country currencies having large cross-border capital movements, but still subject to convertibility restrictions.

Answer:  TRUE

Diff: 1

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Conceptual

AACSB:  Application of knowledge

12) NDFs are traded and settled inside the country of the subject currency, and therefore are within the control of the country’s government.

Answer:  FALSE

Diff: 2

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

 

13) A contract to deliver dollars for euros in six months is both “buying euros forward for dollars” and “selling dollars forward for euros.”

Answer:  TRUE

Diff: 2

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

14) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used.

Answer:  Spot transactions are exchanging one currency for another right now. Spot transactions are typically entered into because the parties need to exchange foreign currencies that they have received into their domestic currency, or because they have an obligation that requires them to obtain foreign currency.

Forward foreign exchange transactions are agreements entered into today to exchange currencies at a particular price at some point in the future. Forwards may be speculative or a hedge against unexpected changes in the price of the other currency.

Swaps are the simultaneous purchase and sale of a given amount of a foreign exchange for two different dates. Both transactions are conducted with the same counterparty. A swap may be considered a technique for borrowing another currency on a fully collateralized basis.

Diff: 2

L.O.:  5.3 Transactions in the Foreign Exchange Market

Skill:  Conceptual

AACSB:  Application of knowledge

 

5.4   Size of the Foreign Exchange Market

 

1) Daily trading volume in the foreign exchange market was about ________ per ________ in 2013.

1. A) $5,300 billion; month
2. B) $3,300 billion; month
3. C) $5,300 billion; day
4. D) $3,300 billion; day

Answer:  C

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

2) The greatest volume of daily foreign exchange transactions are:

1. A) spot transactions.
2. B) forward transactions.
3. C) swap transactions.
4. D) This question is inappropriate because the volume of transactions are approximately equal across the three categories above.

Answer:  C

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

3) The United Kingdom and United States together make up nearly ________ of daily currency trading.

1. A) 30%
2. B) 40%
3. C) 50%
4. D) 60%

Answer:  D

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

4) The top three currency pairs traded with the U.S. dollar are:

1. A) U.K. pound, Chinese Yuan, Japanese yen.
2. B) Swiss franc, euro, Japanese yen.
3. C) U.K. pound, euro, Japanese yen.
4. D) euro, Chinese Yuan, Japanese yen.

Answer:  C

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

5) The greatest amount of foreign exchange trading takes place in the following three cities:

1. A) New York, London, and Tokyo.
2. B) New York, Singapore, and Zurich.
3. C) London, Frankfurt, and Paris.
4. D) London, Tokyo, and Zurich.

Answer:  A

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

6) The four currencies that constitute about 80% of all foreign exchange trading are:

1. A) U.K pound, Chinese yuan, euro, and Japanese yen.
2. B) U.S. dollar, euro, Chinese yuan, and U.K. pound.
3. C) U.S. dollar, Japanese yen, euro, and U.K. pound.
4. D) U.S. dollar, U.K. pound, yen, and Chinese yuan.

Answer:  C

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

7) As you might expect, the foreign exchange daily trading volume in in New York City is roughly twice as large as the daily trading volume in London.

Answer:  FALSE

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

8) The low level of interest rates around the globe in recent years, combined with slowing economic growth and new debt issuances, has had a dampening impact on the swap market.

Answer:  FALSE

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

9) Since the global financial crisis of 2008-2009, the Chinese renminbi (yuan) has become the most widely traded currency with the U.S. dollar surpassing the euro, yen, and pound as dollar trading pairs.

Answer:  FALSE

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

10) Swap and forward transactions account for an insignificant portion of the foreign exchange market.

Answer:  FALSE

Diff: 1

L.O.:  5.4 Size of the Foreign Exchange Market

Skill:  Recognition

AACSB:  Application of knowledge

 

5.5   Foreign Exchange Rates and Quotations

 

1) A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate.

1. A) quote; rate
2. B) quote; quote
3. C) rate; quote
4. D) rate; rate

Answer:  C

Diff: 1

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge

 

2) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars per foreign unit.

1. A) European terms; indirect
2. B) American terms; direct
3. C) American terms; European terms
4. D) European terms; American terms

Answer:  D

Diff: 1

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge

 

3) The following is an example of an American term foreign exchange quote:

1. A) $20/£
2. B) €0.85/$
3. C) ¥100/€
4. D) none of the above

Answer:  A

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge

 

 

4) From the viewpoint of a British investor, which of the following would be a direct quote in the foreign exchange market?

2. A) SF2.40/£
3. B) $1.50/£
4. C) £0.55/€
5. D) $0.90/€

Answer:  C

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge

5) A/an ________ quote in the United States would be foreign units per dollar, while a/an ________ quote would be in dollars per foreign currency unit.

1. A) direct; direct
2. B) direct; indirect
3. C) indirect; indirect
4. D) indirect; direct

Answer:  D

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Recognition

AACSB:  Application of knowledge

 

6) If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________.

1. A) £0.699/$; £0.699/$
2. B) $0.699/£; £0.699/$
3. C) £1.43/£; £0.699/$
4. D) £0.699/$; $1.43/£

Answer:  A

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

 

 

7) ________ make money on currency exchanges by the difference between the ________ price, or the price they offer to pay, and the ________ price, or the price at which they offer to sell the currency.

1. A) Dealers; ask; bid
2. B) Dealers; bid; ask
3. C) Brokers; ask; bid
4. D) Brokers; bid; ask

Answer:  B

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge

TABLE 5.1

Use the table to answer following question(s).

 

 

8) Refer to Table 5.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.

1. A) £1.4484/$; $0.6904/£
2. B) $1.4481/£; £0.6906/$
3. C) $1.4484/£; £0.6904/$
4. D) £1.4487/$; $0.6903/£

Answer:  C

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

 

 

9) Refer to Table 5.1. The one-month forward bid price for dollars as denominated in Japanese yen is:

20. A) -¥20.
21. B) -¥18.
22. C) ¥129.74/$.
23. D) ¥129.62/$.

Answer:  D

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

 

10) Refer to Table 5.1. The ask price for the two-year swap for a British pound is:

1. A) $1.4250/£.
2. B) $1.4257/£.
3. C) -$230.
4. D) -$238.

Answer:  B

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

11) Refer to Table 5.1. According to the information provided in the table, the 6-month yen is selling at a forward ________ of approximately ________ per annum. (Use the mid rates to make your calculations.)

2. A) discount; 2.09%
3. B) discount; 2.06%
4. C) premium; 2.09%
5. D) premium; 2.06%

Answer:  C

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

 

 

12) Given the following exchange rates, which of the multiple-choice choices represents a potentially profitable intermarket arbitrage opportunity?

¥129.87/$

€1.1226/$

€0.00864/¥

115. A) ¥115.69/€
116. B) ¥114.96/€
117. C) $0.8908/€
118. D) $0.0077/¥

Answer:  B

Diff: 3

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

 

13) The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of 0.8909/€ to $0.8709/€. Thus, the dollar has ________ by ________.

2. A) appreciated; 2.30%
3. B) depreciated; 2.30%
4. C) appreciated; 2.24%
5. D) depreciated; 2.24%

Answer:  C

Diff: 3

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

 

14) A German firm is attempting to determine the euro/pound exchange rate and has the following exchange rate information: USD/pound = $1.5509/£ and the USD/euro rate = $1.2194/€. Therefore, the euro/pound rate must be:

1. A) £1.2719/€.
2. B) €1.2719/£.
3. C) €0.7316/£.
4. D) €0.7863/£.

Answer:  B

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Analytical

AACSB:  Analytical thinking

15) The European and American terms for foreign currency exchange are square roots of one another.

Answer:  FALSE

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Recognition

AACSB:  Application of knowledge

 

16) When the cross rate for currencies offered by two banks differs from the exchange rate offered by a third bank, a triangular arbitrage opportunity exists.

Answer:  TRUE

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Recognition

AACSB:  Application of knowledge

 

17) A confusing “quirk” of international exchange rates occurs when calculating the percentage change in spot rates from one period to another. The percent change in the spot rate from one period to another when quoted using foreign currency terms is always greater than the percent changes quoted when using home currency terms.

Answer:  FALSE

Diff: 1

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge

 

18) The most commonly quoted currency exchange is that between the U.S. dollar and the European euro. For example, a quotation of EUR/USD 1.2174. The euro is the base currency and the dollar the price currency.

Answer:  TRUE

Diff: 1

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Recognition

AACSB:  Application of knowledge

 

19) Since in the U.S. the home currency is the dollar and the foreign currency is the euro, in New York USD 1.2174 = EUR 1.00 would be a direct quote on the euro and an indirect quote on the dollar.

Answer:  TRUE

Diff: 1

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge

 

20) A bid is the price in one currency at which a dealer will buy another currency. An ask is the price at which a dealer will sell the other currency. Dealers bid (buy) at one price and ask (sell) at a slightly higher price, making their profit from the spread between the prices. List and explain three reasons/factors that could make the spread small.

Answer: The bid-ask spread may be quite large for currencies that are traded infrequently, in small volumes, or both. The spread in wholesale transactions between banks and large corporations is normally smaller than in the retail market. Competition among dealers worldwide narrows the spread between bids and offers and so contributes to making the foreign exchange market “efficient” in the same sense as are securities markets. Other factors that affect the spread are the cost of processing orders, the cost of maintaining an inventory of a particular currency, and the volatility in the value of a currency.

Diff: 2

L.O.:  5.5 Foreign Exchange Rates and Quotations

Skill:  Conceptual

AACSB:  Application of knowledge