290+ International Financial Management Solved MCQs

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Chapter: Unit 1
1.

Recently, the UK experienced an annual balance of trade representing a __________.

A. large surplus (exceeding £100 billion)
B. level of zero
C. small surplus
D. deficit
Answer» D. deficit
discuss
2.

An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.

A. upward
B. downward
C. no
D. upward or downward (depending on the size of the deficit)
Answer» B. downward
discuss
3.

The North American Free Trade Agreement (NAFTA) increased restrictions on:

A. trade between Canada and Mexico.
B. trade between Canada and the U.S.
C. direct foreign investment in Mexico by U.S. firms.
D. none of the above.
Answer» D. none of the above.
discuss
4.

The primary component of the current account is the:

A. balance of trade.
B. balance of capital market flows.
C. balance of money market flows.
D. unilateral transfers.
Answer» A. balance of trade.
discuss
5.

A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:

A. increased trade restrictions outside of North America.
B. lower trade restrictions around the world.
C. uniform environmental standards around the wor
Answer» B. lower trade restrictions around the world.
discuss
6.

______________ is (are) income received by investors on foreign investments in financial assets (securities).

A. Portfolio income
B. Unilateral transfers
C. Direct foreign income
D. Factor income
Answer» D. Factor income
discuss
7.

Based on the text, it should be obvious that markets are__________ in reality, and consequently, monopolistic advantages _________ be exploited.

A. Perfect; may possibly
B. Perfect; cannot
C. Imperfect; may possibly
D. Imperfect; cannot
Answer» C. Imperfect; may possibly
discuss
8.

If countries are highly influential upon each other, the correlations of their economic growth levels would likely be __________. A firm would benefit __________ by diversifying sales among these countries relative to another set of countries that were not influential upon each other.

A. high and positive; more
B. high and positive; less
C. close to zero; more
D. close to zero; less
Answer» C. close to zero; more
discuss
9.

Which of the following is a reason to consider international business?

A. economies of scale.
B. exploit monopolistic advantages.
C. diversification.
D. all of the above
Answer» D. all of the above
discuss
10.

Assume a U.S. firm initiates direct foreign investment in the U.K.. If the British pound is expected to appreciate against the dollar, the dollar value of earnings remitted to the parent should _______. The parent may request that the subsidiary _______ in order to benefit from the expectation about the pound.

A. increase; postpone remitting earnings until the pound strengthens
B. decrease; postpone remitting earnings until the pound strengthens
C. decrease; remit earnings immediately before the pound strengthens
D. increase; remit earnings immediately before the pound strengthens
Answer» A. increase; postpone remitting earnings until the pound strengthens
discuss
11.

A country with high unemployment could best increase its employment by:

A. encouraging foreign firms to establish subsidiaries that produce the same products local firms produce.
B. encouraging foreign firms to establish licensing arrangements for products local firms produce.
C. encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
D. none of the above would reduce employment.
Answer» C. encouraging foreign firms to establish subsidiaries that produce products local firms do not produce.
discuss
12.

Which of the following is not true regarding host government attitudes towards foreign direct investment (FDI)?

A. Host governments may offer incentives to MNCs in the form of subsidies in certain circumstances.
B. Host governments generally perceive FDI as a remedy to eliminate a country's political problems.
C. The ability of a host government to attract FDI is dependent on the country's markets and resources.
D. Some types of FDI will be more attractive to some governments than to others.
Answer» B. Host governments generally perceive FDI as a remedy to eliminate a country's political problems.
discuss
13.

When a firm perceives that a foreign currency is ________, the firm may attempt direct foreign investment in that country, as the initial outlay should be relatively _______.

A. overvalued; high
B. overvalued; low
C. undervalued; high
D. undervalued; low
Answer» D. undervalued; low
discuss
14.

To enter markets where superior profits are possible, an MNC should:

A. acquire a competitor that has controlled its local market.
B. establish a subsidiary or acquire a competitor in a new market.
C. establish a subsidiary in a market where tougher trade restriction will adversely affect the firm's export volume.
D. establish subsidiaries in markets whose business cycles differ from those where existing subsidiaries are based.
Answer» A. acquire a competitor that has controlled its local market.
discuss
15.

When economic conditions of two countries are ________, then a firm would _______ its risk by operating in both countries instead of concentrating just in one.

A. highly correlated; reduce
B. not highly correlated; reduce
C. not highly correlated; not reduce
D. none of the above
Answer» C. not highly correlated; not reduce
discuss
16.

Consider an exporter that sells its accounts receivables off to another firm that becomes responsible for obtaining cash from the various importers. This reflects:

A. accounts receivable financing.
B. consignment.
C. factoring.
D. a letter of credit.
Answer» C. factoring.
discuss
17.

Consider an exporter that is willing to send goods to the importer without a guaranteed payment by the bank. The bank provides a loan to the exporter that is backed by the value of the exported goods. This reflects:.

A. accounts receivable financing.
B. forfaiting.
C. factoring.
D. a letter of credit.
Answer» A. accounts receivable financing.
discuss
18.

A ________ provides a summary of freight charges and conveys title to the merchandise.

A. letter of credit
B. banker's acceptance
C. bill of lading
D. bill of exchange
Answer» C. bill of lading
discuss
19.

With _______, the exporter ships the goods to the importer while still retaining actual title to the merchandise.

A. a letter of credit arrangement
B. an open account arrangement
C. a draft arrangement
D. a consignment arrangement
Answer» D. a consignment arrangement
discuss
20.

A bill of exchange requesting the bank to pay the face amount upon presentation of documents is a:

A. banker's acceptance.
B. time draft.
C. letter of credit.
D. sight draft.
Answer» D. sight draft.
discuss
21.

Countertrade represents foreign trade:

A. restrictions imposed by the government on imports from another country.
B. restrictions imposed by the government on exports sent from the country.
C. transactions that force the sales of goods of one country to be linked to the purchase or exchange of goods from the country.
D. financing provided to an exporter in exchange for goods provided to the creditor by the exporter.
Answer» C. transactions that force the sales of goods of one country to be linked to the purchase or exchange of goods from the country.
discuss
22.

Which of the following is not a payment method used for international trade?

A. consignment.
B. open account.
C. factoring.
D. draft.
Answer» C. factoring.
discuss
23.

Which of the following is not true regarding letters of credit?

A. They are issued by banks on behalf of the importer promising to pay the exporter.
B. A revocable letter of credit can be cancelled or revoked at any time without prior notification to the beneficiary.
C. They guarantee that the goods shipped are the goods purchas
Answer» C. They guarantee that the goods shipped are the goods purchas
discuss
24.

A banker's acceptance is a draft drawn on and accepted by a(n) __________.

A. bank
B. importer
C. exporter
D. none of the above
Answer» A. bank
discuss
25.

A(n) ___________ is an unconditional promise drawn by one party, instructing the buyer to pay the face amount upon presentation.

A. draft
B. bill of lading
C. trade acceptance
D. letter of credit
Answer» A. draft
discuss
26.

In balance of payments accounting, a credit entry for the home country is

A. an international transaction in which foreigners make payments to residents of the home country
B. one in which residents of the home country make payments for foreigners
C. one which results from an import of goods into the home country
D. one which results from an outflow of capital from the home country to a foreign country
Answer» A. an international transaction in which foreigners make payments to residents of the home country
discuss
27.

If the value of exports for a country is $35,500,000 and the value of imports is $35,000,000, the balance of trade can be described as

A. in surplus but unfavorable
B. showing a gain in real goods but in deficit
C. in deficit and favorable
D. in surplus, favorable and +$500,000
Answer» D. in surplus, favorable and +$500,000
discuss
28.

All of the following statements are explanations of the reason for short-term capital transfers from Country X to Country Y EXCEPT

A. Political instability in Country X
B. Lower interest rates in Country X
C. Lower interest rates in Country Y
D. Country X has made it known that it is considering devaluation of its currency
Answer» C. Lower interest rates in Country Y
discuss
29.

Multinational firms face exposure to many different types of international risk. Which of the following is not a type of exposure?

A. diversifiable risk
B. political risk
C. foreign economies
D. exchange rate movements
Answer» C. foreign economies
discuss
30.

A firms expects to receive $20,000 from domestic operations and 20,000 British pounds (£) from a business in England. If the pound's value is $1.25, the expected total dollar cash flows are:

A. $40,000
B. $36,000
C. $45,000
D. $20,000
Answer» C. $45,000
discuss
31.

When a country realizes a deficit on its current account:

A. Its net foreign investment position becomes positive
B. It becomes a net demander of funds from other countries
C. It realizes an excess of imports over exports on goods and services
D. It becomes a net supplier of funds to other countries
Answer» B. It becomes a net demander of funds from other countries
discuss
32.

Reducing a current account deficit requires a country to:

A. Increase private saving relative to investment
B. Increase private consumption relative to saving
C. Increase private investment relative to consumption
D. Increase private investment relative to saving
Answer» A. Increase private saving relative to investment
discuss
33.

Reducing a current account deficit requires a country to:

A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease private investment relative to saving
C. Decrease the government’s deficit increase private investment relative to saving
D. Decrease the government’s deficit and decrease private investment relative to saving
Answer» D. Decrease the government’s deficit and decrease private investment relative to saving
discuss
34.

Reducing a current account surplus requires a country to:

A. Increase the government’s deficit and increase private investment relative to saving
B. Increase the government’s deficit and decrease private investment relative to saving
C. Decrease the government’s deficit and increase private investment relative to saving
D. Decrease the government’s deficit and decrease private investment relative to saving
Answer» A. Increase the government’s deficit and increase private investment relative to saving
discuss
35.

Concerning a country’s business cycle, rapid growth of production and employment is commonly associated with:

A. Large or growing trade deficits and current account deficits
B. Large or growing trade deficits and current account surpluses
C. Small or shrinking trade deficits and current account deficits
D. Small or shrinking trade deficits and current account surpluses
Answer» A. Large or growing trade deficits and current account deficits
discuss
36.

The burden of a current account deficit would be the least if a nation uses what it borrows to finance:

A. Unemployment compensation benefits
B. Social Security benefits
C. Expenditures on food and recreation
D. Investment on plant and equipment
Answer» D. Investment on plant and equipment
discuss
37.

On the balance-of-payments statements, merchandise imports are classified in the:

A. Current account
B. Capital account
C. Unilateral transfer account
D. Official settlements account
Answer» A. Current account
discuss
38.

The balance of international indebtedness is a record of a country’s international:

A. Investment position over a period of time
B. Investment position at a fixed point in time
C. Trade position over a period of time
D. Trade position at a fixed point in time
Answer» B. Investment position at a fixed point in time
discuss
39.

Which of the following exchange rate policies uses a target exchange rate, but allows the target to change?

A. fixed exchange rate
B. flexible exchange rate
C. crawling peg
D. moving target
Answer» C. crawling peg
discuss
40.

A firm that buys foreign exchange in order to take advantage of higher foreign interest rates is

A. speculating.
B. demonstrating purchasing power parity.
C. engaging in interest rate arbitrage.
D. responding to fluctuations in the business cycle.
Answer» B. demonstrating purchasing power parity.
discuss
41.

When an individual or firm in a particular country requests that a bank sell foreign exchange, the bank will probably

A. call a foreign bank and arrange a purchase.
B. call the central bank and arrange a purchase.
C. call another bank customer with foreign exchange holdings.
D. call another domestic bank and arrange a purchase.
Answer» A. call a foreign bank and arrange a purchase.
discuss
42.

In order to protect against foreign exchange risk, firms can use

A. the spot market for foreign exchange.
B. interest rate arbitrage.
C. purchasing power parity.
D. the forward market for foreign exchange.
Answer» B. interest rate arbitrage.
discuss
43.

Covered interest arbitrage involves both

A. the purchase of a foreign asset and a forward contract in the market for foreign exchange.
B. the purchase of a domestic asset and a spot contract in the market for foreign exchange.
C. the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange.
D. the sale of domestic stocks and the purchase of foreign bonds.
Answer» D. the sale of domestic stocks and the purchase of foreign bonds.
discuss
44.

All else equal and under a system of floating exchange rates, if a country enters a period of exceptionally strong growth,

A. the pressure on its currency is to revalue.
B. the pressure on its currency is to devalue.
C. the pressure on its currency is to depreciate.
D. the pressure on its currency is to appreciate.
Answer» A. the pressure on its currency is to revalue.
discuss
45.

All else equal, if Euro Area raises its interest rates,

A. the dollar depreciates.
B. the U.S. demand for euros increases.
C. the Euro Area supply of euros increases.
D. Both A and B.
Answer» B. the U.S. demand for euros increases.
discuss
46.

An Austrian firm that buys foreign exchange because its managers expect the euro to depreciate is

A. increasing the supply of foreign exchange.
B. increasing the demand for foreign exchange.
C. speculating.
D. Both A and B.
Answer» A. increasing the supply of foreign exchange.
discuss
47.

Suppose the exchange rates between the United States and Euro Area are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Euro Area rates of inflation would

A. have no effect on nominal exchange rates.
B. be completely offset by changes in the real exchange rate.
C. be completely offset by changes in the nominal exchange rate.
D. violate the conditions for the law of one price.
Answer» D. violate the conditions for the law of one price.
discuss
48.

An increase in the current account deficit will place _______ pressure on the home currency value, other things equal.

A. upward
B. downward
C. no
D. upward or downward (depending on the size of the deficit)
Answer» B. downward
discuss
49.

The World Bank's Multilateral Investment Guarantee Agency (MIGA):

A. offers various forms of export insurance.
B. offers various forms of import insurance.
C. offers various forms of exchange rate risk insurance.
D. provides loans to developing countries.
Answer» A. offers various forms of export insurance.
discuss
50.

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.
Answer» C. floating, and not subject to central bank intervention.
discuss
51.

A primary result of the Bretton Woods Agreement was:

A. the establishment of the European Monetary System (EMS).
B. establishing specific rules for when tariffs and quotas could be imposed by governments.
C. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
D. establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).
Answer» C. establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
discuss
52.

The currency of country X is pegged to the currency of country Y. Assume that county Y's currency depreciates against the currency of country Z. It is likely that country X will export _______ to country Z and import _______ from country Z.

A. more; more
B. less; less
C. more; less
D. less; more
Answer» B. less; less
discuss
53.

Which of the following would likely have the least direct influence on a country's current account?

A. inflation.
B. national income.
C. exchange rates.
D. tariffs.
Answer» A. inflation.
discuss
54.

Over time, international trade (exports plus imports) as a percentage of GDP has:

A. increased for most major countries.
B. decreased for most major countries.
C. stayed about constant for most major countries.
D. increased for about half the major countries and decreased for the others.
Answer» D. increased for about half the major countries and decreased for the others.
discuss
55.

Major functions of 'IMF' are

A. Oversea's arrangements of fixed exchange rate
B. providing short term capital
C. providing leadership on health matters
D. both a and b
Answer» B. providing short term capital
discuss
56.

International Monetary Fund is classified as

A. intergovernmental organization
B. international organization
C. interregional organization
D. One state organization
Answer» C. interregional organization
discuss
57.

International Monetary Fund formal existence came into being in

A. 12 May, 1945
B. 27 July, 1945
C. 27 December, 1945
D. 27 September, 1945
Answer» A. 12 May, 1945
discuss
58.

International Monetary Fund is headquartered in

A. Washington, United States
B. New York City, United States
C. Geneva, Switzerland
D. Avenue Du Mont Blanc, Switzerland
Answer» B. New York City, United States
discuss
59.

How does the IMF meet its primary objective?

A. By promoting free international trade
B. By overseeing the balance of payments, acting as a forum of world negotiation and regulating world exchange rates
C. By acting as an arbitrator for the dispute settlement of world trade matters
D. By aligning its primary objective with the monetary objectives of national governments
Answer» A. By promoting free international trade
discuss
60.

A eurocurrency is:

A. a bank deposit held in a country that does not issue that currency in which the deposit is denominated.
B. the currency of European Economic and Monetary Union - called the 'euro' for short.
C. a bank deposit in a non-European currency held in Europe.
D. a bank deposit in a European currency held outside of Europe. the currency of the European Union.
Answer» C. a bank deposit in a non-European currency held in Europe.
discuss
61.

The eurocurrency market did not develop until the late 1950s because:

A. the countries of the Soviet bloc did not earn dollars in foreign trade until 1958.
B. European currencies were only convertible for non-residents before 1958.
C. the major European economies had not recovered sufficiently from the effects of World War II.
D. US banks were not permitted to open branches outside the USA until 1958.
Answer» B. European currencies were only convertible for non-residents before 1958.
discuss
Chapter: Unit 2
62.

Assume that a bank's bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Its bid-ask percentage spread is:

A. 4.00%.
B. about 3.85%.
C. 4.26%.
D. about 4.17%.
Answer» C. 4.26%.
discuss
63.

Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:

A. about .3621 Canadian dollars.
B. about 2.36 Canadian dollars.
C. about .3137 Canadian dollars.
D. about 2.51 Canadian dollars.
Answer» B. about 2.36 Canadian dollars.
discuss
64.

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.
Answer» A. the interest rate commonly charged for loans between banks.
discuss
65.

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.
Answer» A. fixed within narrow boundaries.
discuss
66.

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
Answer» C. sold on an exchange; offered by commercial banks
discuss
67.

When the foreign exchange market opens in the UK 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.
Answer» C. prevailing prices in locations where the foreign exchange markets have been open.
discuss
68.

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
Answer» C. $16.50
discuss
69.

The value of the Australian dollar (A$) today is £0.41. Yesterday, the value of the Australian dollar was £0.38. The Australian dollar by _______%.

A. depreciated; 7.90
B. appreciated; 7.90
C. depreciated; 7.30
D. appreciated; 7.30
Answer» C. depreciated; 7.30
discuss
70.

An increase in UK interest rates relative to euro interest rates is likely to ________ the UK demand for euros and _________ the supply of euros for sale.

A. reduce; increase
B. increase; reduce
C. reduce; reduce
D. increase; increase
Answer» A. reduce; increase
discuss
71.

Assume the following information regarding UK and European annualized interest rates: Currency Lending Rate Borrowing Rate UK pound (£) 6.73% 7.20% Euro (€) 6.80% 7.28% Milly Bank can borrow either £20 million or €20 million. The current spot rate of the euro is £0.75. Furthermore, Milly Bank expects the spot rate of the euro to be £0.76 in 90 days. What is Milly Bank’s pound profit from speculating if the spot rate of the euro is indeed £0.76 in 90 days?

A. £251,200
B. £251,386
C. £541,324
D. £561,813
Answer» A. £251,200
discuss
72.

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:

A. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
B. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.
C. U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
Answer» D. U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.
discuss
73.

If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:

A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
B. an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
C. an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
D. an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
Answer» A. an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
discuss
74.

Any event that reduces the euro area demand for Japanese yen should result in a(n) _______ in the value of the Japanese yen with respect to _______, other things being equal.

A. increase; euro
B. increase; noneuro currencies
C. decrease; noneuro currencies
D. decrease; euro
Answer» D. decrease; euro
discuss
75.

News of a potential surge in U.S. inflation and zero Chilean inflation places _______ pressure on the value of the Chilean peso. The pressure will occur _______.

A. upward; only after the U.S. inflation surges
B. downward; only after the U.S. inflation surges
C. upward; immediately
D. downward; immediately
Answer» C. upward; immediately
discuss
76.

If a country experiences high inflation relative to the UK, its exports to the UK should _______________, its imports should ___________, and there is __________ pressure on its currency's equilibrium value.

A. decrease; increase; upward
B. decrease; decrease; upward
C. increase; decrease; downward
D. decrease; increase; downward
Answer» C. increase; decrease; downward
discuss
77.

To force the value of the dollar to appreciate against the pound, the Federal Reserve should:

A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
B. sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
C. sell dollars for pounds in the foreign exchange market and the Bank of England should not intervene.
D. sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
Answer» A. sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
discuss
78.

The currency of country X is pegged to the currency of country Y. Assume that county Y's currency depreciates against the currency of country Z. It is likely that country X will export _______ to country Z and import _______ from country Z.

A. more; more
B. more; less
C. less; less
D. less; more
Answer» C. less; less
discuss
79.

The Bank of England may use a stimulative monetary policy with least concern about causing inflation if the pound's value is expected to:

A. remain stable.
B. strengthen.
C. weaken.
D. none of the above will have an impact on inflation.
Answer» B. strengthen.
discuss
80.

The exchange rate mechanism (ERM) crisis in 1992 represents the __________ in German interest rates that caused other European interest rates to __________, and resulted in less aggregate spending.

A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase
Answer» A. increase; increase
discuss
81.

As foreign exchange activity has grown:

A. central bank intervention has become more effective.
B. central bank intervention has become more frequent.
C. central bank intervention has become less effective.
D. none of the above
Answer» C. central bank intervention has become less effective.
discuss
82.

Which of the following are examples of currency controls?

A. import restrictions.
B. prohibition of remittance of funds.
C. ceilings on granting credit to foreign firms.
D. all of the above
Answer» D. all of the above
discuss
83.

Due to _______, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.

A. forward realignment arbitrage
B. covered interest arbitrage
C. triangular arbitrage
D. locational arbitrage
Answer» C. triangular arbitrage
discuss
84.

In which case will locational arbitrage most likely be feasible?

A. One bank's ask price for a currency is greater than another bank's bid price for the currency.
B. One bank's bid price for a currency is greater than another bank's ask price for the currency.
C. One bank's ask price for a currency is less than another bank's ask price for the currency.
D. One bank's bid price for a currency is less than another bank's bid price for the currency.
Answer» B. One bank's bid price for a currency is greater than another bank's ask price for the currency.
discuss
85.

If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

A. U.S. investors could possibly benefit from covered interest arbitrage.
B. British investors could possibly benefit from covered interest arbitrage.
C. neither U.S. nor British investors could benefit from covered interest arbitrage.
D. A and B
Answer» A. U.S. investors could possibly benefit from covered interest arbitrage.
discuss
86.

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the UK interest rate, the:

A. larger will be the forward discount of the foreign currency.
B. larger will be the forward premium of the foreign currency.
C. smaller will be the forward premium of the foreign currency.
D. smaller will be the forward discount of the foreign currency.
Answer» A. larger will be the forward discount of the foreign currency.
discuss
87.

Assume the bid rate of a Singapore dollar is £0.20 while the ask rate is £0.21 at Bank X. Assume the bid rate of a Singapore dollar is £0.22 while the ask rate is £0.23 at Bank Z. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?

A. £11,764.
B. £47,619.
C. £36,585.
D. £48,710.
Answer» D. £48,710.
discuss
88.

Assume the U.S. dollar is worth £0.55, and the Canadian dollar is worth £0.47. What is the value of the Canadian dollar in U.S. dollars to the nearest cent?

A. 1.54.
B. 0.42.
C. 0.15
D. 0.85
Answer» D. 0.85
discuss
89.

Assume the bid rate of a Swiss franc is £0.42 while the ask rate is £0.45 at Bank X. Assume the bid rate of the Swiss franc is £0.40 while the ask rate is £0.41 at Bank Y. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?

A. £24,340
B. £125,000
C. £150,000
D. £12,550
Answer» A. £24,340
discuss (1)
90.

Assume the bid rate of an Australian dollar is £0.40 while the ask rate is £0.42 at Bank Q. Assume the bid rate of an Australian dollar is £0.415 while the ask rate is £0.419 at Bank V. Given this information, what would be your gain if you use £1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the £1,000,000 you started with?

A. £10,003
B. £12,063
C. £14,441
D. £0
Answer» D. £0
discuss
91.

Arbitrageurs in foreign exchange markets:

A. take advantage of the small inconsistencies that develop between markets.
B. attempt to make profits by outguessing the market.
C. make their profits through the spread between bid and offer rates of exchange.
D. need foreign exchange in order to buy foreign goods.
Answer» A. take advantage of the small inconsistencies that develop between markets.
discuss
92.

Covered interest rate parity occurs as the result of:

A. the actions of market-makers.
B. purchasing power parity
C. interest rate arbitrage.
D. stabilising speculation.
Answer» C. interest rate arbitrage.
discuss
93.

Given the following interest rates on different currencies, which of the following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25 percent. Yen 0.5 percent.

A. The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried out in dollars.
B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
C. The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall in value.
D. The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a low rate of interest.
Answer» B. The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.
discuss
94.

Which of the following best explains the fact that interest rates on the euro are lower than those on the pound? Inflationary expectations are higher in the UK than in the eurozone.

A. British markets are offshore from mainland Europe.
B. Unemployment is higher in the eurozone than in the UK.
C. Bond prices are lower in the UK than in the eurozone.
D. The euro is a weaker currency than sterling.
Answer» A. British markets are offshore from mainland Europe.
discuss
95.

The euro is:

A. a currency, the value of which is determined by demand and supply.
B. the currency of EU member countries.
C. a weighted average of the currencies of EU member countries.
D. a currency that is only traded offshore.
Answer» A. a currency, the value of which is determined by demand and supply.
discuss
96.

Overshooting models of the exchange rate are an attempt to explain:

A. why purchasing power parity plays no role in determining the value of a currency.
B. why exchange rates are so volatile.
C. why the foreign exchange market is never in equilibrium.
D. why forward rates of exchange are not good predictors of future spot rates of exchange.
Answer» B. why exchange rates are so volatile.
discuss
97.

Suppose a deposit in New York earns 6 percent a year and a deposit in London earns 4 percent a year. Interest rate parity holds if the

A. U.S. dollar depreciates by 2 percent a year.
B. U.S. dollar appreciates by 2 percent a year.
C. U.K. pound depreciates by 2 percent a year.
D. None of the above answers is correct because interest rate parity requires that the interest
Answer» A. U.S. dollar depreciates by 2 percent a year.
discuss
98.

When the value of one currency falls relative to another currency, the exchange rate for the first currency has

A. revalued.
B. depreciated.
C. appreciat
Answer» B. depreciated.
discuss
99.

Under a gold standard, countries should

A. keep the supply of their domestic money constant.
B. keep the supply of their domestic money fixed in proportion to their gold holdings.
C. keep the supply of foreign exchange less than their domestic money supply.
D. restrict the demand for foreign goods.
Answer» C. keep the supply of foreign exchange less than their domestic money supply.
discuss
100.

Under a fixed exchange standard, if the domestic demand for foreign exchange increases

A. the central monetary authority must meet the demand out of its reserves.
B. the central monetary authority must increase the supply of domestic money.
C. the fixed exchange standard will breakdown.
D. inflation will increase.
Answer» B. the central monetary authority must increase the supply of domestic money.
discuss

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