Question 1

Which form of arbitrage involves profiting from price differences in two distinct markets?

Accepted Answer

A)   geographic arbitrage
B)   three-point arbitrage
C)   covered interest
D)   arbitrage of goods A

Question 2

On the basis of which interest rate are Euroloans often quoted?

Accepted Answer

A)   United States Prime Rate
B)   European Central Bank Offer Rate
C)   London Interbank Offer Rate
D)   International Monetary Fund Interest Rate C

Question 3

The ________ consists of foreign-exchange transactions that are to be consummated immediately.

Accepted Answer

A)   soft currency market
B)   spot market
C)   hard currency market
D)   forward market B

Question 4

A ________ allows, but does not require, a firm to buy or sell a specified amount of foreign currency at a specified price on a specified date.

Accepted Answer

A)   forward swap
B)   currency option
C)   call option
D)   discount put

Question 5

Which of the following is not an example of a participant in the foreign exchange market?

Accepted Answer

A)   Pakistani tourists exchanging rupees for British pounds at a bank in London
B)   British retailer Marks and Spencer purchasing appliances from a British supplier
C)   the U.S. government arranging a multimillion-dollar loan to Mexico
D)   Toyota exporting cars to Canada from factories in Japan

Question 6

The rising value of the Canadian dollar relative to the U.S. dollar makes American goods cheaper to consumers in Canada.

Accepted Answer

A) True 
 B)False

Question 7

The direct exchange rate and the indirect exchange rate are reciprocals of one another.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is a true statement about the Euroloan market?

Accepted Answer

A)   It is extremely competitive and lenders operate on razor-thin margins.
B)   It is extremely competitive but lenders still receive substantial margins.
C)   It is monopolistic, yet lenders operate on razor-thin margins.
D)   It is monopolistic and lenders receive substantial margins.

Question 9

When an overseas banking operation is separately incorporated from the parent bank, what is it called?

Accepted Answer

A)   subsidiary bank
B)   branch bank
C)   affiliated bank
D)   correspondent bank

Question 10

Why does arbitrage most likely exist?

Accepted Answer

The answer of Why does arbitrage most likely exist?...

Question 11

How did the Eurocurrency market develop? What role did global banks play in the process?

Accepted Answer

The answer of How did the Eurocurrency market develop? What...

Question 12

A bond that is issued by Nestle, a Swiss company, that is denominated in yen and sold to residents of Japan is most likely a ________.

Accepted Answer

A)   Eurobond
B)   global bond
C)   foreign bond
D)   country fund

Question 13

The international bond market is a major source of debt financing for which of the following?

Accepted Answer

A)   world governments
B)   regional organizations
C)   small firms
D)   small businesses

Question 14

What is a correspondent relationship between banks? What services are performed by correspondent banks?

Accepted Answer

The answer of What is a correspondent relationship between banks?...

Question 15

________ is the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy.

Accepted Answer

A)   Commercial exchange
B)   Foreign exchange
C)   Arbitrage
D)   Parity

Question 16

What is a currency selling at if the forward price is higher than the spot price?

Accepted Answer

A)   forward premium
B)   forward discount
C)   par value
D)   swap value

Question 17

What most likely happens when the price of yen falls?

Accepted Answer

A)   the quantity of yen demanded goes down
B)   the demand curve slopes downward
C)   the demand curve slopes upward
D)   the value of yen fluctuates

Question 18

Suppose £1 is trading for $2.00 in New York City and $1.80 in London. A foreign exchange trader could take $1.80 and buy £1 in London's financial exchange market and then sell it for $2.00 in New York's financial exchange market. What is this an example of?

Accepted Answer

A)   two-point arbitrage
B)   three-point arbitrage
C)   covered interest
D)   arbitrage of goods

Question 19

________ suggests that national differences in expected inflation rates yield differences in nominal interest rates among countries.

Accepted Answer

A)   Two-point arbitrage
B)   Three-point arbitrage
C)   The international Fisher effect
D)   The law of one market price

Question 20

________ assume exchange rate risks by acquiring positions in a currency and hoping that they can correctly predict changes in the currency's market value.

Accepted Answer

A)   Commercial customers
B)   Speculators
C)   Arbitrageurs
D)   Individuals

Exam 8: Foreign Exchange and International Financial Markets