International Finance Essay
Exercise Questions for Mid-term Exam 1. Which of the following factors of production DO NOT flow freely between countries? A) Labors and Land B) Financial capital C) (Non-military) Technology D) All of the above factors of production flow freely among countries. 2. Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20. 67 in U. S. dollars and ? 4. 2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was A) ? 4. 8665/$. B) ? 0. 2055/$. C) always changing because the price of gold was always changing.
D) unknown because there is not enough information to answer this question 3. The post WWII international monetary agreement that was developed in 1944 is known as the ________. A) United Nations. B) League of Nations. C) Yalta Agreement. D) Bretton Woods Agreement. 4. Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods? A) Widely divergent national monetary and fiscal policies among member nations.
B) Differential rates of inflation across member nations. C) Several unexpected economic shocks to member nations.
D) all of the above 5. Which of the following correctly identifies exchange rate regimes from less fixed to more fixed? A) Independent floating, currency board arrangement, crawling pegs. B) Independent floating, currency board arrangement, managed float. C) Independent floating, crawling pegs, exchange arrangements with no separate legal tender. D) Exchange arrangements with no separate legal tender, currency board arrangement, crawling pegs. 6. Which of the following is NOT a major subaccount of the Balance of Payments? A) The financial account. B) The accounts payable.
C) The capital account. D) The current account. 7. The balance of payments as applied to a course in international finance may be defined as: A) the amount still owed by an exporting firm after making an initial down payment. B) the amount still owed by governments to the International Monetary Fund. C) the measurement of all international economic transactions between the residents of a country and foreign residents. D) the amount of a country’s merchandise trade deficit or surplus. 8. Which of the following is NOT a part of the Current Account of BOP? A) Net export/import of goods.
B) Balance of Trade. C) Net portfolio investment. D) Net export/import of services. 9. The ________ includes all international economic transactions with income or payment flows occurring within the year. A) capital account B) current account C) financial account D) IMF account 10. Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of ________. A) services trade B) income trade C) goods trade D) current transfers 1. When categorizing investments for the financial account component of the balance of payments the ________ is an investment where the investor has no control whereas the ________ is an investment where the investor has control over the asset. A) direct investment; portfolio investment B) direct investment; indirect investment C) portfolio investment; indirect investment D) portfolio investment; direct investment 12. The process of turning an illiquid asset into a liquid saleable asset is called ________. A) swapping B) wrapping C) securitization D) creationism 3. A ________ is a financial intermediation device that allowed the participant to borrow short and lend long. A) sub-prime loan B) structured investment vehicle C) non-conforming loan D) all of the above 14. ________ is the method of making investments more attractive to prospective buyers by reducing their perceived risk. A) Subordination B) Credit enhancement C) Derivation D) Deregulation 15. While trading in foreign exchange takes place worldwide, the major currency trading centers are located in A) London, New York, and Tokyo. B) New York, Zurich, and Bahrain.
C) Paris, Frankfurt, and London. D) Los Angeles, New York, and London. 16. Which of the following is NOT a function of the foreign exchange market? A) The transfer of purchasing power between countries. B) Obtaining or providing credit for international trade transactions. C) Minimizing the risks of exchange rate changes. D) All of the above were identified as functions of the foreign exchange market. 17. It is characteristic of foreign exchange dealers to A) bring buyers and sellers of currencies together but never to buy and hold an inventory of currency for resale.
B) act as market makers, willing to buy and sell the currencies in which they specialize. C) trade only with clients in the retail market and never operate in the wholesale market for foreign exchange. D) All of the above are characteristics of foreign exchange dealers. 18. Which of the following may be participants in the foreign exchange markets? A) Bank and nonbank foreign exchange dealers. B) Central banks and treasuries. C) Speculators and arbitragers. D) All of the above. 19. ________ are NOT one of the three categories reported for foreign exchange.
A) Spot transactions B) Swap transactions C) Strip transactions D) Futures transactions 20. The four currencies that constitute about 80% of all foreign exchange trading are A) U. K pound, Chinese yuan, euro, and Japanese yen. B) U. S. dollar, euro, Chinese yuan, and U. K. pound. C) U. S. dollar, Japanese yen, euro, and U. K. pound. D) U. S. dollar, U. K. pound, yen, and Chinese yuan. 21. A ________ transaction in the foreign exchange market requires an almost immediate delivery (typically within two days) of foreign exchange. A) spot B) forward C) futures
D) none of the above 22. A forward contract to deliver British pounds for U. S. dollars could be described either as ________ or ________. A) buying dollars forward; buying pounds forward. B) selling pounds forward; selling dollars forward. C) selling pounds forward; buying dollars forward. D) selling dollars forward; buying pounds forward. 23. 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.
A) “forward against spot” B) “forspot” C) “repurchase agreement” D) “spot against forward” 24. 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. A) nondeliverable forward B) dollar only forward C) virtual forward D) internet forward 25. If the direct quote for a U. S. investor for British pounds is $1. 43/? then the indirect quote for the U. S. investor would be ________ and the direct quote for the British investor would be ________. A) ? 0. 699/$; ? 0. 699/$ B) $0. 699/? ; ? 0. 699/$ C) ? 1. 43/? ; ? 0. 699/$ D) ? 0. 699/$; $1. 43/? 26. 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. A) direct; direct B) direct; indirect C) indirect; indirect D) indirect; direct 27. The following is an example of an American term foreign exchange quote: A) $20/?. B) €0. 5/$. C) 100? /€. D) None of the above. 28. The U. S. dollar suddenly changes in value against the euro moving from an exchange rate of $0. 8909/euro to $0. 8709/€. Thus, the dollar has ________ by ________. A) appreciated; 2. 30% B) depreciated; 2. 30% C) appreciated; 2. 24% D) depreciated; 2. 24% 29. The U. S. dollar suddenly changes in value against the euro moving from an exchange rate of $0. 8909/euro to $0. 8709/€. Thus, the euro has ________ by ________. A) appreciated; 2. 30% B) depreciated; 2. 30% C) appreciated; 2. 24% D) depreciated; 2. 24% 30.
If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product’s price should be the same in both markets. This is known as A) relative purchasing power parity. B) interest rate parity. C) the law of one price. D) equilibrium. 31. The Economist publishes annually the “Big Mac Index” by which they compare the prices of the McDonald’s Corporation’s Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same.
If a Big Mac costs $2. 54 in the United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index? A) $0. 0086/? B) 124? /$ C) $0. 0081/? D) 115. 75? /$ 32. One year ago the spot rate of U. S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U. S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U. S. dollars for Canadian dollars should be approximately ________. A) $0. 96/C$ B) $1/C$1 C) $1. 4/C$1 D) relative PPP provides no guide for this type of question 33. Assume the current U. S. dollar-British spot rate is 0. 6993? /$. If the current nominal one-year interest rate in the U. S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days? A) 1. 42? /$ B) 1. 43? /$ C) 0. 6993? /$ D) 0. 7060? /$ 34. The current U. S. dollar-yen spot rate is 125? /$. If the 90-day forward exchange rate is 127 ? /$ then the yen is selling at a per annum ________ of ________. A) premium; 1. 57% B) premium; 6. 0% C) discount; 1. 57% D) discount; 6. 30% 35. Covered interest arbitrage moves the market ________ equilibrium because ________ A) toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two. B) toward; investors are now more willing to invest in risky securities. C) away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the two. D) away from; demand for the stronger currency forces up interest rates on the weaker security.