If a U.S. firm desires to avoid the risk from exchange rateChapter 3—International Financial
Markets
1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask
percentage spread is: aabout 4.44%. . babout 4.26%. . cabout 4.03%. . dabout 4.17%. .
ANS: B SOLUTIOBid-ask percentage spread = ($.47 ?? $.45)/$.47 = 4.26% N:
PTS: 1
2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its
bid-ask percentage spread is: aabout 4.99%. . babout 4.88%. . cabout 4.65%. . dabout 4.43%. .
ANS: C SOLUTIOBid-ask percentage spread = ($.0043 ?? $.0041)/$.0043 = 4.65% N:
PTS: 1
3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent. a3 to 7 . b.01 to .03 . c10 to 15 . d.5 to 1 .
ANS: A PTS: 1
4. ____ is not a factor that affects the bid/ask spread. aOrder costs . bInventory costs . cVolume . dAll of the above factors affect the bid/ask spread .
ANS: D PTS: 1
7. According to the text, the forward rate is commonly used for: ahedging. . bimmediate transactions. . cprevious transactions. . dbond transactions. .
ANS: A PTS: 1
8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving
100,000 in 90 days, it could: aobtain a 90-day forward purchase contract on euros. . bobtain a 90-day forward sale contract on euros. . cpurchase euros 90 days from now at the spot rate. . dsell euros 90 days from now at the spot rate. .
ANS: B PTS: 1
9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need
C$200,000 in 90 days to make payment on imports from Canada, it could: aobtain a 90-day forward purchase contract on Canadian dollars. . bobtain a 90-day forward sale contract on Canadian dollars. . cpurchase Canadian dollars 90 days from now at the spot rate. . dsell Canadian dollars 90 days from now at the spot rate. .
ANS: A PTS: 1
10. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The
value of the Peruvian Sol in Canadian dollars is: aabout .3621 Canadian dollars. . babout .3977 Canadian dollars. . cabout 2.36 Canadian dollars. . dabout 2.51 Canadian dollars. .
ANS: B $.35/$.88 = .3977 SOLUTION:
PTS: 1
11. Which of the following is not true with respect to spot market liquidity? aThe more willing buyers and sellers there are, the more liquid a market is. . bThe spot markets for heavily traded currencies such as the Japanese yen are . very liquid. cA currency's liquidity affects the ease with which an MNC can obtain or . sell that currency. dIf a currency is illiquid, an MNC is typically able to quickly purchase that . currency at a reasonable exchange rate.
ANS: D PTS: 1
12. Forward markets for currencies of developing countries are: aprohibited. . bless liquid than markets for developed countries. . cmore liquid than markets for developed countries. . donly available for use by government agencies. .
ANS: B PTS: 1
13. A forward contract can be used to lock in the ____ of a specified currency for a future
point in time. apurchase price . bsale price . cA or B . dnone of the above .
ANS: C PTS: 1
14. The forward market: afor euros is very illiquid. . bfor Eastern European countries is very liquid. . cdoes not exist for some currencies. . dnone of the above .
ANS: C PTS: 1
15. ____ is not a bank characteristic important to customers in need of foreign exchange. aQuote competitiveness . bSpeed of execution . cForecasting advice . dAdvice about current market conditions . eAll of the above are important bank characteristics to customers in need of . foreign exchange.
ANS: E PTS: 1
16. The Basel II accord is focused on eliminating inconsistencies in ____ across countries. acapital requirements . bdeposit rates . cdeposit insurance . dbank failure policies .
ANS: A PTS: 1
17. The international money market primarily concentrates on: ashort-term lending (one year or less). . bmedium-term lending. . clong-term lending. . dplacing bonds with investors. . eplacing newly issued stock in foreign markets. .