Test Bank Multinational Finance Evaluating the Opportunities, Costs, and Risks of Multinational Operations, 6th Edition
Chapter 3- Kirt C. Butler, Test Bank for Multinational Finance, John Wiley & Sons, 6h edition (2016)
Chapter 3 Foreign Exchange and Eurocurrency Markets
Notes to instructors:
Answers to non-numeric multiple-choice questions are arranged alphabetically so that answers are randomly assigned to the five outcomes.
1. Liquidity refers to the ease with which you can exchange one asset for another of equal value.
2. Internal credit markets are markets for deposits and loans by local residents and hence are governed by the rules and institutional conventions of the local government.
3. External credit markets trade interest rate contracts denominated in a currency but traded outside the borders of the country issuing that currency.
4. Money markets are markets for financial assets and liabilities of short maturity, considered to be less than one year.
5. Capital markets are markets for financial assets and liabilities with maturities greater than one year.
6. Eurocurrency markets are highly liquid and relatively unencumbered by government regulation, resulting in borrowing and lending rates that are generally more favorable to large retail customers than domestic rates.
7. International commercial banks are the major market makers in the currency markets.
8. The most active market makers in the market for spot foreign exchange are the major investment banks, such as Salomon Smith Barney and Goldman Sachs.
False. The major market makers are the large commercial banks.
9. In the spot market, trades is conducted in a single spot or location.
False. Trade is conducted at commercial banks worldwide.
10. In the forward currency markets, trades are made for future delivery according to an agreed-upon delivery date, exchange rate, and amount.
11. A bank that is making a market in euros stands ready to buy euros at its euro offer price and sell euros at its euro bid price.
False. The bank will buy at the bid and sell at the offer price.
12. American terms state the dollar value of one unit of foreign currency, such as $0.0085/¥.
13. European terms state the foreign currency price of one U.S. dollar (e.g., C$1.1054/$).
14. If the current spot rate is S0$/C$ = $0.8839/C$ and the one-year forward rate is F1$/C$ = $0.8754/C$, then the Canadian dollar is selling at a forward premium.
False. The Canadian dollar (in the denominator of the quote) is selling at a forward discount.
15. If the current spot rate is S0$/C$ = $0.8839/C$ and the one-year forward rate is F1$/C$ = $0.8754/C$, then the U.S. dollar is selling at a forward premium.
True. Conversely, the Canadian dollar in the denominator is at a forward discount.
16. A bank offers you the following quote: “$0.8841/C$ BID and $0.8852/C$ ASK.” The bank will buy U.S. dollars at $0.8841/C$ or sell U.S. dollars at $0.8852/C$.
False. Banks quote foreign currency in order to make a profit. The bank will buy C$ (and sell $) at $0.8841/C$ or sell C$ (and buy $) at $0.8852/C$.
17. Currency risk is the risk of unexpected changes in foreign currency values.
18. For the most actively traded currencies, national credit markets are operationally more efficient than the Eurocurrency markets.
False. Eurocurrency markets are generally more operationally efficient.
19. Volume in the foreign exchange markets averages about one billion dollars per day.
False. In the 2014 BIS survey, daily interbank trading volume averages more than $5 trillion.
20. Eurocurrency transactions in the external credit market fall outside the jurisdiction of any single nation.
21. One basis point is equal to one percentage point (e.g., 1 percent of a dollar).
False. It is equal to one hundredth of a percentage point (e.g., 1/100th of a dollar).
22. The majority of the volume in the forward market for foreign exchange is conducted on the floor of the Chicago Mercantile Exchange (CME).
False. Forward exchange contracts are primarily traded through commercial banks.
23. Commercial banks always quote foreign exchange rates with the domestic currency in the denominator of the quote.
False. The domestic currency can be in the numerator or the denominator.
24. A bank’s bid price for one currency is its offer price for another currency.
25. Suppose S0£/$ = £0.6361/$ and F1£/$ = £0.6352/$. The dollar is selling at a forward premium of 9 basis points.
False. It is selling at a forward discount of 9 bps.
26. A LIBOR rate is quoted for all major currencies.
27. Domestic interest rates typically lie inside the LIBID/LIBOR interest rate band.
False. The domestic rates lie outside the LIBID/LIBOR interest rate band.
28. LIBOR is the rate that a Euromarket bank is willing to pay to attract a Eurocurrency deposit.
False. It is an average offer rate at which banks are willing to loan funds in the London Eurocurrency market.
29. Eurocurrency markets are regulated by the governments whose currencies are traded in the market.
False. These governments have little or no jurisdiction over external credit markets.
30. MNCs and financial institutions with access to Eurocurrency markets usually can obtain lower cost funds and store funds at higher interest rates than in domestic credit markets.
31. Commercial banks’ lending rates in the Eurocurrency market are usually higher than their prime lending rates in their domestic credit markets.
False. Eurocurrency markets are usually more competitive and lending rates are lower.
32. Foreign currency deposits held in the United States are called Eurodollars.
False. Eurodollars are dollar deposits held outside the borders of the United States.
33. Eurodollar deposits typically have fixed interest rates.
False. Most Eurodollar deposits have floating interest rates.
34. Government regulation is nearly absent in the internal markets for long-term debt capital.
False. Internal markets are monitored and regulated by local authorities.
Multiple Choice Select the BEST ANSWER
1. Which of the following is not a function of the currency and Eurocurrency markets?
a.foreign currency speculation
b.hedging foreign exchange risk
c.provision of credit
d.transfer of purchasing power
* e. Each of the above is a function of the foreign exchange market.
2. What happens when foreigners decide to purchase additional U.S. government bonds?
* a. The demand for dollars rises.
b.The federal government budget deficit declines.
c.The supply of dollars rises.
d.The trade deficit declines.
e.None of these events happens.
3. The primary function of foreign exchange desks at major commercial banks is ____.
* d. market making
e.to take advantage of government subsidies in the foreign exchange market
4. In order to boost the value of the euro relative to the dollar, the U.S. Federal Reserve should ____.
a.sell dollars for euros and buy dollars with euros
* b. sell dollars for euros and buy euros with dollars
c.sell euros for dollars and buy euros with dollars
d.sell euros for dollars and sell dollars for euros
e.more than one of the above
5. The euro depreciates 17 percent against the dollar. How much has the dollar appreciated against the euro?
* d. 20.48%
6. A forward foreign exchange contract ____.
* a. allows a transfer of purchasing power from one currency to another on a predetermined date and at a predetermined exchange rate
b.is a long (or forward) position in a foreign currency
c.is a type of option that can be used to hedge against unfavorable changes in foreign currency values at the discretion of the option holder
d.is priced to equal the spot exchange rate
e.none of the above
7. The biggest traders in the foreign exchange markets are ____.
* a. commercial banks