Question 1

One basis point is equal to one percentage point (e.g., one percent of a dollar).

Accepted Answer

A) True 
 B)False

Question 2

Capital markets are markets for financial assets and liabilities with maturities greater than one year.

Accepted Answer

A) True 
 B)False  True

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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 $0.8852/C$.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False  True

Question 6

A forward foreign exchange contract ______.

Accepted Answer

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

Question 7

Money markets are markets for financial assets and liabilities of short maturity, considered to be less than one year.

Accepted Answer

A) True 
 B)False

Question 8

When foreigners decide to purchase additional U.S. government bonds, ______.

Accepted Answer

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 the above

Question 9

Which of the following statements regarding nominal exchange rate forecasts is FALSE?

Accepted Answer

A)   Forward exchange rates perform better than spot exchange rates as the forecasting horizon is extended beyond one year.
B)   The current spot rate is a useful forecast of future exchange rates for horizons of up to one year.
C)   The variability of nominal exchange rates is large relative to forward premiums and discounts.
D)   The variability of nominal exchange rates is large relative to inflation differentials.
E)   The variability of forward premiums/discounts is large relative to interest rate differentials.

Question 10

In the forward currency markets, trades are made for future delivery according to an agreed-upon delivery date, exchange rate, and amount.

Accepted Answer

A) True 
 B)False

Question 11

International commercial banks are the major market makers in the currency markets.

Accepted Answer

A) True 
 B)False

Question 12

Currency risk is the risk of unexpected changes in foreign currency values.

Accepted Answer

A) True 
 B)False

Question 13

The foreign exchange desks of commercial banks typically make their profits through ______.

Accepted Answer

A)   arbitrage
B)   government subsidies
C)   investment banking
D)   market making
E)   speculation

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

Government regulation is nearly absent in the internal markets for long-term debt capital.

Accepted Answer

A) True 
 B)False

Question 16

Eurodollar deposits typically have fixed rate pricing.

Accepted Answer

A) True 
 B)False

Question 17

A bank's bid price for one currency is its offer price for another currency.

Accepted Answer

A) True 
 B)False  True

Question 18

Characteristics of the Eurocurrency market include which of the following?

Accepted Answer

A)   no interest rate regulations on Euromarket transactions
B)   no regulations influencing credit allocation decisions
C)   no reserve requirements on Euromarket transactions
D)   no withholding taxes on Euromarket transactions
E)   All of the above

Question 19

Domestic interest rates typically lie inside the LIBID/LIBOR interest rate band.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is NOT a function of the currency and Eurocurrency markets?

Accepted Answer

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

Exam 3: Foreign Exchange and Eurocurrency Markets

One basis point is equal to one percentage point (e.g., one percent of a dollar).

Correct AnswerverifiedShow Answer

Capital markets are markets for financial assets and liabilities with maturities greater than one year.

Correct AnswerverifiedTrue

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.

Correct AnswerverifiedShow Answer

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 $0.8852/C$.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedTrue

A forward foreign exchange contract ______.

Correct AnswerverifiedShow Answer

Money markets are markets for financial assets and liabilities of short maturity, considered to be less than one year.

Correct AnswerverifiedShow Answer

When foreigners decide to purchase additional U.S. government bonds, ______.

Correct AnswerverifiedShow Answer

Which of the following statements regarding nominal exchange rate forecasts is FALSE?

Correct AnswerverifiedShow Answer

In the forward currency markets, trades are made for future delivery according to an agreed-upon delivery date, exchange rate, and amount.

Correct AnswerverifiedShow Answer

International commercial banks are the major market makers in the currency markets.

Correct AnswerverifiedShow Answer

Currency risk is the risk of unexpected changes in foreign currency values.

Correct AnswerverifiedShow Answer

The foreign exchange desks of commercial banks typically make their profits through ______.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Government regulation is nearly absent in the internal markets for long-term debt capital.

Correct AnswerverifiedShow Answer

Eurodollar deposits typically have fixed rate pricing.

Correct AnswerverifiedShow Answer

A bank's bid price for one currency is its offer price for another currency.

Correct AnswerverifiedTrue

Characteristics of the Eurocurrency market include which of the following?

Correct AnswerverifiedShow Answer

Domestic interest rates typically lie inside the LIBID/LIBOR interest rate band.

Correct AnswerverifiedShow Answer

Which of the following is NOT a function of the currency and Eurocurrency markets?

Correct AnswerverifiedShow Answer

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