International Finance Management- Quiz I

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International Finance Management- Quiz I - Quiz

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Questions and Answers
  • 1. 

    What foreign currency alternative is classified as derivative?

    • A.

      Forward contract

    • B.

      Future contract

    • C.

      Both of above

    • D.

      None of above

    Correct Answer
    C. Both of above
    Explanation
    Both forward and futures contracts are classified as derivative or contingent claim securities because their values are derived from or are contingent upon the value of the underlying asset - foreign currency. (p. 220)

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  • 2. 

    What foreign currency alternative is classified as contingent claim securities?

    • A.

      Forward contract

    • B.

      Future contract

    • C.

      Both of above

    • D.

      None of above

    Correct Answer
    C. Both of above
    Explanation
    Both forward and futures contracts are classified as derivative or contingent claim securities because their values are derived from or are contingent upon the value of the underlying asset - foreign currency. (p. 220)

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  • 3. 

    What foreign currency alternative is considered more flexible?

    • A.

      Forward contract

    • B.

      Future contract

    • C.

      Eurodollar interest rate futures contracts

    • D.

      None of above

    Correct Answer
    A. Forward contract
    Explanation
    A futures contract is similar to a forward contract but with a crucial distinction. A forward exchange contract is tailor-made for a client by his international bank; in contrast, a futures contract has standardized features and is exchange-traded, that is, traded oon organized exchanges rather over the counter. (p. 220)

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  • 4. 

    Which of the following is a standard feature of future contract?

    • A.

      Contract size

    • B.

      Fixed interest rate

    • C.

      Fixed currency exchange rate

    • D.

      Bid-ask spread plus bank charges

    Correct Answer
    A. Contract size
    Explanation
    The main standardized features of future contracts are the contract size specifying the amount of the underlying foreign currency for future purchase or sale. (p 220)

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  • 5. 

    Which of the following is a standard feature of futures contract?

    • A.

      Maturity date

    • B.

      Tailor-made delivery date

    • C.

      Bid-as spread plus indirect bank charges

    • D.

      Trade by bank dealers

    Correct Answer
    A. Maturity date
    Explanation
    The main standar geatures of future contracts are contract size and maturity date of the contract. Futures contracts have specific delivery month during the yar in which contracts mature on a specified day of the month. (p 220)

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  • 6. 

    What is the initial margin generally required for a futures contract?

    • A.

      2%

    • B.

      3%

    • C.

      5%

    • D.

      There is no initial margin required

    Correct Answer
    A. 2%
    Explanation
    To stabilish a futures position, an initial margin must be deposited in a collateral account. The initial margin is generaaly equal to about 2 percent of the contract value. (p. 220)

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  • 7. 

    What is the initial margin generally required for a forward contract?

    • A.

      2%

    • B.

      4%

    • C.

      1%

    • D.

      There is no initial margin required

    Correct Answer
    D. There is no initial margin required
    Explanation
    In a forward contract, there is typically no initial margin required. Unlike futures contracts, which are traded on exchanges and require initial margin to mitigate the risk of default, forward contracts are privately negotiated between two parties. The terms of the contract, including any margin requirements, are agreed upon by the parties involved. Therefore, it is possible for a forward contract to have no initial margin requirement.

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  • 8. 

    How forward contract asset is priced?

    • A.

      Forward contract states a price for the future transaction.

    • B.

      Forward contract is settled-up, or market-to-market, daily at the settlement price at the close of daily trading on the exchange.

    • C.

      Forward contract is based on bid-ask spread.

    • D.

      Forward contract is based on one year currency exchange forecast.

    Correct Answer
    A. Forward contract states a price for the future transaction.
    Explanation
    A forward contract states a price for the future transaction.

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  • 9. 

    In a futures contract, a seller could be consider?

    • A.

      In a short position

    • B.

      In a long position

    • C.

      In a neutral position

    • D.

      In a reverse position

    Correct Answer
    A. In a short position
    Explanation
    A seller in a futures contract is considered to be in a short position. This means that they have agreed to sell the underlying asset at a predetermined price in the future. By taking a short position, the seller is betting that the price of the asset will decrease, allowing them to buy it back at a lower price and make a profit. This is in contrast to a long position, where the buyer agrees to purchase the asset at a future date, anticipating that its price will rise. A neutral position or a reverse position are not relevant terms in the context of a futures contract.

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  • 10. 

    In a futures contract, a buyer could be consider?

    • A.

      In a long position

    • B.

      In a short position

    • C.

      In a neutral position

    • D.

      In a reverse position

    Correct Answer
    A. In a long position
    Explanation
    A buyer in a futures contract is considered to be in a long position. This means that the buyer has agreed to purchase the underlying asset at a specified price and time in the future. By taking a long position, the buyer is expecting the price of the asset to increase, allowing them to profit from the price difference between the agreed upon price and the market price at the time of the contract's expiration.

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  • 11. 

    A buyer of a future contract in which the settlement price is higher than the previous day's settlement price as a...

    • A.

      Positive settlement for the day

    • B.

      Negative settlement for the day

    • C.

      Neutral settlement for the day

    • D.

      Undefinied settlement for the day

    Correct Answer
    A. Positive settlement for the day
    Explanation
    A buyer of a future contract in which the settlement price is higher than the previous day's settlement price as a positive settlement for the day. Since a long position entitles the owner to purchase the underlying asset, a higher settlement price means the futures price of the underlying asset has increased. Consequently, a long position in the contract is worth more.

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  • 12. 

    A buyer of a future contract in which the settlement price is lower than the previous day's settlement price as a...

    • A.

      Positive settlement for the day

    • B.

      Negative settlement for the day

    • C.

      Neutral settlement for the day

    • D.

      Undefinied settlement for the day

    Correct Answer
    B. Negative settlement for the day
    Explanation
    A buyer of a future contract in which the settlement price is lower than the previous day's settlement price as a negative settlement for the day. Since a long position entitles the owner to purchase the underlying asset, a lower settlement price means the futures price of the underlying asset has decreased. Consequently, a long position in the contract is worth less.

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  • 13. 

    What is generally a percentage for maintance margin?

    • A.

      75%

    • B.

      80%

    • C.

      50%

    • D.

      25%

    Correct Answer
    A. 75%
    Explanation
    If the investor's margin account falls below a maintance margin level (roughly equal to 75% of the initial margin), variation margin must be added to the account to bring it back to the initial margin level in order to keep the position open.

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  • 14. 

    All above are forward contract characteristics, except:

    • A.

      Tailor-made to the needs of the participant

    • B.

      Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price

    • C.

      Delivery of the underlying asset is commonly made

    • D.

      Trading costs are bid-ask spread plus broker's commission

    Correct Answer
    D. Trading costs are bid-ask spread plus broker's commission
    Explanation
    1 - Traded by bank dealers via a network of telephones and computerized dealing systems
    2 - Tailor-made to the needs of the participant
    3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
    4 - Tailor-made delivery date that meets the need of the investor
    5 - Delivery of the underlying asset is commonly made
    6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

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  • 15. 

    All above are forward contract characteristics, except:

    • A.

      Traded competitively on an organized exchange

    • B.

      Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price

    • C.

      Delivery of the underlying asset is commonly made

    • D.

      Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

    Correct Answer
    A. Traded competitively on an organized exchange
    Explanation
    1 - Traded by bank dealers via a network of telephones and computerized dealing systems
    2 - Contract size is tailor-made to the needs of the participant
    3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
    4 - Tailor-made delivery date that meets the need of the investor
    5 - Delivery of the underlying asset is commonly made
    6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

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  • 16. 

    All above are forward contract characteristics, except:

    • A.

      Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account

    • B.

      Contract size is tailor-made to the needs of the participant

    • C.

      Delivery of the underlying asset is commonly made

    • D.

      Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

    Correct Answer
    A. Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
    Explanation
    1 - Traded by bank dealers via a network of telephones and computerized dealing systems
    2 - Contract size is tailor-made to the needs of the participant
    3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
    4 - Tailor-made delivery date that meets the need of the investor
    5 - Delivery of the underlying asset is commonly made
    6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

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  • 17. 

    All above are forward contract characteristics, except:

    • A.

      Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market

    • B.

      Contract size is tailor-made to the needs of the participant

    • C.

      Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price

    • D.

      Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

    Correct Answer
    A. Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
    Explanation
    1 - Traded by bank dealers via a network of telephones and computerized dealing systems
    2 - Contract size is tailor-made to the needs of the participant
    3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
    4 - Tailor-made delivery date that meets the need of the investor
    5 - Delivery of the underlying asset is commonly made
    6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

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  • 18. 

    All above are forward contract characteristics, except:

    • A.

      Standardized delivery dates

    • B.

      Contract size is tailor-made to the needs of the participant

    • C.

      Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price

    • D.

      Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

    Correct Answer
    A. Standardized delivery dates
    Explanation
    1 - Traded by bank dealers via a network of telephones and computerized dealing systems
    2 - Contract size is tailor-made to the needs of the participant
    3 - Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
    4 - Tailor-made delivery date that meets the need of the investor
    5 - Delivery of the underlying asset is commonly made
    6 - Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

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  • 19. 

    ​All above are futures contract characteristics, except:

    • A.

      Traded by bank dealers via a network of telephones and computerized dealing systems

    • B.

      Contract size is standardized amount of the underlying asset

    • C.

      Standardized delivery dates

    • D.

      Trading cost are bid-ask spread plus broker's commission

    Correct Answer
    A. Traded by bank dealers via a network of telephones and computerized dealing systems
    Explanation
    1 - Traded competitively on a organized exchange
    2 - Contract size is standardized amount of the underlying asset
    3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
    4 - Standardized delivery dates
    5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
    6 - Trading cost are bid-ask spread plus broker's commission

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  • 20. 

    ​All above are futures contract characteristics, except:

    • A.

      Contract size is tailor-made to the needs of the participant

    • B.

      Traded competitively on a organized exchange

    • C.

      Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account

    • D.

      Trading cost are bid-ask spread plus broker's commission

    Correct Answer
    A. Contract size is tailor-made to the needs of the participant
    Explanation
    1 - Traded competitively on a organized exchange
    2 - Contract size is standardized amount of the underlying asset
    3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
    4 - Standardized delivery dates
    5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
    6 - Trading cost are bid-ask spread plus broker's commission

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  • 21. 

    ​All above are futures contract characteristics, except:

    • A.

      Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price

    • B.

      Contract size is standardized amount of the underlying asset

    • C.

      Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account

    • D.

      Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market

    Correct Answer
    A. Participant buys or sells the contractual amount of the asset at maturity at the forward contractual price
    Explanation
    1 - Traded competitively on a organized exchange
    2 - Contract size is standardized amount of the underlying asset
    3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
    4 - Standardized delivery dates
    5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
    6 - Trading cost are bid-ask spread plus broker's commission

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  • 22. 

    ​All above are futures contract characteristics, except:

    • A.

      Tailor-made delivery date that meets the need of the investor

    • B.

      Traded competitively on a organized exchange

    • C.

      Contract size is standardized amount of the underlying asset

    • D.

      Trading cost are bid-ask spread plus broker's commission

    Correct Answer
    A. Tailor-made delivery date that meets the need of the investor
    Explanation
    1 - Traded competitively on a organized exchange
    2 - Contract size is standardized amount of the underlying asset
    3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
    4 - Standardized delivery dates
    5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
    6 - Trading cost are bid-ask spread plus broker's commission

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  • 23. 

    ​All above are futures contract characteristics, except:

    • A.

      Delivery of the underlying asset is commonly made

    • B.

      Contract size is standardized amount of the underlying asset

    • C.

      Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account

    • D.

      Standardized delivery dates

    Correct Answer
    A. Delivery of the underlying asset is commonly made
    Explanation
    1 - Traded competitively on a organized exchange
    2 - Contract size is standardized amount of the underlying asset
    3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
    4 - Standardized delivery dates
    5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
    6 - Trading cost are bid-ask spread plus broker's commission

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  • 24. 

    ​All above are futures contract characteristics, except:

    • A.

      Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements

    • B.

      Traded competitively on a organized exchange

    • C.

      Contract size is standardized amount of the underlying asset

    • D.

      Standardized delivery dates

    Correct Answer
    A. Trading costs are bid-ask spread plus indirect bank charges via compensating balance requirements
    Explanation
    1 - Traded competitively on a organized exchange
    2 - Contract size is standardized amount of the underlying asset
    3 - Daily settlement, or marking-to-market, by the futures clearinghouse through the participant's margin account
    4 - Standardized delivery dates
    5 - Delivery of the underlying asset is seldom made. Usually, a reversing trade is transacted to exit the market
    6 - Trading cost are bid-ask spread plus broker's commission

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  • 25. 

    What are the two types of market participants needed for a futures market to operate?

    • A.

      Speculators and hedgers

    • B.

      Speculators and contractors

    • C.

      Hedgers and contractors

    • D.

      Speculators and investors

    Correct Answer
    A. Speculators and hedgers
    Explanation
    Two types of market participants are necessary for a futures market to operate: speculators and hedgers. A speculator attempts to profit from a change in the futures price. A hedger wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or locking in a sales price through a short position.

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  • 26. 

    Which of the following attempts to profit from a change in the futures price, taking a long or short position in a futures contract depending upoin his expectations of future price movement?

    • A.

      Speculator

    • B.

      Hedger

    • C.

      Bank

    • D.

      Broker

    Correct Answer
    A. Speculator
    Explanation
    Two types of market participants are necessary for a futures market to operate: speculators and hedgers. A speculator attempts to profit from a change in the futures price. A hedger wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or locking in a sales price through a short position.

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  • 27. 

    Which of the following wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or locking in a sales price through a short position?

    • A.

      Hedger

    • B.

      Speculator

    • C.

      Bank

    • D.

      Broker

    Correct Answer
    A. Hedger
    Explanation
    Two types of market participants are necessary for a futures market to operate: speculators and hedgers. A speculator attempts to profit from a change in the futures price. A hedger wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or locking in a sales price through a short position.

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  • 28. 

    What happen when the investor's margin account falls below a maintance margin level?

    • A.

      Variation margin must be added to the account to bring it back to the initial margin level in order to keep the position open

    • B.

      Variation margin must be added to the account to bring it back to 90% ot the initial margin level in order to keep the position open

    • C.

      The only available solution is to have the investor position liquidated by his broker as soon as his margin account falls below a maintance margin level

    • D.

      The investor receive his investment back from his broker

    Correct Answer
    A. Variation margin must be added to the account to bring it back to the initial margin level in order to keep the position open
    Explanation
    Variation margin must be added to the account to bring it back to the initial margin level in order to keep the position open. An investor who suffers a liquidity crunch and cannot deposit additional margin money will have his position liquidated by his broker.

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  • 29. 

    What are futures contract standardized expiration date?

    • A.

      March, June, September, and December

    • B.

      April, June, September, and December

    • C.

      March, July, September, and December

    • D.

      March, June, October, and December

    Correct Answer
    A. March, June, September, and December
    Explanation
    Expiration dates are in the end of each quarter:
    Q1 = March
    Q2 = June
    Q3 = September
    Q4 = December

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  • 30. 

    How much is generally a commission that buyers and sellers pay to transact in the futures market?

    • A.

      $15

    • B.

      $20

    • C.

      $10

    • D.

      $25

    Correct Answer
    A. $15
    Explanation
    The commission that buyers and sellers pay to transact in the futures market is a single amount paid upfront that covers the round-trip transactions of initiating and closing out the position. These days, through a discount broker, the commission charge can be as little as $15 per currency futures contract.

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  • 31. 

    All the following are currency future trading, except:

    • A.

      Chicago Mercantile Exchange (CME)

    • B.

      NASDAQ OMX Futures Exchange (NFX)

    • C.

      New Your Board of Trade

    • D.

      Deutsche Futures Exchange

    Correct Answer
    D. Deutsche Futures Exchange
    Explanation
    The given answer, Deutsche Futures Exchange, is the correct choice because it is not a currency future trading platform. The other options, Chicago Mercantile Exchange (CME), NASDAQ OMX Futures Exchange (NFX), and New York Board of Trade, are all well-known exchanges where currency future trading takes place.

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  • 32. 

    A Trasure Director of the company ABC is analyzing alternatives to avoid currency exchange fluctuation risks. The company will receive an amount of CAD$80,000 in October 15th, 2016 and wants to exchange it to US Dollars. Which of the following is the best approach in order to avoid any king of exchange rate fluctiation risks?

    • A.

      Forward contract

    • B.

      Future contract

    • C.

      Currency options

    • D.

      Eurodollar interest rate futures contracts

    Correct Answer
    A. Forward contract
    Explanation
    Forward contract is the most suitable for this scenario. It is flexible to define a specific amount and maturity date.
    Future contract doesn't allow a tailored maturity date.
    Currency options is an opotion if the total amount is bigger than 100,000.

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  • 33. 

    Bombardier has a receivable amount of BRL 5,000,000 for June 2016 and made a foreign currency contract in order to avoid a depreciation of Brazilian Real. However Real has appreciated against Canadian Dollar and Bombardier see an opportunity to make profits. Thus, Bombardier decided to decline the right to buy BRL. Which currency contract type is Bombardier using?

    • A.

      Currency options

    • B.

      Forward contract

    • C.

      Futures contract

    • D.

      Eurodollar interest rate futures contracts

    Correct Answer
    A. Currency options
    Explanation
    Bombardier is using a currency options contract. This type of contract gives the holder the right, but not the obligation, to buy or sell a specific amount of currency at a predetermined exchange rate, known as the strike price, on or before a specific date. In this case, Bombardier has the right to buy BRL, but they have chosen to decline this right due to the appreciation of the Brazilian Real against the Canadian Dollar. This allows Bombardier to potentially make profits by not exercising their right to buy BRL at a less favorable exchange rate.

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  • 34. 

    The specific price at which the currencies will be exchanged at a specified future date in a currency option transaction is called

    • A.

      Strike price

    • B.

      Spot rate

    • C.

      Expirity date

    • D.

      Call

    Correct Answer
    A. Strike price
    Explanation
    The specific price at which the currencies will be exchanged at a specified future date is referred to as the strike price or exercise price.

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  • 35. 

    What is the difference of a European option and an American option?

    • A.

      European option can be exercised only at the maturity whereas an American option can be exercised at any time during the contract

    • B.

      European option can be negotiated using the currency Euro only, whereas American option can be negotiated using US Dollar only

    • C.

      European option ha 6 months contract only, whereas American option has 1 year contract only

    • D.

      European option minimum contract is $100,000, whereas American option has no minimum contract

    Correct Answer
    A. European option can be exercised only at the maturity whereas an American option can be exercised at any time during the contract
    Explanation
    European options can only be exercised at the maturity date, which means that the option holder can only exercise their right to buy or sell the underlying asset on the expiration date. On the other hand, American options can be exercised at any time during the contract period, giving the option holder more flexibility in choosing when to exercise the option.

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  • 36. 

    In a currency option transaction, whenever the spot rate is less than the exercise price, the call option is said to be...

    • A.

      Out-of-the-money

    • B.

      In-the-money

    • C.

      Premium

    • D.

      Asymetric pay-off

    Correct Answer
    A. Out-of-the-money
    Explanation
    Whenever the spot rate is less than the exercise price, the call option is said to be out-of-the-money. It the call is out-of-the-money at expiry, it has a value of zero.

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  • 37. 

    In a currency option transaction, whenever the spot rate is greater than the exercise price, the call option is said to be...

    • A.

      In-the-money

    • B.

      Out-of-the-money

    • C.

      Premium

    • D.

      Asymmetric pay-off

    Correct Answer
    A. In-the-money
    Explanation
    Whenever the spot rate is greater than the exercise price, the call option is said to be in-the-money. It the call option is in-the-money at expiry, the contract has a value.

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  • 38. 

    All below are currency option characteristics, except:

    • A.

      An option gives the holder the right but not the obligation to buy a specific asset

    • B.

      Options have a distinctly asymmetric pay-off

    • C.

      Options transfer risk

    • D.

      Options have no cost involved

    Correct Answer
    D. Options have no cost involved
    Explanation
    The given answer states that "Options have no cost involved" is not a characteristic of currency options. This is because options typically involve a cost known as the premium, which is the price paid to acquire the option. The premium is the upfront cost that the holder pays to gain the right to buy or sell the underlying asset. Therefore, the statement contradicts the concept of options having a cost, making it the exception among the listed characteristics.

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  • 39. 

    All of the following are services provided by international banks, except:

    • A.

      International banks borrow, lend and intermediate in a variety of currencies

    • B.

      Arrange international trade finance

    • C.

      Assist clients in hedging exchange rate risk

    • D.

      Provides currency futures contract services

    Correct Answer
    D. Provides currency futures contract services
    Explanation
    International banks provide a wide range of services, including borrowing, lending, intermediating in different currencies, arranging international trade finance, and assisting clients in hedging exchange rate risk. However, they do not typically offer currency futures contract services. Currency futures contracts are usually offered by specialized financial institutions or exchanges, allowing individuals or businesses to speculate on the future value of currencies. International banks may facilitate currency trading, but they do not directly provide currency futures contract services.

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  • 40. 

    What is the main characteristic of a Correspondent Bank?

    • A.

      Large Banks generally have correspondent relationships with other banks in the financial centers in which they do not have their own operations. It is established when two banks maintain a correspondent bank account with one another.

    • B.

      It is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.

    • C.

      It operates much like a local bank, but legally it is a part of the parent bank. As such, a branch bank is subject to the banking regulation of both its home country and the country in which it operates.

    • D.

      It is a locally incorporated bank that is either wholly owned or owned in major part by a foreign parent.

    Correct Answer
    A. Large Banks generally have correspondent relationships with other banks in the financial centers in which they do not have their own operations. It is established when two banks maintain a correspondent bank account with one another.
    Explanation
    The main characteristic of a Correspondent Bank is that it is established when two banks maintain a correspondent bank account with one another. This means that large banks, which do not have their own operations in certain financial centers, establish relationships with other banks in those centers. They do this by maintaining correspondent bank accounts, which allows them to conduct financial transactions and provide services to their clients in those centers. This arrangement enables the banks to expand their reach and provide global banking services.

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  • 41. 

    What is the main characteristic of a Representative Office?

    • A.

      Is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.

    • B.

      Large Banks generally have correspondent relationships with other banks in the financial centers in which they do not have their own operations. It is established when two banks maintain a correspondent bank account with one another.

    • C.

      It operates much like a local bank, but legally it is a part of the parent bank. As such, a branch bank is subject to the banking regulation of both its home country and the country in which it operates.

    • D.

      It is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.

    Correct Answer
    A. Is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.
    Explanation
    A Representative Office is a small service facility that is staffed by personnel from the parent bank. Its main characteristic is that it is designed to assist multinational clients of the parent bank in their dealings with the bank's correspondents. This means that the representative office acts as a liaison between the multinational clients and the correspondents, helping to facilitate their transactions and communications. It provides support and assistance to the clients, ensuring smooth interactions with the bank's correspondents.

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  • 42. 

    What is the main characteristic of a Foreign Branches?

    • A.

      It operates much like a local bank, but legally it is a part of the parent bank. As such, a branch bank is subject to the banking regulation of both its home country and the country in which it operates.

    • B.

      It is one that is only partially owned but not controlled by its foreign parent. It operates under the banking laws of the country in which it is incorporated.

    • C.

      It is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.

    • D.

      Is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.

    Correct Answer
    A. It operates much like a local bank, but legally it is a part of the parent bank. As such, a branch bank is subject to the banking regulation of both its home country and the country in which it operates.
    Explanation
    A foreign branch operates similarly to a local bank but is legally considered a part of its parent bank. This means that it is subject to the banking regulations of both its home country and the country in which it operates. This characteristic distinguishes a foreign branch from other options mentioned in the question, such as a partially owned but not controlled entity, a country with a banking system allowing external accounts, or a small service facility for MNC clients.

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  • 43. 

    What is the main characteristic of a Subsidiary Bank?

    • A.

      It is a locally incorporated bank that is either wholly owned or owned in major part by a foreign parent. It operates under the banking laws of the country in which it is incorporated.

    • B.

      It is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.

    • C.

      Large Banks generally have correspondent relationships with other banks in the financial centers in which they do not have their own operations. It is established when two banks maintain a correspondent bank account with one another.

    • D.

      Is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.

    Correct Answer
    A. It is a locally incorporated bank that is either wholly owned or owned in major part by a foreign parent. It operates under the banking laws of the country in which it is incorporated.
    Explanation
    A subsidiary bank is a locally incorporated bank that is either wholly owned or owned in major part by a foreign parent. It operates under the banking laws of the country in which it is incorporated. This means that the subsidiary bank functions as a separate legal entity but is controlled by a foreign parent company. This arrangement allows the foreign parent to expand its operations into a new market while adhering to the local banking regulations and laws.

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  • 44. 

    What is the main characteristic of a Affiliate Bank?

    • A.

      It is one that is only partially owned but not controlled by its foreign parent. It operates under the banking laws of the country in which it is incorporated.

    • B.

      Large Banks generally have correspondent relationships with other banks in the financial centers in which they do not have their own operations. It is established when two banks maintain a correspondent bank account with one another.

    • C.

      Is a small service facility staffed by parent bank personnel that is designed to assist MNC clients of the parent bank in dealings with the bank's correspondents.

    • D.

      It is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.

    Correct Answer
    A. It is one that is only partially owned but not controlled by its foreign parent. It operates under the banking laws of the country in which it is incorporated.
    Explanation
    The main characteristic of an Affiliate Bank is that it is partially owned but not controlled by its foreign parent. This means that the foreign parent has some ownership stake in the bank, but does not have full control over its operations. The Affiliate Bank also operates under the banking laws of the country in which it is incorporated, which means it must comply with the regulations and requirements set by that country's banking authorities. This allows the Affiliate Bank to operate independently within the legal framework of its host country while still maintaining some level of connection to its foreign parent.

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  • 45. 

    What is the main characteristic of an Offshore Banking Centre?

    • A.

      It is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.

    • B.

      It is a locally incorporated bank that is either wholly owned or owned in major part by a foreign parent. It operates under the banking laws of the country in which it is incorporated.

    • C.

      It is one that is only partially owned but not controlled by its foreign parent. It operates under the banking laws of the country in which it is incorporated.

    • D.

      Large Banks generally have correspondent relationships with other banks in the financial centers in which they do not have their own operations. It is established when two banks maintain a correspondent bank account with one another.

    Correct Answer
    A. It is a country whose banking system is organized to permit external accounts beyond the normal economic activity of the country.
    Explanation
    Offshore Banking Centers are characterized by their banking systems that allow for external accounts beyond the regular economic activity of the country. This means that individuals and businesses can open accounts and conduct financial transactions that are not directly related to the country's domestic economy. These external accounts often provide advantages such as tax benefits, privacy, and asset protection. Offshore Banking Centers attract international clients and serve as financial hubs for global transactions, making them an important part of the global financial system.

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  • 46. 

    What is a bank capital adequacy?

    • A.

      Refers to the amount of equity capital and other securities a bank holds as reserves against risky assets to reduce the probability of a bank failure.

    • B.

      It is an agreement which establish a framework for measuring bank capital adequacy for banks.

    • C.

      It is am interbank contract that allows the Eurobank ti hedge the interest rate risk in mismatched deposits and credits.

    • D.

      In an unsecured short-term promissory note issued by a corporation or a bank and placed directly with the investment public through dealer.

    Correct Answer
    A. Refers to the amount of equity capital and other securities a bank holds as reserves against risky assets to reduce the probability of a bank failure.
    Explanation
    Bank capital adequacy refers to the amount of equity capital and other securities that a bank holds as reserves against risky assets. This is done in order to reduce the probability of a bank failure. By maintaining adequate capital reserves, banks are better equipped to absorb losses and continue operating even during periods of financial stress. This measure is important for ensuring the stability and soundness of the banking system, as it helps protect depositors and maintain public confidence in the banking sector.

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  • 47. 

    What is a Eurocurrency?

    • A.

      It is a time deposit of money in an international bank located in a country different from the country that issued the currency.

    • B.

      It is a time deposit of money in an international bank located in the same country from the country that issued the currency.

    • C.

      It is a time deposit in Euros in an international bank located in a country different from the country that issued the currency.

    • D.

      It is a time deposit in Euros in an international bank located in the same country from the country that issued the currency.

    Correct Answer
    A. It is a time deposit of money in an international bank located in a country different from the country that issued the currency.
    Explanation
    The correct answer is "It is a time deposit of money in an international bank located in a country different from the country that issued the currency." This answer accurately defines a Eurocurrency as a time deposit of money held in an international bank situated in a country other than the one that issued the currency. Eurocurrency is commonly used for international transactions and provides flexibility and ease of access to funds across different countries.

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  • 48. 

    How is Eurocurrency market regulation?

    • A.

      It is less regulated than domestic banking system.

    • B.

      It is more regulated than domestic banking system.

    • C.

      It has the same regulation as domestic banking system.

    • D.

      It has no regulation.

    Correct Answer
    A. It is less regulated than domestic banking system.
    Explanation
    The Eurocurrency market is less regulated than the domestic banking system. This means that there are fewer restrictions and regulations imposed on the Eurocurrency market compared to the regulations that govern domestic banking activities. The Eurocurrency market operates with more freedom and flexibility, allowing for greater ease of transactions and less oversight from regulatory authorities.

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  • 49. 

    What is interbank offered rate in a Eurocurrency market?

    • A.

      It is a rate charged by banks with surplus of Eurocurrency when lend to a Eurobank that need loanable funds.

    • B.

      It is an amount of Eurocurrency (surplus) that a bank lend to a Eurobank that need loanable funds.

    • C.

      It is a deposit of Eurocurrency in a Eurobank.

    • D.

      It is a bid-ask spread in a foreign currency transaction.

    Correct Answer
    A. It is a rate charged by banks with surplus of Eurocurrency when lend to a Eurobank that need loanable funds.
    Explanation
    The interbank offered rate in a Eurocurrency market refers to the rate charged by banks with a surplus of Eurocurrency when lending to a Eurobank that is in need of loanable funds. This rate is applicable in the Eurocurrency market, where banks outside of the currency's home country accept deposits and make loans in that currency. The interbank offered rate is used as a benchmark for various financial products and serves as an important reference rate in the Eurocurrency market.

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  • 50. 

    What is a Eurocredit?

    • A.

      It is a short-to-medium-term loan of Eurocurrency extended by Eurobanks. The loans are denominated in currencies other than the home currency of the Eurobank.

    • B.

      It is a interbank contract that allows the Eurobank to hedge the interest rate risk in mismatched deposits and credits.

    • C.

      It is a short-term notes underwritten by a group of international investment or commercial banks called a "facility".

    • D.

      It is an unsecured short-term promissory note issued by a corporation or a bank and placed directly with the investment public through a dealer.

    Correct Answer
    A. It is a short-to-medium-term loan of Eurocurrency extended by Eurobanks. The loans are denominated in currencies other than the home currency of the Eurobank.
    Explanation
    The correct answer explains that a Eurocredit is a short-to-medium-term loan of Eurocurrency extended by Eurobanks. These loans are denominated in currencies other than the home currency of the Eurobank. This suggests that Eurocredits are a form of borrowing in a foreign currency, allowing Eurobanks to provide financing in different currencies to their clients.

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