International Financial Management- Quiz III
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Questions and Answers
- 1.
Which of the following is not a form of corporate control that could reduce agency problems for an MNC?
- A.
Investor monitoring
- B.
Stock options
- C.
Hostile takeover threat
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
All of the options mentioned in the question - investor monitoring, stock options, and hostile takeover threat - are forms of corporate control that can help reduce agency problems for a multinational corporation (MNC). Investor monitoring involves shareholders actively monitoring and overseeing the actions of management to ensure their interests are protected. Stock options provide incentives for managers to align their interests with those of shareholders. Hostile takeover threats create a disciplinary mechanism where underperforming managers can be replaced by more efficient ones. Therefore, all of these options are effective in reducing agency problems for an MNC.Rate this question:
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- 2.
Which of the following theories suggests that firms seek to penetrate new markets over time?
- A.
Theory of comparative advantage
- B.
Imperfect markets theory
- C.
Product cycle theory
- D.
None of the above
Correct Answer
C. Product cycle theoryExplanation
The product cycle theory suggests that firms seek to penetrate new markets over time. This theory states that a product goes through different stages in its life cycle, starting with introduction in the domestic market, followed by growth, maturity, and eventually decline. As the product matures and saturates the domestic market, firms look to expand into new markets to continue their growth. This theory emphasizes the importance of international expansion for firms to maintain their competitiveness and maximize their profits. Therefore, the correct answer is Product cycle theory.Rate this question:
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- 3.
Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks or trade names) in exchange for fees or some other specified benefits.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Licensing refers to the practice of granting permission to another party to use a firm's intellectual property, such as copyrights, patents, trademarks, or trade names, in exchange for certain benefits, usually in the form of fees or royalties. This allows the licensee to legally use the technology or intellectual property while the licensor retains ownership. Therefore, the statement "Licensing is the process by which a firm provides its technology in exchange for fees or some other specified benefits" is true.Rate this question:
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- 4.
Which of the following is not a way in which agency problems can be reduced through corporate control?
- A.
Threat of hostile takeover
- B.
Acquisition of a foreign subsidiary
- C.
Executive compensation
- D.
Monitoring by large shareholders
Correct Answer
B. Acquisition of a foreign subsidiaryExplanation
Acquisition of a foreign subsidiary is not a way in which agency problems can be reduced through corporate control. Agency problems arise when there is a conflict of interest between the shareholders (principals) and the management (agents) of a company. The other options listed - threat of hostile takeover, executive compensation, and monitoring by large shareholders - are all mechanisms that can help align the interests of management with those of shareholders and reduce agency problems. However, acquiring a foreign subsidiary does not directly address the issue of agency problems within the company.Rate this question:
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- 5.
An increase in the current account deficit will place _______ pressure on the home currency value, other things equal
- A.
Downward
- B.
Upward
- C.
No
- D.
Upward or downward (depending on the size of the deficit)
Correct Answer
B. UpwardExplanation
An increase in the current account deficit means that the country is importing more goods and services than it is exporting. This leads to an increase in the demand for foreign currency to pay for these imports. As a result, the value of the home currency decreases relative to foreign currencies. Therefore, an increase in the current account deficit will place upward pressure on the home currency value.Rate this question:
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- 6.
A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
A weakening of the U.S. dollar with respect to the British pound would make U.S. goods cheaper for British consumers, which would likely increase U.S. exports to Britain. Additionally, it would make British goods more expensive for U.S. consumers, which would likely reduce U.S. imports from Britain. Therefore, the statement is false.Rate this question:
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- 7.
Assume that a bank's bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Its bid-ask percentage spread is:
- A.
4.26%
- B.
4%
- C.
About 4.17%
- D.
About 3.85%
Correct Answer
D. About 3.85%Explanation
The bid-ask percentage spread is calculated by taking the difference between the ask rate and the bid rate, dividing it by the ask rate, and then multiplying by 100 to get the percentage. In this case, the ask rate is £0.26 and the bid rate is £0.25. The difference between them is £0.01. Dividing £0.01 by £0.26 and multiplying by 100 gives us approximately 3.85%. Therefore, the correct answer is about 3.85%.Rate this question:
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- 8.
The forward rate is the exchange rate used for immediate exchange of currencies
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement is false because the forward rate is not used for immediate exchange of currencies. The forward rate is actually the exchange rate that is agreed upon now, but the actual exchange of currencies takes place at a future date. It is used for transactions that are planned to happen in the future, such as hedging against currency fluctuations or for future investments.Rate this question:
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- 9.
Assume the Canadian dollar is equal to £0.51 and the Peruvian Sol is equal to £0.16. The value of the Peruvian Sol in Canadian dollars is:-
- A.
About 2.36 Canadian dollars
- B.
About .3621 Canadian dollars
- C.
About 2.51 Canadian dollars
- D.
About .3137 Canadian dollars
Correct Answer
D. About .3137 Canadian dollarsExplanation
The value of the Peruvian Sol in Canadian dollars can be calculated by dividing the value of the Peruvian Sol in pounds by the value of the Canadian dollar in pounds. In this case, the value of the Peruvian Sol in pounds is £0.16 and the value of the Canadian dollar in pounds is £0.51. Dividing £0.16 by £0.51 gives approximately 0.3137 Canadian dollars.Rate this question:
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- 10.
From 1944 to 1971, the exchange rate between any two currencies was typically:-
- A.
Non existent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions
- B.
Floating, but subject to central bank intervention
- C.
Fixed within narrow boundaries
- D.
Floating and not subject to central bank intervention
Correct Answer
C. Fixed within narrow boundariesExplanation
During the period from 1944 to 1971, the exchange rate between any two currencies was fixed within narrow boundaries. This means that the value of one currency in terms of another currency was set and maintained within a specific range. Central banks would intervene in the foreign exchange market to ensure that the exchange rate stayed within these boundaries. This fixed exchange rate system was known as the Bretton Woods system, which aimed to promote stability in international trade and finance. However, this system eventually collapsed in 1971 due to various economic factors.Rate this question:
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- 11.
Futures contracts are typically _______; forward contracts are typically _______.
- A.
Sold on an exchange; Offered by commercial banks
- B.
Sold on an exchange; Sold on an exchange
- C.
Offered by commercial banks; Sold on an exchange
- D.
Offered by commercial banks; Offered by commercial banks
Correct Answer
A. Sold on an exchange; Offered by commercial banksExplanation
Futures contracts are typically sold on an exchange, whereas forward contracts are typically offered by commercial banks. This is because futures contracts are standardized and traded on organized exchanges, allowing for liquidity and transparency. On the other hand, forward contracts are customized agreements between two parties, often tailored to their specific needs, and are not traded on exchanges but rather offered by banks or other financial institutions.Rate this question:
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- 12.
When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:-
- A.
Prevailing prices in locations where the foreign exchange markets have been open
- B.
Closing prices in Canada during the previous day
- C.
Officially set by central banks before the U.S. market opens
- D.
Closing prices in the U.S. during the previous day
Correct Answer
A. Prevailing prices in locations where the foreign exchange markets have been openExplanation
The opening exchange rate quotations in the UK are based on the prevailing prices in locations where the foreign exchange markets have been open. This means that the exchange rates are determined by the prices at which currencies are being traded in other countries that have already opened their foreign exchange markets. These prices reflect the current supply and demand dynamics in the global foreign exchange market and serve as a starting point for the UK market when it opens.Rate this question:
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- 13.
Under the gold standard, each currency was convertible into gold at a specified rate and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
Under the gold standard, each currency could be exchanged for a specific amount of gold at a fixed rate. This meant that the exchange rate between two currencies was determined by their convertibility rates per ounce of gold. Therefore, the statement is true as it accurately describes how the gold standard worked.Rate this question:
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- 14.
The strike price is also known as the premium price.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The strike price is not known as the premium price. The strike price refers to the predetermined price at which the underlying asset can be bought or sold, while the premium price is the cost of purchasing an options contract. These two terms have different meanings and are not interchangeable. Therefore, the statement is false.Rate this question:
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- 15.
Eurobonds are certificates representing bundles of stock.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
Eurobonds are not certificates representing bundles of stock. Eurobonds are actually debt securities issued in a currency different from the currency of the country where they are issued. They are typically issued by corporations, governments, or international organizations and are used to raise capital from investors. Unlike stocks, which represent ownership in a company, Eurobonds represent a loan made by the investor to the issuer. Therefore, the correct answer is False.Rate this question:
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- 16.
A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 15 Euros when the Dutch market closed. As the U.S. market opens, the Euro is worth $1.10. Thus, the price of the ADR should be _____.
- A.
$15
- B.
$16.5
- C.
16.50 euro
- D.
15 euro
Correct Answer
B. $16.5Explanation
When the Dutch market closed, the share price of the firm was 15 Euros. As the U.S. market opens and the Euro is worth $1.10, the price of the ADR should be converted to dollars. Therefore, the price of the ADR should be 15 Euros multiplied by $1.10, which equals $16.5.Rate this question:
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- 17.
The commonly accepted goal of the MNC is to:-
- A.
Maximize short-term earnings
- B.
Maximize shareholder wealth
- C.
Maximize international sales
- D.
None of the above
Correct Answer
B. Maximize shareholder wealthExplanation
The commonly accepted goal of the MNC is to maximize shareholder wealth. This means that the primary objective of a multinational corporation is to generate the highest possible return for its shareholders. This is typically achieved by making strategic decisions that increase the value of the company's stock, such as increasing profits, expanding market share, or making wise investment choices. By focusing on maximizing shareholder wealth, the MNC aims to attract and retain investors, ensuring the long-term success and sustainability of the company.Rate this question:
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- 18.
An increase in UK interest rates relative to India's interest rates is likely to ________ the UK demand for Rupees and _________ the supply of Rupees for sale.
- A.
Reduce; Increase
- B.
Increase; Increase
- C.
Reduce; Reduce
- D.
Increase; Reduce
Correct Answer
A. Reduce; IncreaseExplanation
An increase in UK interest rates relative to India's interest rates is likely to reduce the UK demand for Rupees and increase the supply of Rupees for sale. When UK interest rates increase, it becomes more attractive for investors to hold UK currency, leading to a decrease in demand for Rupees. Additionally, the higher interest rates in the UK may incentivize investors to sell Rupees and buy UK currency, increasing the supply of Rupees for sale.Rate this question:
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- 19.
In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
When speculating on exchange rate movements, the speculator will actually borrow the currency that is expected to depreciate and invest in the country whose currency is expected to appreciate. This is because by borrowing the currency that is expected to depreciate, the speculator can repay the loan with a lower amount of that currency in the future. At the same time, by investing in the country whose currency is expected to appreciate, the speculator can earn a profit when they convert the invested currency back into their own currency. Therefore, the correct answer is false.Rate this question:
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- 20.
The exchange rates of smaller countries are very stable because the market for their currency is very liquid.
- A.
True
- B.
False
Correct Answer
B. FalseExplanation
The statement suggests that the exchange rates of smaller countries are stable because the market for their currency is very liquid. However, this statement is false. The stability of exchange rates is not solely determined by the liquidity of the market for a currency. Various factors such as economic conditions, government policies, and market speculation can affect the stability of exchange rates. Therefore, it cannot be generalized that smaller countries have stable exchange rates based solely on the liquidity of their currency market.Rate this question:
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- 21.
What is Option price
- A.
Strike price Strike price Strike price Strike price Strike price
- B.
Exercise price Exercise price Exercise price
- C.
Option premium
- D.
None of the above
Correct Answer
C. Option premiumExplanation
The correct answer is "Option premium". Option premium refers to the price that an investor pays to purchase an option contract. It is the cost of buying the right to exercise the option at a later date. This premium is determined by various factors such as the underlying asset's price, volatility, time to expiration, and interest rates.Rate this question:
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- 22.
When a company adopts the Home Market orient policy
- A.
Geocentric
- B.
Ethnocentric
- C.
Poly-centric
- D.
None
Correct Answer
C. Poly-centricExplanation
When a company adopts the poly-centric approach, it means that it focuses on each individual market and tailors its products and marketing strategies to meet the specific needs and preferences of each market. This approach recognizes that consumer behavior and preferences can vary significantly across different countries and regions. By adopting a poly-centric approach, the company aims to build strong local market presence and establish deep connections with local customers, which can lead to higher customer satisfaction and increased sales. This approach also allows the company to benefit from local market knowledge and expertise, which can help in adapting to local regulations and cultural nuances.Rate this question:
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- 23.
Which one of the following is not a form of FDI
- A.
Greenfield Investment
- B.
Brownfield Investment
- C.
M & A
- D.
Listing in foreign Stock Market
Correct Answer
D. Listing in foreign Stock MarketExplanation
Listing in a foreign stock market is not considered a form of Foreign Direct Investment (FDI). FDI refers to the investment made by a company or individual from one country into another country, with the purpose of establishing a lasting interest in the foreign country's economy. Greenfield investment involves establishing a new business or facility in a foreign country, while brownfield investment refers to the acquisition or redevelopment of an existing business. M&A (mergers and acquisitions) involve the consolidation of two companies. However, listing in a foreign stock market does not involve direct investment into a foreign country's economy, but rather allows a company to raise capital by selling shares to foreign investors.Rate this question:
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- 24.
Which of the following is not true about a poly-centric solution to international financial management?
- A.
Decisions are made on the spot by those most informed about market considerations.
- B.
It reduces the authority of the home office
- C.
It treats the MNC as a holding company
- D.
It centralizes decision making
Correct Answer
D. It centralizes decision makingExplanation
A poly-centric solution to international financial management is characterized by decentralized decision-making, where decisions are made on the spot by those who are most informed about market considerations. This approach reduces the authority of the home office and treats the multinational company (MNC) as a holding company. However, it does not centralize decision-making, as the authority is distributed among different subsidiaries or units in different countries.Rate this question:
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- 25.
Peso is currency of
- A.
Norway
- B.
Mexico
- C.
Thailand
- D.
Libya
Correct Answer
B. MexicoExplanation
The correct answer is Mexico because the currency of Mexico is the Peso.Rate this question:
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- 26.
Which of the following statements is true?
- A.
A) If the value of the local currency strengthens, the sale of inventory will generate larger dollar profits
- B.
If the value of the local currency weakens, the sale of inventory will generate lower dollar profits.
- C.
If the value of the local currency weakens, the sale of inventory will generate larger dollar profits.
- D.
None of the above
Correct Answer
C. If the value of the local currency weakens, the sale of inventory will generate larger dollar profits. -
- 27.
Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:
- A.
Closing down most of its plants in the U.S.
- B.
Producing more automobiles in the U.S.
- C.
Relying completely on Japanese suppliers for its parts.
- D.
Pricing its exports in dollars
Correct Answer
B. Producing more automobiles in the U.S.Explanation
Producing more automobiles in the U.S. would reduce the economic exposure of the Japanese car manufacturer because it would decrease its reliance on exporting cars priced in yen. By increasing production in the U.S. and pricing those cars in dollars, the manufacturer would be less affected by fluctuations in the exchange rate between the yen and the dollar. This would help to mitigate the decline in demand for cars when the yen is strong and provide stability for the manufacturer's revenue.Rate this question:
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- 28.
An increases in US exports to foreign markets ________________ the amount of dollars in the foreign exchange and _______________ the value of the US dollar
- A.
Increases, decreases
- B.
Increases, increases
- C.
Decreases, increases
- D.
Decreases, decreases
Correct Answer
B. Increases, increasesExplanation
An increase in US exports to foreign markets leads to an increase in the amount of dollars in the foreign exchange. This is because when US exports increase, foreign buyers need to purchase more US dollars in order to pay for those exports. As a result, the demand for US dollars increases, causing the value of the US dollar to also increase.Rate this question:
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- 29.
When you own ______, there is no obligation on your part; however, when you own _____, there is an obligation on your part
- A.
Call options; put options
- B.
Futures contracts; call options
- C.
Forward contracts; futures contracts
- D.
Put options; forward contracts
Correct Answer
D. Put options; forward contractsExplanation
When you own put options, there is no obligation on your part to buy the underlying asset. However, when you own forward contracts, there is an obligation on your part to buy or sell the underlying asset at a predetermined price in the future.Rate this question:
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- 30.
__________ is (are) not a determinant of translation exposure
- A.
The MNC's degree of foreign involvement
- B.
The locations of foreign subsidiaries
- C.
The local (domestic) earnings of the MNC
- D.
The accounting methods used
Correct Answer
C. The local (domestic) earnings of the MNCExplanation
The local (domestic) earnings of the MNC are not a determinant of translation exposure. Translation exposure refers to the risk that a company's financial statements will be affected by changes in exchange rates when they are translated into a different currency. The local earnings of the MNC, which are already in the domestic currency, do not need to be translated and therefore do not contribute to translation exposure.Rate this question:
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- 31.
A firm will likely benefit most from diversifying if:
- A.
The correlations between country economies are high
- B.
The correlations between country economies are low
- C.
The variability of country economy levels is high
- D.
B and C
Correct Answer
D. B and CExplanation
A firm will likely benefit most from diversifying if the correlations between country economies are low and the variability of country economy levels is high. When the correlations between country economies are low, it means that the economies are not strongly influenced by each other. This reduces the risk of a downturn in one country negatively impacting the firm's overall performance. Additionally, when the variability of country economy levels is high, it provides opportunities for the firm to capitalize on the growth potential in different countries and mitigate the risk of relying too heavily on a single market.Rate this question:
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- 32.
Which of the following does not facilitate, Inter bank transaction globally
- A.
Bloomberg Bloomberg
- B.
Reuters
- C.
Bridge
- D.
MCX
Correct Answer
D. MCXExplanation
MCX does not facilitate interbank transactions globally. MCX is a commodity exchange based in India and primarily deals with trading in commodities such as gold, silver, crude oil, etc. It is not involved in facilitating interbank transactions between different banks on a global scale. On the other hand, Bloomberg, Reuters, and Bridge are well-known platforms that provide financial information, news, and facilitate interbank transactions globally.Rate this question:
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- 33.
Over time, the economic interdependence of nations have:
- A.
Grown
- B.
Diminished
- C.
Remained unchanged
- D.
Cannot say
Correct Answer
A. GrownExplanation
The economic interdependence of nations has grown over time. This is because globalization and advancements in technology have made it easier for countries to trade with one another, leading to increased economic integration. As a result, countries are more reliant on each other for goods, services, and investments, creating a greater level of interdependence. This trend is evident in the increasing volume of international trade, the growth of multinational corporations, and the interconnectedness of financial markets.Rate this question:
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- 34.
Futures contracts are typically _______; forward contracts are typically _______.
- A.
Sold on an exchange; Offered by commercial banks
- B.
Sold on an exchange; Sold on an exchange
- C.
Offered by commercial banks; Sold on an exchange
- D.
Offered by commercial banks; Offered by commercial banks
Correct Answer
A. Sold on an exchange; Offered by commercial banksExplanation
Futures contracts are typically sold on an exchange, meaning that they are traded through a centralized marketplace where buyers and sellers come together. On the other hand, forward contracts are typically offered by commercial banks, meaning that they are customized agreements between two parties that are not traded on an exchange.Rate this question:
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- 35.
European currency options can be exercised _______; American currency options can be exercised _______.
- A.
A) any time up to the expiration date; any time up to the expiration date
- B.
B) any time up to the expiration date; only on the expiration date
- C.
Only on the expiration date; only on the expiration date
- D.
D) only on the expiration date; any time up to the expiration date
Correct Answer
D. D) only on the expiration date; any time up to the expiration dateExplanation
European currency options can be exercised only on the expiration date, while American currency options can be exercised any time up to the expiration date.Rate this question:
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- 36.
In which case will locational arbitrage most likely be feasible?
- A.
One bank's bid price for a currency is less than another bank's bid price for the currency
- B.
One bank's ask price for a currency is less than another bank's ask price for the currency
- C.
One bank's bid price for a currency is greater than another bank's ask price for the currency
- D.
One bank's ask price for a currency is greater than another bank's bid price for the currency
Correct Answer
C. One bank's bid price for a currency is greater than another bank's ask price for the currencyExplanation
Locational arbitrage is a strategy where a trader takes advantage of price differences between different locations. In this case, if one bank's bid price for a currency is greater than another bank's ask price for the currency, it means that the trader can buy the currency at a lower price from one bank and immediately sell it at a higher price to another bank, making a profit from the price difference. This scenario creates an opportunity for locational arbitrage to be feasible.Rate this question:
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- 37.
If the interest rate is lower in the U.S. than in the United Kingdom and if the forward rate of the British pound is the same as its spot rate:-
- A.
U.S. investors could possibly benefit from covered interest arbitrage
- B.
British investors could possibly benefit from covered interest arbitrage
- C.
Neither U.S. nor British investors could benefit from covered interest arbitrage
- D.
Both (a) and (b)
Correct Answer
A. U.S. investors could possibly benefit from covered interest arbitrageExplanation
If the interest rate is lower in the U.S. than in the United Kingdom and the forward rate of the British pound is the same as its spot rate, U.S. investors could possibly benefit from covered interest arbitrage. Covered interest arbitrage involves borrowing funds in a country with a lower interest rate, converting them into the currency of a country with a higher interest rate, and then investing them in that country to earn the higher interest rate. In this case, U.S. investors could borrow funds at a lower interest rate in the U.S., convert them into British pounds, and invest them in the U.K. to earn a higher interest rate.Rate this question:
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- 38.
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the UK interest rate, the:-
- A.
Smaller will be the forward premium of the foreign currency
- B.
Smaller will be the forward discount of the foreign currency
- C.
Larger will be the forward premium of the foreign currency
- D.
Larger will be the forward discount of the foreign currency
Correct Answer
D. Larger will be the forward discount of the foreign currencyExplanation
According to interest rate parity, when the foreign interest rate exceeds the UK interest rate by a larger degree, it indicates that the foreign currency is expected to depreciate in the future. This expectation of depreciation leads to a larger forward discount of the foreign currency. Therefore, the correct answer is that larger will be the forward discount of the foreign currency.Rate this question:
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- 39.
Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
- A.
If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken
- B.
If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken
- C.
If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen
- D.
If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken
Correct Answer
A. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weakenExplanation
If Country A's inflation rate exceeds Country B's inflation rate, it means that the prices of goods and services in Country A are increasing at a faster rate than in Country B. This will lead to a decrease in the purchasing power of Country A's currency compared to Country B's currency. As a result, Country A's currency will weaken in relation to Country B's currency. In other words, it will take more units of Country A's currency to purchase the same amount of goods and services as before, making it less valuable.Rate this question:
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- 40.
The international Fisher effect (IFE) suggests that:
- A.
A home currency will depreciate if the current home interest rate exceeds the current foreign interest rate
- B.
A home currency will appreciate if the current home interest rate exceeds the current foreign interest rate
- C.
A home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate
- D.
A home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate
Correct Answer
A. A home currency will depreciate if the current home interest rate exceeds the current foreign interest rateExplanation
The international Fisher effect (IFE) suggests that a home currency will depreciate if the current home interest rate exceeds the current foreign interest rate. This is because higher interest rates in the home country attract foreign investors, leading to an increase in demand for the foreign currency and a decrease in demand for the home currency. As a result, the home currency depreciates relative to the foreign currency.Rate this question:
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- 41.
Translation exposure reflects:
- A.
The exposure of a firm's ongoing international transactions to exchange rate fluctuations
- B.
The exposure of a firm's local currency value to transactions between foreign exchange traders
- C.
The exposure of a firm's financial statements to exchange rate fluctuations
- D.
D) the exposure of a firm's cash flows to exchange rate fluctuations
Correct Answer
C. The exposure of a firm's financial statements to exchange rate fluctuationsExplanation
Translation exposure refers to the impact of exchange rate fluctuations on a firm's financial statements. When a company operates in different countries and has subsidiaries or branches in foreign countries, it must consolidate its financial statements, which involves translating the financial results from foreign currencies to the reporting currency. Exchange rate fluctuations can affect the translation of foreign currency assets, liabilities, revenues, and expenses, leading to changes in the reported financial statements. Therefore, the exposure of a firm's financial statements to exchange rate fluctuations is the correct answer.Rate this question:
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- 42.
An example of cross-hedging is:
- A.
Find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currency
- B.
Use the forward market to sell forward whatever currencies you will receive
- C.
Use the forward market to buy forward whatever currencies you will receive
- D.
B and C
Correct Answer
A. Find two currencies that are highly positively correlated; match the payables of the one currency to the receivables of the other currencyExplanation
Cross-hedging involves finding two currencies that have a strong positive correlation, meaning their values tend to move in the same direction. By matching payables of one currency to the receivables of the other currency, a company can offset potential losses due to currency fluctuations. This can be done by using the forward market to either sell forward the currencies that will be received or buy forward the currencies that will be received. Therefore, the correct answer is B and C.Rate this question:
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- 43.
What would be the cost of borrowing, if an Indian firms borrows money from US, Interest rate in US is 6%, India - 9% and Dollar appreciation rate – 3%
- A.
9.18%
- B.
9.81%
- C.
12.27%
- D.
12.72%
Correct Answer
A. 9.18%Explanation
When an Indian firm borrows money from the US, it incurs a cost of borrowing based on the interest rate difference between the two countries and the exchange rate movement. In this case, the interest rate in the US is 6%, while in India it is 9%. Additionally, the dollar is appreciating at a rate of 3%. To calculate the cost of borrowing, we need to add the interest rate difference (9% - 6% = 3%) to the dollar appreciation rate (3%). Therefore, the total cost of borrowing would be 6% (US interest rate) + 3% (interest rate difference) + 3% (dollar appreciation rate) = 12%. However, since the question asks for the cost of borrowing in India, we subtract the dollar appreciation rate (3%) from the total cost of borrowing, resulting in 12% - 3% = 9%. Therefore, the correct answer is 9.18%.Rate this question:
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- 44.
Mr. A bought 10 quantities call option from Mr. B and sold it to Mr. C. What is OI and traded Volume
- A.
20,10
- B.
10,20
- C.
10,10
- D.
20,20
Correct Answer
B. 10,20Explanation
The open interest (OI) is the total number of outstanding options contracts that have not been closed or exercised. In this scenario, Mr. A initially bought 10 call options from Mr. B, creating an open interest of 10. Later, Mr. A sold these options to Mr. C, which means the open interest remains unchanged at 10.
The traded volume refers to the total number of options contracts that have been bought or sold during a specific period. In this case, Mr. A bought 10 options from Mr. B and sold them to Mr. C, resulting in a traded volume of 20 options.Rate this question:
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- 45.
SDRs are
- A.
International reserve assets
- B.
US currency
- C.
Currency in Europe
- D.
None
Correct Answer
A. International reserve assetsExplanation
SDRs, or Special Drawing Rights, are international reserve assets created by the International Monetary Fund (IMF). They are used as a supplementary foreign exchange reserve and serve as a unit of account between different currencies. SDRs are not a specific currency like the US dollar or a currency limited to Europe, but rather a global reserve asset that can be used by member countries to supplement their official reserves.Rate this question:
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- 46.
When Spread is low, which is not true?
- A.
Low profit margin
- B.
Low liquidity
- C.
Low Risk
- D.
High trade volume
Correct Answer
B. Low liquidityExplanation
When the spread is low, it means that there is a small difference between the bid and ask prices of a security. This indicates that there is a high level of liquidity in the market, as there are many buyers and sellers actively trading the security. Therefore, the correct answer is "Low liquidity" because when the spread is low, it implies high liquidity, not low liquidity.Rate this question:
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- 47.
Assume that the inflation rate in Canada is 3.20%, while the inflation rate in the U.S. is 3.00%. According to PPP, the Canadian dollar (CAD) should _______ by _______%.
- A.
Appreciate; 0.1938%
- B.
Depreciate; 0.1938%
- C.
Appreciate; 0.1942%
- D.
Depreciate; 0.1942%
Correct Answer
B. Depreciate; 0.1938%Explanation
According to the theory of Purchasing Power Parity (PPP), the exchange rate between two currencies should adjust to reflect the difference in inflation rates between the two countries. In this case, since the inflation rate in Canada is higher than the inflation rate in the U.S., the Canadian dollar (CAD) should depreciate. The given answer of depreciate; 0.1938% indicates that the Canadian dollar should decrease in value by 0.1938%.Rate this question:
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- 48.
What is a floating exchange rate?
- A.
An exchange rate set by central banks
- B.
An exchange rate set by governments
- C.
An exchange rate set by brokers
- D.
An exchange rate set by the supply and demand
Correct Answer
D. An exchange rate set by the supply and demandExplanation
A floating exchange rate is an exchange rate that is determined by the supply and demand of a currency in the foreign exchange market. Unlike a fixed exchange rate, which is set by central banks or governments, a floating exchange rate is flexible and can fluctuate based on market forces. This means that the value of a currency can rise or fall depending on factors such as economic conditions, interest rates, and investor sentiment. The supply and demand for a currency in the market determine its exchange rate relative to other currencies.Rate this question:
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- 49.
What is the most traded pair on the Forex?
- A.
USD/JPY
- B.
EUR/USD
- C.
EUR/JPY
- D.
GBP/USD
Correct Answer
B. EUR/USDExplanation
The most traded pair on the Forex is EUR/USD because it represents the two largest economies in the world, the Eurozone and the United States. This pair is highly liquid and has tight spreads, making it attractive to traders. Additionally, the Euro and the US Dollar are widely accepted and used in international trade and finance, further contributing to the popularity of this pair.Rate this question:
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- 50.
What is the size of a unit for Yen future currency trading in India?
- A.
¥1000
- B.
¥10000
- C.
¥100000
- D.
¥100
Correct Answer
C. ¥100000Explanation
The size of a unit for Yen future currency trading in India is ¥100,000. This means that each contract for Yen future currency trading is based on an amount of ¥100,000.Rate this question:
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