Q&A Hero

Q: What is arbitrage? Assume that the dollar is quoted $1 = 0.625 in New York and the pound sterling is quoted as 1 = $1.63 in London. Is there an arbitrage opportunity? If so, what would an astute trader do? What will happen to the quotes as trades are made at current prices?

Q: The current direct quote in New York is .01075 dollars per yen. Suppose the current direct quote in Tokyo is 91 yen per dollar. What is the appropriate indirect quote in New York? What will arbitrageurs do to eliminate the differential rates in these markets?

Q: A forward exchange contract A) gives the owner the right, but not the obligation, to buy a foreign currency at a fixed exchange rate for a fixed period of time. B) gives the owner the right to purchase a foreign currency at some point in the future and any gains or losses are credited/debited to the account at the close of business each day. C) requires delivery, at a specified future date, of one currency for a specified amount of another currency. D) requires delivery, within two working days, of one currency for a specified amount of another currency.

Q: You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to the dollar. What is the name for such a transaction? A) trend trading B) arbitrage C) currency swapping D) exchange rate hedging

Q: Why do currency exchange rates throughout the world trade within a very narrow range on any given day? A) because of purchasing power parity B) because of the international translation effect C) because of arbitrage D) because of the law of one price

Q: If the exchange rate quotes in two different countries were out of line with each other, an enterprising trader could make a profit by buying in the market where the currency was cheaper and simultaneously selling it in the market where the currency was more expensive. Such a person would be known as a(n) A) spot trader. B) arbitrageur. C) cross trader. D) capitalist.

Q: Assume that the British pound is worth 1.6242 U.S. dollars. If a new Jaguar costs $138,000, what is the cost in British pounds? A) 201,000 B) 84,965 C) 71,642 D) 119,998

Q: WSM Wine Importers, Inc. purchased 75,000 cases of French wine at a cost of 6,000,000 euros. If the current exchange rate is 0.7576 euros to the U.S. dollar, what is the purchase price of the wine in U.S. dollars? A) $9,684,148 B) $9,328,651 C) $8,350,012 D) $ 7,919,747

Q: If you are an importer of goods and you will make payment for the purchase of inventory on 90-day terms, which of the below is the correct term for the exchange rate that you will use? A) indirect rate B) spot rate C) direct rate D) forward rate

Q: If you are an importer of goods and you need to make payment for the purchase of inventory before the close of business today, which of the below is the correct term for the exchange rate that you will use? A) indirect rate B) spot rate C) direct rate D) forward rate

Q: Which of the following is true regarding the correct price of the forward contract? A) If the quote is less than the computed price, the forward contract is undervalued. B) If the quote is greater than the computed price, the forward contract is overvalued. C) Both A and B D) Neither A nor B

Q: Forward rates are all of the following EXCEPT A) quoted in both direct and indirect form. B) quoted at a premium or discount. C) beneficial to risk-reduction. D) equal to future spot rates.

Q: Which of the following is true? A) The forward rate is the same as the spot rate that will prevail in the future. B) The future spot rate is equal to the forward rate less the current spot rate. C) The actual spot rate that will prevail in the future is not known today. D) The future spot rate is the current spot rate increased by the inflation rate.

Q: Buying and selling in more than one market to make a riskless profit is called A) profit-maximization. B) arbitrage. C) international trading. D) cannot be determined from the above information

Q: A Spot transaction occurs when A) one currency is deposited in a foreign bank. B) one currency is immediately exchanged for another currency. C) one currency is exchanged for another currency at a specified price. D) one currency is exchanged for another currency in 30, 60, or 90 days.

Q: The 30-day forward exchange rate is .01073033 dollars per yen. If this forward rate represents a per year discount of 2.5% from the current spot rate, what is the current spot exchange rate? A) .01073033 dollars per yen B) .01257754 dollars per yen C) .01329684 dollars per yen D) .01093833 dollars per yen

Q: The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds per dollar. The percent-per-year discount on the 30-day pound is A) 32.77%. B) 30.57%. C) 48.00%. D) 45.93%.

Q: The spot exchange rate is 1.57 dollars per pound. The 30-day forward exchange rate is .6211 pounds per dollar. Therefore, pounds in the forward market are selling at a ________ to the current spot rate. A) .958 discount B) .958 premium C) .04 discount D) .04 premium

Q: IMXP Corp. enters into a 30-day forward exchange contract to buy 113,540,000 yen for $100,000. Which of the following statements is true concerning this transaction? A) IMXP will pay $100,000 and receive 113,540,000 yen 30 days from now. B) IMXP will pay $100,000 today and receive 113,540,000 yen 30 days from now. C) The spot exchange rate in 30 days will be 113.54 yen per dollar. D) IMXP will receive 113,540,000 yen today and pay $100,000 30 days from now.

Q: Suppose the current exchange rates are 1.3215 dollars per euro, and 84.19 yen per dollar. What is the current exchange rate between yen and euros? A) 86.356 yen per euro B) 147.571 yen per euro C) 151.696 yen per euro D) 111.257 yen per euro

Q: The direct quote in New York is .015 dollar per Pakistani rupee. The direct quote in Pakistan is 60 rupees per dollar. This imbalance in rates can be corrected by arbitrage. A trader will ________ rupees in New York and ________ rupees in Pakistan, causing the direct quote in New York to ________. A) buy; sell; increase B) buy; sell; decrease C) sell; buy; decrease D) sell; buy; increase

Q: A British-made component costs 36 U.K. pounds. A company in the United States needs to buy these components and the current indirect quote indicates that one dollar will buy .6250 pounds. Ignoring transactions costs, how much will one component cost in U.S. dollars? A) $22.50 B) $45.94 C) $57.60 D) $72.00

Q: The Euro increased dramatically in value against the U.S. dollar between 2000 and 2009. The result has been that A) U.S. exports are more competitive in Europe. B) U.S. goods cost more in Europe. C) U.S. travelers are finding it less expensive to travel in Europe. D) European exports to the United States are more competitive.

Q: A wide bid/ask spread could indicate which of the following? A) the presence of arbitrageurs B) large volume transactions are taking place C) frequent trading of a currency D) an inefficient market

Q: If a U.S. company enters into a purchase agreement with a European company and the contract is denominated in euros, then direct exchange rate risk exists for both companies.

Q: Exchange rate risk exists in international trade contracts denominated in a foreign currency, but not in foreign portfolio investments, because the returns on investment securities are adjusted automatically for differences in exchange rates.

Q: The U.S. dollar is the most frequently traded currency in foreign currency markets, accounting for over 40% of total trading.

Q: Due to the dominance of Chinese companies in international trade, the Chinese yuan is the most frequently traded currency.

Q: The forward-spot differential is the difference between the forward rate and the expected future spot rate.

Q: Three types of arbitrage are simple arbitrage, rectangular arbitrage, and covered-expense arbitrage.

Q: A direct quote of $1.6 per British pound in the United States is equivalent to a direct quote of .625 British pounds per U.S. dollar in Great Britain.

Q: An exchange rate of $1.6 per British pound is an example of a direct quote in the United States.

Q: A direct quote is always denominated in U.S. dollars, since the dollar is the medium of exchange in international business.

Q: Commercial centers for foreign exchange exist only in New York and London in order to make it possible for arbitrage to work.

Q: A direct quote of $1.6255 dollars to buy one U.K. pound corresponds to an indirect quote of .6152 pounds per one dollar.

Q: The existence of a forward-spot differential creates an arbitrage opportunity that will eliminate the differential almost immediately.

Q: The asked rate is also known as the selling rate or the offer rate.

Q: Triangular arbitrage eliminates exchange rate differentials across three markets for three currencies.

Q: A direct quote of $1.9887 dollars to buy one U.K. pound corresponds to an indirect quote of .9887 pounds per one dollar.

Q: The value of the euro floats against other major international currencies, but has a fixed value when compared to the currencies of the countries in the European Union, such as the French franc and the German mark.

Q: Covered interest arbitrage can be taken advantage of when premiums in forward rates are not exactly equal to the interest rate differential between two countries.

Q: In order to profit from an expected near-term increase in the relative value of the British pound versus the U.S. dollar, an investor would be wise to maintain a short position in pounds, then sell when the pound rises in relative value.

Q: Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.

Q: The bid rate is the rate at which the bank buys the foreign currency from the customer by paying in home currency.

Q: A quote of .7645 euros per dollar in New York is an example of a direct quote.

Q: The efficiency of foreign currency markets is assured, in large measure, by the process of arbitrageurs.

Q: Forward contracts benefit only the customer due to a reduction in uncertainty.

Q: Forward rates, like spot rates, are quoted in both direct and indirect form.

Q: Forward contracts are usually quoted for periods greater than 1 year.

Q: A narrow spread indicates efficiency in the spot exchange market.

Q: The difference between the asked price and the bid price is known as the spread.

Q: Spot exchange markets provide the potential for arbitrage opportunities.

Q: Arbitrage is the process of buying in one market and selling in another market in order to make a riskless profit.

Q: An indirect quote indicates the number of units of foreign currency that can be bought for one unit of the home currency.

Q: Short-term daily fluctuations in exchange rates are caused by supply and demand conditions in the foreign exchange market.

Q: The forward exchange rate quoted today should be equal to the spot rate in the future.

Q: A cross rate is the computation of an exchange rate for a currency from the exchange rates of two other currencies.

Q: The bid-asked spread is much lower for currencies that are infrequently traded in order to compensate banks for providing the service.

Q: Most major countries in the world have agreed on fixed exchange rates in order to facilitate international trade.

Q: Which of the following is a reason for international investment?A) to reduce portfolio riskB) to increase P/E ratioC) to gain an advantage in a foreign countryD) to gain access to foreign currency

Q: Problems of multinationals include A) cash management and positioning of funds. B) managing receivables. C) global control. D) all of the above.

Q: A major source of long-term capital overseas is in the Eurocurrency market.

Q: The cost of debt used in the international investment decision is the lesser of the parent's or the subsidiary's cost of debt.

Q: A U.S. corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange is an example of direct foreign investment.

Q: International expansion often occurs because it is generally easier for firms to expand the market for their products rather than to develop new products.

Q: The Eurodollar market is larger than any financial market in the United States.

Q: Investments in capital markets in foreign countries are motivated by the desire to earn higher returns and reduce risk through international diversification.

Q: Compared with other developed countries, the U.S. is particularly reliant on foreign trade for self-subsistence.

Q: Spontaneous sources of financing include A) marketable securities. B) wages payable. C) accounts receivable. D) common stock.

Q: Accrued wages and accrued taxes are considered to be A) permanent sources of financing because companies must always pay wages and taxes. B) spontaneous sources of unsecured short-term financing. C) secured sources of short-term financing. D) current assets.

Q: According to the hedging principle, fixed assets should NOT be financed with A) permanent financing. B) temporary financing. C) permanent plus spontaneous financing. D) equity financing.

Q: AFB, Inc. purchases a new delivery van which is expected to increase cash flows for the next 10 years. AFB can finance the purchase with a standard 48-month vehicle loan, or by getting a 10-year loan from the bank. According to the hedging principle, AFB should A) use the 10-year financing in order to match the cash flow stream from the asset with the financing repayments. B) use the 48-month loan since it matches the type of asset with the type of loan. C) use either type of financing, but hedge the risk in the options market. D) avoid using either loan and finance the truck with current cash reserves to avoid interest expense.

Q: The primary source of spontaneous financing is accrued taxes.

Q: The hedging principle implies that permanent asset investments not financed by spontaneous sources should be financed with permanent sources, and temporary investments not financed by spontaneous sources should be financed with temporary sources.

Q: Sources of spontaneous financing include trade credit, salaries payable, and accrued taxes.

Q: Total debt must always be equal to the sum of temporary, permanent, and spontaneous sources of financing.

Q: Commercial paper is an example of spontaneous financing because it is generated by the day-to-day operations of a company.

Q: Trade credit is a source of spontaneous financing.

Q: Notes payable is a spontaneous source of financing.

Q: The firm's total investment in current assets should be financed with temporary sources of financing.