Midterm 1 SINA A Commonly used alternative to setting up production facilities abroad is to ___ a local firm to manufacture the company’s products in return for royalties Horizontally integrate Vertically integrate Finance License   Suppose it is January 1980 and the $/DM exchange rate is DM1= $

Midterm 1 SINA

1. A Commonly used alternative to setting up production facilities abroad is to ___ a local firm to manufacture the company’s products in return for royalties

1. Horizontally integrate
2. Vertically integrate
3. Finance
4. License

2. Suppose it is January 1980 and the $/DM exchange rate is DM1= $.35 and the DM/FF exchange rate is FF1= DM.31. What is the FF/$ exchange rate?

1. 3.226 French francs per dollar
2. .886 French francs per dollar
3. 1.129 French francs per dollar
4. 9.217 French franc per dollar

3. With respect to credit risk, the CME’s _____ assumes the opposite side of each futures contract, thereby reducing credit risk substantially.

1. Opening bank
2. Maintenance margin
3. Credit limit
4. Clearing house

4. The inflation rates in the U.S. and Franc in January 1991 were expected to be 4% per annum and 7% per annum, respectively. If the current spot rate that day was $.1050, then the expected spot rate in three years was

1. $.0992/FF
2. $.0964/FF
3. $.1112/FF
4. $.1150/FF

5. The overwhelming majority of foreign exchange transactions involve

1. Multinational corporations buying and selling foreign exchange
2. Governments buying and selling foreign exchange
3. Importers and exporters buying and selling feorign exchange
4. Banks buying and selling foreign exchange

6. As a condition of his hiring by Enron, Jeff Skilling required that the SEC approve the accounting methodology known as ____ accounting

1. Black-box
2. Cash
3. Mark-to-market
4. Accrual

7. Suppose you are holding a long position in a euro futures contract that matures in 76 days. The agreed upon price is $1.15 for 125,000 euro. At the close of trading today, the futures price has risen to $1.155. Under marking to market, you now

1. Will receive $625 and a new futures contract prices at $1.155
2. Must pay over $1,250 to the seller of the futures contract
3. Hold a futures contract that has risen in value by $1,250
4. Hold a futures contract that has fallen in value by $625

8. The basic difference between currency forward and futures contracts is that

1. Forward contracts have less credit risk than futures
2. Forward contracts have daily limits on price fluctuations whereas futures contracts have no daily limit on price fluctuations
3. Forward contracts are standardized while futures contracts are individually tailored
4. Forward contracts are negotiated with banks whereas futures contracts are not

9. An American company that imports leather goods from England is most likely to be

1. Short pounds
2. Long pounds
3. Can’t tell
4. None of the above

10. A _____ between a bank and a customer calls for a fixed delivery date, at a fixed exchange rate for a specified amount of one currency against another currency payment.

1. Currency option
2. Forward contract
3. Currency swap
4. Spot quotation

11. An exporter manufacturing a specialized piece of equipment can hedge the risk that its customer will cancel the contract before shipment by insisting on___ method of payment

1. Open account
2. Letter of credit
3. Credit card
4. Bull of lading

12. On Friday, September 13, 1992, the lira was worth DM 0.0013/L over the weekend the lira devalued against the DM to DM 0.0012/L By how much had the lira devalued against the DM?

1. 7.69%
2. 5.21%
3. 9.27%
4. 8.33%

13. In the interbank currency market, dealers quote the forward rate as a discount or premium from the spot rate. The differential is known as the ___ rate.

1. Interest
2. Premium
3. Swap
4. Outright

14. There are two types of currency options based on expiration dates. They are the ___ options.

1. American and European
2. Fixed and variable
3. American and British
4. British and Asian

15. Suppose the current spot rate for the euro is $1.3427. A call option with an exercise price of $1.3550 is said to be.

1. In-the-money
2. Past breakeven
3. Out-of-the-money
4. At-the-money

16. If a foreigner purchases a U.S. government security, the

17. Which INCOTERM will exporters quote most frequently?

1. FOB
2. CIF
3. EX WORKS
4. FAS

18. Which of the following has provided a major incentive for currency speculators to participate in the currency futures market?

1. S table and orderly market
2. Many types of currencies available to use as a hedge
3. Low initial margins
4. Smaller bid-ask spreads

19. In annualized interest rates in the U.S. and France on January 1, 1991 are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180 day forward rare will interest rate parity hold?

1. $.1088
2. $.1070
3. $.1130
4. $.1150

20. ___ is enforced by global arbitrageurs who follow the profit- guaranteeing rule of “buy low, sell high”

1. The law of one price
2. Marking to market
3. The fisher effect
4. Market inefficiency

21. A higher nominal interest rate in one country indicates the fact that the country’s currency under a freely-floating exchange system is expected to___.

1. Appreciate
2. Evaluate
3. Devalue
4. Depreciate

22. After factoring is set up on a non-recourse basis, the ___ has title to the receivables and the __ is responsible for credit checking and collecting them.

1. Factor, factor
2. Exporter, factor
3. Exporter, importer
4. Factor, exporter

23. In the Marc Rich & co. illustration, the barter portion of the story involved

1. Marc rich shipping oil to be paid using copper concentrate from the Brazilians
2. The Mongolian company selling oil to marc rich in exchange for a hard currency profit
3. Marc rich selling sugar in exchange for oil products
4. The sale by Brazilian sugar dealers in exchange for marc rich payment of copper concentrate

24. Of the following exchange rates depend the most upon relative

1. Monetary systems
2. Political systems
3. Trade deficits
4. Inflation rates between nations

25. A____ contract is between the Chicago Mercantile Exchange and its customer and required a fixed delivery date, at a fixed exchange rate for a fixed- sized contract amount of a foreign currency to be delivered or purchased.

1. Currency options
2. Currency forward
3. Currency swap
4. Currency futures

26. The post and 180 day forward rates for the euro are $1.3310 and $1.3402, respectively, the euro is said to be selling at a forward

1. Discount of 6.9%
2. Discount of 1.4%
3. Premium of 6.9%
4. Premium of 1.4%

27. In the currency markets, the ____ for spot transactions is set as the ___ after the date on which the transaction is concluded.

1. Value date, second working day
2. Expiration date, same day
3. Strike date, one month
4. Settlement date, same day

28. Most currency transactions are channeled through the worldwide __ market which accounts for ___ of foreign exchange transactions.

1. Interbank, 95%
2. Internet, 30%
3. Interbank, 50%
4. Stock, 50%

29. The average total volume on the global currency markets daily approximates

1. $4trillion
2. $2trillion
3. $3trillion
4. $1trillion

30. A draft serves which of the following functions?

1. A conditional instrument of payment
2. The most expensive form of trade payment methods
3. A process that requires a bank’s guarantee
4. Written evidence of a financial obligation

31. The world’s largest currency market is located in the city of___.

1. London
2. Tokyo
3. New York
4. Shanghai

32. On January 1, 1990, the annual inflation rates in the U.S. and Greece were expected to be 3% and 8%, respectively. If the currency spot rate that day for the drachma was $.007, then the expected spot rate in three years was

1. $.00823
2. $.00751
3. $.00607
4. $.00694

33. Multinational firms hedge most often with ___ contracts.

1. Options
2. Forward
3. Discounted drafts
4. Futures

34. The off shoring of services can be done in two ways:___, through the establishment of wholly owned subsidiaries, or ___, by outsourcing a service to a ___.

1. Internally, externally, foreign government
2. Internally, externally, third-party provider
3. Externally, internally, foreign competitor
4. Externally, internally, third-party provider

35. A ____ draft is one unaccompanied by any other documents and its primary purpose is to pressure the buyer into paying.

1. Time
2. Sight
3. Clean
4. Documentary

36. The only U.S.  government agency dedicated solely to financing and facilitating U.S. exports is the

1. U.S. agency for international development
2. Export import bank of the U.S.
3. Foreign credit association for foreign trade
4. Bankers’ association for foreign trade

37. A major advantage of hedging with currency options contracts includes the

1. Extensive delivery dates available
2. Large number of currencies traded
3. The right but not the requirement to exercise the contract
4. Unlimited contract sizes

38. Suppose the quote for euro is $.9865-92/E. the percent spread is

1. 0.27%
2. 0.62%
3. 2.31%
4. 0.97%

39. When we say containerized shipping in international trade is inter-modal, we mean

1. The shipment may use a variety of rail, truck, and ocean transport
2. The goods are consolidated into larger shipments of various products
3. Any method of production may be used in the manufacturing process
4. The shipment if bound for ports that are at either end of the land bridge

40. The Alameda Corridor provides direct access from the ____ of Los Angeles and Long Beach to the railroad terminals in downtown Los Angeles.

1. Freight forwarders
2. City governments
3. Financial institutions
4. Ports

41. A currency whose exchange rate is set by the government of the country rather than the forces of supply and demand is known as a ___ currency.

1. Fiat
2. Pegged
3. Hard
4. Freely-floating

42. Fluor Corporation has just made a French euro bid on a major project located in France. It won’t find out for 60 days whether it has won the contract. There will be a 10% signing bonus payable to the winner in Euros. The best way to protect against exchange rate risk on its bid is for Fluor to

1. Buy a euro put option
2. Sell a euro futures contract
3. Sell a euro call option
4. Buy a euro futures contract

43. Which of the following is NOT an advantage when hedging with currency future contracts?

1. Low margin requirements
2. Many safeguards such as daily trading limits on price changes
3. Multiple expiration dates during the next 12 months
4. Low default rates

44. An exporter shipping goods to a nation that may impose currency controls will reduce risk the most by seeking a letter of credit that is

1. Irrevocable and documentary
2. Irrevocable, confirmed and documentary
3. Documentary and confirmed
4. Irrevocable and confirmed

45. Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005 , then the best estimate of the peso’s spot value in 3 years is

1. $.00276/peso
2. $.00102/peso
3. $.00321/peso
4. $.01190/peso

46. In the currency options market, the original seller of the option is known as the

1. Arbitrageur
2. Speculator
3. Writer
4. Broker

47. In the DVD “Enron: The smartest guys in room” who was the CEO of the company during most of the 1990’s?

1. Andrew Fastow
2. Ken Lay
3. Cliff Baxter
4. Jeff Skilling

48. ____ is the process that mitigates the exchange rate risk involved in transactions using international currencies.

1. Discounting
2. Hedging
3. Arbitraging
4. Swapping

49. Most often banker’s acceptances trade at rates very close to those on___.

1. Promissory notes
2. Certificates of deposit
3. Sight drafts
4. 90 day Treasuery bills

50. ____ in the currency markets is (are) considered desire able by international traders since it results in uniform exchange rates globally.

1. A covered call
2. Arbitrage
3. Currency controls by government
4. Short selling