Test bank International Finance MCQ(word)Chap 5

Fundamentals of Multinational Finance, 3e (Moffett) Chapter 5 The Foreign Exchange Market 5.1 Multiple Choice and True/False Questions

1) Which of the following is NOT true regarding the market for foreign exchange?

A) The market provides the physical and institutional structure through which the money

of one country is exchanged for another.

B) The rate of exchange is determined in the market.

C) Foreign exchange transactions are physically completed in the foreign exchange market.

D) All of the above are true.

Answer: D

Topic: Introduction to the Foreign Exchange Market

Skill: Recognition

2) A/An ________ is an agreement between a buyer and seller that a fixed amount of one

currency will be delivered at a specified rate for some other currency. A) Eurodollar transaction

B) import/export exchange

C) foreign exchange transaction

D) interbank market transaction

Answer: C

Topic: Introduction to the Foreign Exchange Market

Skill: Recognition

3) While trading in foreign exchange takes place worldwide, the major currency trading centers

are located in

A) London, New York, and Tokyo.

B) New York, Zurich, and Bahrain.

C) Paris, Frankfurt, and London.

D) Los Angeles, New York, and London.

Answer: A

Topic: Introduction to the Foreign Exchange Market

Skill: Recognition

4) Because the market for foreign exchange is worldwide, the volume of foreign exchange

currency transactions is level throughout the 24-hour day. Answer: FALSE

Topic: Introduction to the Foreign Exchange Market

Skill: Recognition

5) Which of the following is NOT a motivation identified by the authors as a function of the

foreign exchange market?

A) The transfer of purchasing power between countries.

B) Obtaining or providing credit for international trade transactions.

C) Minimizing the risks of exchange rate changes.

D) All of the above were identified as functions of the foreign exchange market.

Answer: D

Topic: Foreign Exchange Market Functions

Skill: Recognition

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6) The authors identify two tiers of foreign exchange markets:

A) bank and nonbank foreign exchange.

B) commercial and investment transactions.

C) interbank and client markets.

D) client and retail market.

Answer: C

Topic: Foreign Exchange Market Tiers

Skill: Recognition

7) The foreign exchange market is NOT efficient because

A) market participants do not compete with one another due to the fact that exchange

takes place around the world and not in a single centralized location. B) dealers have ask prices that are higher than bid prices.

C) central governments dominate the foreign exchange market and everybody knows that

by definition, central governments are inefficient.

D) none of the reasons listed are accurate because the foreign exchange market is efficient.

Answer: D

Topic: Foreign Exchange Market Efficiency

Skill: Conceptual

8) Dealers in foreign exchange departments at large international banks act as market makers

and maintain inventories of the securities in which they specialize. Answer: TRUE

Topic: Foreign Exchange Market Dealers and Brokers

Skill: Recognition

9) Currency trading lacks profitability for large commercial and investment banks but is

maintained as a service for corporate and institutional customers. Answer: FALSE

Topic: Foreign Exchange Market Profitability

Skill: Recognition

10) It is characteristic of foreign exchange dealers to

A) bring buyers and sellers of currencies together but never to buy and hold an inventory

of currency for resale.

B) act as market makers, willing to buy and sell the currencies in which they specialize.

C) trade only with clients in the retail market and never operate in the wholesale market

for foreign exchange.

D) All of the above are characteristics of foreign exchange dealers.

Answer: B

Topic: Foreign Exchange Market Dealers

Skill: Recognition

11) Which of the following may be participants in the foreign exchange markets?

A) bank and nonbank foreign exchange dealers

B) central banks and treasuries

C) speculators and arbitragers

D) All of the above.

Answer: D

Topic: Foreign Exchange (FX) Market Participants

Skill: Recognition

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12) ________ seek to profit from trading in the market itself rather than having the foreign

exchange transaction being incidental to the execution of a commercial or investment transaction.

A) Speculators and arbitragers

B) Foreign exchange brokers

C) Central banks

D) Treasuries

Answer: A

Topic: Foreign Exchange (FX) Market Participants

Skill: Recognition

13) In the foreign exchange market, ________ seek all of their profit from exchange rate changes

while ________ seek to profit from simultaneous exchange rate differences in different markets.

A) wholesalers; retailers

B) central banks; treasuries

C) speculators; arbitragers

D) dealers; brokers

Answer: C

Topic: Foreign Exchange (FX) Market Participants

Skill: Recognition

14) Foreign exchange ________ earn a profit by a bid -ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase. A) central banks; treasuries

B) dealers; brokers

C) brokers; dealers

D) speculators; arbitragers

Answer: B

Topic: Foreign Exchange (FX) Market Participants

Skill: Recognition

15) The primary motive of foreign exchange activities by most central banks is profit.

Answer: FALSE

Topic: Foreign Exchange (FX) Market Participants

Skill: Recognition

16) Dealers sometimes use brokers in the foreign exchange market because the dealers desire

A) speed.

B) accuracy.

C) to remain anonymous.

D) all of the above.

Answer: D

Topic: Foreign Exchange (FX) Market Participants

Skill: Recognition

3

17) Daily trading volume in the foreign exchange market was about ________ per ________ in

2007.

A) $3,200 billion; month

B) $1,000 billion; month

C) $3,200 billion; day

D) $1,000 billion; day

Answer: C

Topic: FX Trading Volume

Skill: Recognition

18) Daily trading volume of foreign exchange had actually decreased in 2004 from the levels

reported in 2001. Answer: FALSE

Topic: FX Trading Volume

Skill: Recognition

19) ________ are NOT one of the three categories reported for foreign exchange.

A) Spot transactions

B) Swap transactions

C) Strip transactions

D) Futures transactions

Answer: C

Topic: FX Trading Volume

Skill: Recognition

20) Foreign exchange swaps were larger in 1998 than in 2001. The Bank for International

Settlements attributes this to

A) the introduction of the euro.

B) growing electronic brokering in the spot interbank market.

C) consolidation in general.

D) all of the above.

Answer: D

Topic: FX Trading Volume

Skill: Recognition

21) The greatest amount of foreign exchange trading takes place in the following three cities:

A) New York, London, and Tokyo.

B) New York, Singapore, and Zurich.

C) London, Frankfurt, and Paris.

D) London, Tokyo, and Zurich.

Answer: A

Topic: Foreign Exchange Market Locations

Skill: Recognition

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22) The four currencies that constitute about 80% of all foreign exchange trading are

A) U.K pound, Chinese yuan, euro, and Japanese yen.

B) U.S. dollar, euro, Chinese yuan, and U.K. pound.

C) U.S. dollar, Japanese yen, euro, and U.K. pound.

D) U.S. dollar, U.K. pound, yen, and Chinese yuan.

Answer: C

Topic: Foreign Exchange Market Currencies

Skill: Recognition

23) A ________ transaction in the foreign exchange market requires an almost immediate

delivery of foreign exchange. A) spot

B) forward

C) futures

D) none of the above

Answer: A

Topic: Foreign Exchange Market Transactions

Skill: Recognition

24) A ________ transaction in the foreign exchange market requires delivery of foreign exchange

at some future date. A) spot

B) forward

C) swap

D) currency

Answer: B

Topic: Foreign Exchange Market Transactions

Skill: Recognition

25) A spot transaction in the interbank market for foreign exchange would typically involve a

two-day delay in the actual delivery of the currencies, while such a transaction between a bank and its commercial customer would not necessarily involve a two-day wait. Answer: TRUE

Topic: Foreign Exchange Market Spot Transactions

Skill: Recognition

26) A forward contract to deliver British pounds for U.S. dollars could be described either as

________ or ________.

A) buying dollars forward; buying pounds forward

B) selling pounds forward; selling dollars forward

C) selling pounds forward; buying dollars forward

D) selling dollars forward; buying pounds forward

Answer: C

Topic: Foreign Exchange Market Forward Transactions

Skill: Recognition

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