Chapter 5 Practice questions and answer keys

Lecture #3 – Practice Questions – International Financial Management 456

Chapter 5 – The Market for Foreign Exchange

1. Most foreign exchange transactions are for

A. intervention by central banks.

B. interbank trades between international banks or nonbank dealers. C. retail trade.

D. purchase of hard currencies.

2. The difference between a broker and a dealer is

A. dealers sell drugs; brokers sell houses.

B. brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to buy and sell from their inventory.

C. brokers transact in stocks and bonds; currency is bought and sold through dealers. D. none of the above

3. Intervention in the foreign exchange market is the process of

A. a central bank requiring the commercial banks of that country to trade at a set price level. B. commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.

C. a central bank buying or selling its currency in order to influence its value. D. the government of a country prohibiting transactions in one or more currencies.

4. The spot market

A. involves the almost-immediate purchase or sale of foreign exchange. B. involves the sale of futures, forwards, and options on foreign exchange. C. takes place only on the floor of a physical exchange. D. all of the above. 5.

Using the table shown, what is the most current spot exchange rate shown for British pounds? Use a direct quote from a U.S. perspective. A. $1.61 = ￡1.00 B. $1.60 = ￡1.00 C. $1.00 = ￡0.625 D. $1.72 = ￡1.00

6. Suppose that the current exchange rate is

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