Faculty of Foreign Languages – Department of Business English BF-Term 5

Full Name: Phạm Thị Thanh Thương Class: .................................. Student Code: 11215612
Mark:

TEST 6

 TOPIC 6: FINANCIAL MARKETS 

SECTION 1 - Match the terms with the explanations

Terms
1 Appreciation
2 Asset-backed
commercial paper
3 Bearer instrument
4 Book entry
5 Capital mobility
6 Competitive bidding
7 Depreciation
8 Discounting
9 Deep market
10 Liquid market
11 LIBOR - London
interbank offer rate
12 Exchange rate
14 Forward transactions
15 Foreign exchange
market
16 Law of one price
17 Tariffs
18 Theory of purchasing
Explanations
C A The immediate exchange of bank deposits denominated
in different currencies.
N B The interest rate charged on short-term funds bought or
sold between large international banks.
T C Increase in a currency’s value
O D The principle is that if two or more countries produce an
identical good, the price of this good should be the same
no matter which country produces it.
K E Competing in an auction against other potential buyers
of Treasury securities.
E F Restrictions on the quantity of foreign goods that can be
imported
M G A market in which securities can be bought and sold
quickly and with low transaction costs.
P H The theory that exchange rates between any two
currencies will adjust to reflect changes in the price
levels of the two countries.
R I The price of one currency in terms of another.
G K A situation in which foreigners can easily purchase a
country’s assets and the country’s residents can easily
purchase foreign assets.
B L Taxes on imported goods.
I M Decrease in a currency’s value.
Q N Short-term commercial paper secured by a bundle of
assets, usually mortgages
S O System of tracking securities ownership where no
certificate is issued. Instead, the security issuer keeps
records, usually electronically, of who holds outstanding
securities.
D P Reduction in the value of a security at purchase such
that when it matures at full value, the investor receives a
fair return.
L Q An exchange rate transaction that involves the exchange
of bank deposits denominated in different currencies at
some specified future date.
H R Markets where there are many participants and a great
 Faculty of Foreign Languages – Department of Business English BF-Term 5
power parity deal of activity, thus ensuring that securities can be
(PPP) rapidly sold at fair prices.
19 Quotas F S The market in which exchange rates are determined.
20 Spot transactions A T A security payable to the holder when presented. No
proof of ownership is required.

SECTION 2 – Fill in the gaps

denominated currencies forecasts productivity traders

Eurodollars money market price levels low decisions
managers price needed maturity cost
high banker’s treasury bill negotiable commercial
acceptances returns certificates of paper
deposit

- (1) _ money market _ securities are short-term instruments with an original (2) __ maturity __ of
less than one year. These securities include Treasury bills, (3) __ commercial paper __, federal funds,
repurchase agreements, negotiable certificates of deposit, banker’s acceptances, and (4)
__Eurodollars__.
- Money market securities are used to “warehouse” funds until (5) __ needed __. The returns earned
on these investments are low due to their (6) ___low___ risk and (7) ____high___ liquidity.
- (8) ___ treasury bill returns ___ are the lowest because they are virtually devoid of default risk. (9)
____ banker’s acceptances ____ and (10) ___ negotiable certificates of deposit ___ are next lowest
because they are backed by the creditworthiness of large money center banks.
- Foreign exchange rates are important because they affect the (11) ____price____ of domestically
produced goods sold abroad and the (12) ____cost____ of foreign goods bought domestically.
- The theory of purchasing power parity suggests that long-run changes in the exchange rate between
two countries’ (13) ___ currencies ___ are determined by changes in the relative (14) ____price
levels____ in the two countries. Other factors that affect exchange rates in the long run are tariffs and
quotas, import demand, export demand, and (15) ___ productivity ____.
- (16) ____ forecasts ____ of foreign exchange rates are very valuable to (17) ____ managers ____ of
financial institutions because these rates influence (18) ___ decisions ____ about which assets (19)
___ denominated ___ in foreign currencies the institutions should hold and what kinds of trades
should be made by their (20) ____ traders ____ in the foreign exchange market.

SECTION 3 – Multiple Choice Questions

1) A financial market in which only short-term debt instruments are traded is called the ________
market.
A) bond
B) money
C) capital
D) stock
 Faculty of Foreign Languages – Department of Business English BF-Term 5
2) Because these securities are more liquid and generally have smaller price fluctuations, corporations
and banks use the ________ securities to earn interest on temporary surplus funds.
A) money market
B) capital market
C) bond market
D) stock market

3) Prices of money market instruments undergo the least price fluctuations because of
A) the short terms to maturity for the securities.
B) the heavy regulations in the industry.
C) the price ceiling imposed by government regulators.
D) the lack of competition in the market.

4) U.S. Treasury bills pay no interest but are sold at a ________. That is, you will pay a lower
purchase price than the amount you receive at maturity.
A) premium
B) collateral
C) default
D) discount

5) A debt instrument sold by a bank to its depositors that pays annual interest of a given amount and
at maturity pays back the original purchase price is called
A) commercial paper.
B) a negotiable certificate of deposit.
C) a municipal bond.
D) federal funds.

6) A short-term debt instrument issued by well-known corporations is called

A) commercial paper.
B) corporate bonds.
C) municipal bonds.
D) commercial mortgages.

7) Federal funds are

A) funds raised by the federal government in the bond market.
B) loans made by the Federal Reserve System to banks.
C) loans made by banks to the Federal Reserve System.
D) loans made by banks to each other.

8) The British Banker's Association average of interbank rates for dollar deposits in the London
market is called the
A) Libor rate.
B) federal funds rate.
C) prime rate.
D) Treasury Bill rate.

9) Which of the following instruments are traded in a money market?

A) State and local government bonds
B) U.S. Treasury bills
C) Corporate bonds
 Faculty of Foreign Languages – Department of Business English BF-Term 5
D) U.S. government agency securities

10) Which of the following instruments is not traded in a money market?

A) Residential mortgages
B) U.S. Treasury Bills
C) Negotiable bank certificates of deposit
D) Commercial paper

SECTION 4 – Answer the questions (Homework)

1. When the euro appreciates, are you more likely to drink California or French wine?

You are more likely to drink California wine because the euro appreciation makes
French wine relatively more expensive than California wine.

2. If the Indian government unexpectedly announces that it will be imposing higher tariffs on
foreign goods one year from now, what will happen to the value of the Indian rupee today?

The Indian rupee will appreciate. The announcement of tariffs will raise the expected
future exchange rate for the rupee and so increase the expected appreciation of the rupee.
This means that the demand for rupee-denominated assets will increase, shifting the
demand curve to the right, and the rupee exchange rate therefore rises.

3. “A country is always worse off when its currency is weak (falls in value).” Is this statement
true, false, or uncertain? Explain your answer.

False. Although a weak currency has the negative effect of making it more expensive to
buy foreign goods or to travel abroad, it may help domestic industry. Domestic goods
become cheaper relative to foreign goods, and the demand for domestically produced
goods increases. The resulting higher sales of domestic products may lead to higher
employment, a beneficial effect on the economy.