REVIEWS ON INTERNATIONAL FINANCE

1. Assume that a bank's bid rate on Swiss francs is $0.3542 and its ask rate is $0.3786. Its
bid-ask percentage spread is:
a. about 6.53%.
b. about 6.89%.
c. about 6.44%
d. about 6.07%.
2. Eurobonds:
a. can be issued only by European firms.
b. can be sold only to European investors.
c. A and B
d. none of the above
3. The international credit market primarily concentrates on:
a. short-term lending.
b. medium-term lending.
c. long-term lending.
d. providing an exchange of foreign currencies for firms who need them.
4. Assume a Vietnamese firm invoices imports from the U.S. in U.S. dollars. Assume that
the forward rate and spot rate of the Vietnam Dong are equal. If the Vietnamese firm
expects the U.S. dollar to ____ against the VND, it would likely wish to hedge. It could
hedge by ____ dollars forward.
a. depreciate; buying
b. depreciate; selling
c. appreciate; selling
d. appreciate; buying
5. If a home inflation rate ____ relative to other countries, the home country's current
account balance would ____, other things equal.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase
6. The "J curve" effect describes:
a. the continuous long-term inverse relationship between a country's current
account balance and the country's growth in gross national product.
b. the reaction of a country's currency to initially depreciate after the country's
inflation rate declines.
c. the tendency for exporters to initially reduce the price of goods when their
own currency appreciates.
d. the short-run tendency to deteriorate and the long-run tendency to improve for
a country's balance of trade
7. ____ is (are) income received by investors on foreign investments in fixed assets.
a. Foreign portfolio income
b. Foreign direct income
c. Unilateral transfers
d. Factor income
8. Also known as the "central banks' central bank," the ____ attempts to facilitate
cooperation among countries with regard to international transactions and provides
assistance to countries experiencing a financial crisis.
a. International Development Association (IDA)
b. Bank for International Settlements (BIS)
c. International Financial Corporation (IFC)
d. World Trade Organization
9. The one-year forward rate of Euro is quoted at $1.350, and the spot rate of the Euro is
quoted at $1.436. The forward ____ is ____ percent.
a. discount; 5.99
b. discount; 6.37
c. premium; 5.99
d. premium; 6.37
10. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You
decide to hedge your position by selling Japanese yen forward. The current spot rate of the
yen is $0.0087, while the forward rate is $0.0093. You expect the spot rate in 60 days to
be $0.0091. How many dollars will you receive for the 5,000,000 yen 60 days from now?
a. $44,500.
b. $46,500
c. $501 million.
d. $47,500.
11. A put option on Singapore dollar has a strike (exercise) price of $0.012. The present
exchange rate is $0.011. This put option can be referred to as:
a. At the money.
b. out of the money.
c. in the money.
d. at a discount.
12. Assume the bid rate of a Singapore dollar is $0.6354 while the ask rate is $0.6472 at
Bank X. Assume the bid rate of a Singapore dollar is $0.6386 while the ask rate is $0.6510
at Bank Z. Given this information, what would be your gain if you use $1,000,000 and
execute locational arbitrage?
a. $11,764.
b. $11,964.
c. $36,585.
d. Locational arbitrage is not feasible
13. Assume the following bid and ask rates of the pound for two banks as shown below:
Bid Ask
Bank C $1.58 $1.61
Bank D $1.62 $1.65
As locational arbitrage occurs:
a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D
 will increase.
b. the ask rate for pounds at Bank C will increase; the bid rate for pounds at Bank D
will decrease.
c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D
will decrease.
d. the ask rate for pounds at Bank C will decrease; the bid rate for pounds at Bank D
will increase.
14. If quoted cross exchange rates are the same appropriated cross exchange rate, then ____
is not feasible.
a. triangular arbitrage
b. covered interest arbitrage
c. locational arbitrage
d. A and C
15. Assume U.S. and Canadian investors require a real rate of return of 5%. Assume the
nominal U.S. interest rate is 10% and the nominal Canadian interest rate is 8%. If the
Purchasing power parity exists, the Canadian dollar will ____ by about ____.
a. appreciate; 3%
b. appreciate; 2%
c. depreciate; 3%
d. depreciate; 2%
16. Which currency is used the most to denominate Eurobonds?
a. the British pound.
b. the Japanese yen.
c. the U.S. dollar.
d. the Euro.
17. The international money market primarily concentrates on:
a. short-term lending (one year or less).
b. medium-term lending.
c. long-term lending.
d. placing bonds with investors.
18. In the New York forex, the spot rate of the British pound is $1.1345 – $1.1354. Based
on this information, which quotation is used in the New York forex?
a. Direct quotation
b. Indirect quotation
c. A and B
d. None of the above
19. The primary component of the current account is the:
a. balance of capital
b. balance of financial flows.
c. balance of trade.
d. unilateral transfers.
20. A weak home currency may not be a perfect solution to correct a balance of trade deficit
because:
 a. local companies may increase the prices of their products to stay competitive.
b. it reduces the prices of exports by foreign companies.
c. it prevents international trade transactions from being prearranged.
d. it decreases the prices of imports paid by local companies
21. If quoted cross exchange rates are the same appropriated cross exchange rate, then ____
is not feasible.
a. triangular arbitrage
b. covered interest arbitrage
c. locational arbitrage
d. None of the above
22. A Canadian dollar (CAD) is worth $0.81, and a Singapore dollar (SGD) is worth $0.74.
Determine the cross exchange rate CAD/SGD?
a. 0.0946
b. 0.9136
c. 1.0946
d. None of the above
23. If a Government’s restrictions on import in the home country____ relative to other
countries, the home country's current account balance would ____, other things equal.
a. increase; increase
b. increase; decrease
c. decrease; increase
d. decrease; remain unaffected
24. The 90-day forward rate for the euro is $1.083, while the current spot rate of the euro
is $1.064. What is the forward premium or discount of the euro?
a. 1.786 percent discount.
b. 1.786 percent premium.
c. 7.143 percent discount.
d. 7.143 percent premium
25. If your firm expects the British pound to substantially appreciate, it could speculate
by ____ british pound call options or ____ british pound forward in the forward exchange
market.
a. selling; selling
b. selling; purchasing
c. purchasing; purchasing
d. purchasing; selling
26. The premium on a euro put option is $.02. The strike price is $1.32. The break-even
point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero
transactions costs and that the buyer and seller of the put option are speculators.)
a. $1.30; $1.30
b. $1.34; $1.30
c. $1.30; $1.34
d. $1.34; $1.34
27. Assume the following bid and ask rates of the pound for two banks as shown below:
 Bid Ask
Bank A $1.39 $1.40
Bank B $1.41 $1.42
As locational arbitrage occurs:
a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at
Bank B will decrease.
b. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at
Bank B will decrease.
c. the ask rate for pounds at Bank A will increase; the bid rate for pounds at
Bank B will decrease.
d. the ask rate for pounds at Bank A will decrease; the bid rate for pounds at
Bank B will increase.
28. Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian
ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the
ringgit. What will be the profit for an investor who has $500,000 available to conduct
locational arbitrage?
a. $2,041,667.
b. $9,804.
c. $500.
d. $1,639
29. According to interest rate parity (IRP):
a. the forward rate differs from the spot rate by a sufficient amount to offset
the inflation differential between two currencies.
b. the future spot rate differs from the current spot rate by a sufficient amount
to offset the interest rate differential between two currencies.
c. the forward rate differs from the spot rate by a sufficient amount to offset
the interest rate differential between two currencies
d. the future spot rate differs from the current spot rate by a sufficient amount
to offset the inflation differential between two currencies.
30. S(USD/JPY) = 84 and F(USD/JPY) = 92. Interest rate of the U.S dollar is 5%. Assume
that IRP exists, let determine the interest rate of Japaness Yen.
a. 1,15%
b. 15%.
c. 9,52%
d. 3,75%