MCQ on International Finance

1. If portable disk players made in China are imported into the United States, the Chinese
manufacturer is paid with
a) international monetary credits.
b) dollars.
c) yuan, the Chinese currency.
d) euros, or any other third currency.

2. In the foreign exchange market, the ________ of one country is traded for the ________
of another country.
a) currency; currency
b) currency; financial instruments
c) currency; goods
d) goods; goods

3. Which of the following examples definitely illustrates a depreciation of the U.S. dollar?
a)
b)
c)
d)

The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.
The dollar exchanges for 250 yen and then exchanges for 275 francs.
The dollar exchanges for 100 francs and then exchanges for 120 yen.
The dollar exchanges for 120 francs and then exchanges for 100 francs

4. By definition, currency appreciation occurs when

a)
b)
c)
d)

the value of all currencies fall relative to gold.

the value of all currencies rise relative to gold.
the value of one currency rises relative to another currency.
the value of one currency falls relative to another currency.

5. Given a home country and a foreign country, purchasing power parity suggests that:
a)

the home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate;
b) the home currency will depreciate if the current home interest rate exceeds the current
foreign interest rate;
c)

the home currency will depreciate if the current home inflation rate exceeds the
current foreign inflation rate.

d)

the home currency will depreciate if the current home inflation rate exceeds the current
foreign interest rate;

6. If purchasing power parity were to hold even in the short run, then:
a)
b)
c)
d)

real exchange rates should tend to decrease over time;

quoted nominal exchange rates should be stable over time.
real exchange rates should tend to increase over time;
real exchange rates should be stable over time;

7. Interest Rate Parity (IRP) implies that:

a) Interest rates should change by an equal amount but in the opposite direction to the
difference in inflation rates between two countries
b) The difference in interest rates in different currencies for securities of similar risk
and maturity should be consistent with the forward rate discount or premium for
the foreign currency
c) The interest rates between two countries start in equilibrium, any change in the
differential rate of inflation between the two countries tends to be offset over the longterm by an equal but opposite change in the spot exchange rate
d) In the long run real interest rate between two countries will be equal
e) Nominal interest rates in each country are equal to the required real rate plus
compensation for expected inflation

8. A forward currency transaction:

a) Is always at a premium over the spot rate
b) Means that delivery and payment must be made within one business day
(USA/Canada) or two business days after the transaction date
c) Calls for exchange in the future of currencies at an agreed rate of exchange
d) Sets the future date when delivery of a currency must be made at an unknown spot
exchange rate
e) None of the above is correct

9. If inflation is expected to be 5 per cent higher in the United Kingdom than in Switzerland:
a) purchasing power parity would predict that the UK spot rate should decline by
about 5 per cent;
b) the theory of purchasing power parity would predict a drop in nominal interest rates in
the United Kingdom of approximately 5 per cent;
c) expectations theory would suggest that the spot exchange rates between the two
countries should remain unchanged over the long run;
d) the efficient market hypothesis suggests that no predictions can be made under a
system of freely floating rates.

10. The date of settlement for a foreign exchange transaction is referred to as:
a)
b)
c)
d)
e)

Clearing date
Swap date
Maturity date
Value date
Transaction date

11. Hedging is used by companies to:

a)
b)
c)
d)
e)

Decrease the variability of tax paid

Decrease the spread between spot and forward market quotes
Increase the variability of expected cash flows
Decrease the variability of expected cash flows
Increase the variability of tax paid

12. Which of the following is not a type of foreign exchange exposure?

a)
b)
c)
d)
e)

Tax exposure
Translation exposure
Transaction exposure
Balance sheet exposure
Economic exposure

13. Which of the methods below may be viewed as most effective in protecting against
economic exposure?
a)
b)
c)
d)
e)

Futures market hedging

Forward contract hedges
Geographical diversification
Money market hedges
None of the above

14. When an enterprise has an unhedged receivable or payable denominated in a foreign

currency and settlement of the obligation has not yet taken place, that firm is said to have:
a)
b)
c)
d)
e)

Tax exposure
Operating exposure
Infinite exposure
Accounting exposure
Transaction exposure

15. The potential for an increase or decrease in the parent's net worth and reported net income
caused by a change in exchange rates since the last consolidation of international operations is a
reflection of:
a)
b)
c)
d)
e)

Translation exposure
Exchange rate exposure
Strategic exposure
Economic exposure
Operating exposure

16. If one anticipates that the pound sterling is going to appreciate against the US dollar, one
might speculate by _______ pound call options or ______ pound put options.
a) buying; buying
b) selling; buying
c) selling; selling
d) buying; selling

17. Which of the following is true of foreign exchange markets?

a) The futures market is mainly used by hedgers while the forward market is mainly used
for speculating.
b) The futures market and the forward market are mainly used for hedging.
c) The futures market is mainly used by speculators while the forward market is
mainly used for hedging.
d) The futures market and the forward market are mainly used for speculating.

18. The difference between the value of a call option and a put option with the same
exercise price is due primarily to:
a) The greater liquidity of call options
b) The use of continuous as opposed to discrete discounting
c) The differential between the current stock price and the exercise price in present
value terms
d) The effect of dividends on the two securities
e) The volatility of the price of the underlying stock
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19. Which of the following is not an interest rate derivative used for interest rate management?
a)
b)
c)
d)
e)

Swap
Cap
Floor
Interest rate guarantee
All of the above are interest rate derivatives

20. Counterparty risk is:

a) The risk of loss when exchange rates change during the period of a financial contract
b) Based on the notional amount of the contract
c) The risk of loss if the other party to a financial contract fails to honour its
obligation
d) Present only with exchange-traded options
e) Eliminated by the use of compulsory insurance

21. The impact of Foreign exchange rate on firm is called as

a)
b)
c)
d)

Operating Exposure
Transaction exposure
Translation exposure
Business risk

22. Foreign currency forward market is

a)
b)
c)
d)

An over the counter unorganized market

Organized market without trading
Organized listed market
Unorganized listed market

23. Forward premium / differential depends upon

a)
b)
c)
d)

Currencies fluctuation
Interest rate differential between two countries
Demand & supply of two currencies
Stock market returns

24. If transaction exposure are in same dates, then it can be hedged

a)
b)
c)
d)

By purchasing single forward contract

By purchasing multiple forward contract
Cannot be hedged by forward contracts
None of the above

25. Interest rate swaps are usually possible because international financial markets in different
countries are
a)
b)
c)
d)

Efficient
Perfect
Imperfect
Both a & b

26. The exchange rate is the

a) total yearly amount of money changed from one countrys currency to another countrys
currency
b) total monetary value of exports minus imports
c) amount of countrys currency which can exchanged for one ounce of gold
d) price of one countrys currency in terms of another countrys currency

27. Exchange rates

a) are always fixed
b) fluctuate to equate the quantity of foreign exchange demanded with the quantity
supplied
c) fluctuate to equate imports and exports
d) fluctuate to equate rates of interest in various countries

28. If the U.S. dollar appreciates relative to the British pound,

a) it will take fewer dollars to purchase a pound
b) it will take more dollars to purchase a pound
c) it is called a weakening of the dollar
d) both a & c

29. An arbitrageur in foreign exchange is a person who

a) earns illegal profit by manipulating foreign exchange
b) causes differences in exchange rates in different geographic markets
c) simultaneously buys large amounts of a currency in one market and sell it in another
market
d) None of the above

30. A speculator in foreign exchange is a person who

a) buys foreign currency, hoping to profit by selling it a a higher exchange rate at some
later date
b) earns illegal profit by manipulation foreign exchange
c) causes differences in exchange rates in different geographic markets
d) None of the above

31. The Purchasing Power Parity (PPP) theory is a good predictor of

a) all of the following:
b) the long-run tendencies between changes in the price level and the exchange rate of two
countries
c) interest rate differentials between two countries when there are strong barriers preventing
trade between the two countries
d) either b or c
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32)According to the Purchasing Power Parity (PPP) theory,

a) Exchange rates between two national currencies will adjust daily to reflect price level
differences in the two countries
b) In the long run, inflation rates in different countries will equalize around the world
c) In the long run, the exchange rates between two national currencies will reflect pricelevel differences in the two countries
d) None of the above

33) A floating exchange rate

a) is determined by the national governments involved
b) remains extremely stable over long periods of time
c) is determined by the actions of central banks
d) is allowed to vary according to market forces)

34) Under a gold standard,

a) a nations currency can be traded for gold at a fixed rate
b) a nations central bank or monetary authority has absolute control over its money supply
c) new discoveries of gold have no effect on money supply or prices
d) a & b

35) The Bretton Woods accord

a) of 1879 created the gold standard as the basis of international finance
b) of 1914 formulated a new international monetary system after the collapse of the gold
standard
c) of 1944 formulated a new international monetary system after the collapse of the gold
standard
d) None of the above
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36) The current system of international finance is a

a) gold standard
b) fixed exchange rate system
c) floating exchange rate system
d) managed float exchange rate system

37) Ask quote is for

a)
b)
c)
d)

Seller
Buyer
Hedger
Speculator

38) A simultaneous purchase and sale of foreign exchange for two different dates is called
a)
b)
c)
d)

currency devalue
currency swap
currency valuation
currency exchange

39) If your local currency is in variable form and foreign currency is in fixed form the quotation
will be:
a)
b)
c)
d)

Indirect
Direct
Local form
Foreign form

40) In 1944 international accord is recognized as

a)
b)
c)
d)

Breton Wood Agreement

Exchange Agreement
International Trade
Fisher Effect

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41) In a quote exchange rate, the currency that is to be purchase with another currency is called
the
a)
b)
c)
d)

liquid currency
foreign currency
local currency
base currency

42) An economist will define the exchange rate between two currencies as the:
a) Amount of one currency that must be paid in order to obtain one unit of another
currency
b) Difference between total exports and total imports within a country
c) Price at which the sales and purchases of foreign goods takes place
d) Ratio of import prices to export prices for a particular country

43) The Purchasing Power Parity should hold:

a)
b)
c)
d)

Under a fixed exchange rate regime

Under a flexible exchange rate regime
Under a dirty exchange rate regime
Always

44) Which of the following is NOT a criticism of a flexible exchange rate system?
a) Flexible exchange rates tend to be variable and therefore cause more uncertainty
b) Flexible exchange rate systems require discipline on the part of central banks that may
not be forthcoming
c) Under flexible exchange rates, trading countries tend to rely more heavily upon
tariffs and other restrictions
d) The flexible exchange rate system reduces the power of fiscal policy

45) Arbitrageurs in foreign exchange markets:

a)
b)
c)
d)

attempt to make profits by outguessing the market)

make their profits through the spread between bid and offer rates of exchange)
take advantage of the small inconsistencies that develop between markets)
need foreign exchange in order to buy foreign goods)
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46) It is very difficult to interpret news in foreign exchange markets because:

a)
b)
c)
d)

very little information is publicly available

most of the news is foreign
it is difficult to know which news is relevant to future exchange rates
it is difficult to know whether the news has been obtained legally

47) Covered interest rate parity occurs as the result of:

a)
b)
c)
d)

the actions of market-makers

interest rate arbitrage
purchasing power parity
stabilising speculation

48) 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
49) 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
50) A forward contract to deliver British pounds for U)S) dollars could be described either as
________ or ________)
a)
b)
c)
d)

buying dollars forward; buying pounds forward

selling pounds forward; selling dollars forward
selling pounds forward; buying dollars forward
selling dollars forward; buying pounds forward

https://homepage)univie)ac)at/adusei)jumah/chap101)pdf
http://wenku)baidu)com/view/7e7907cebb4cf7ec4afed050)html ( till 26 taken)

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