Ifm Tb Ch3

Chapter 3—International Financial Markets

1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is:

a.|about 4.44%.|

b.|about 4.26%.|

c.|about 4.03%.|

d.|about 4.17%.|

ANS: B

SOLUTION:|Bid-ask percentage spread = ($.47 - $.45)/$.47 = 4.26%|

PTS: 1

2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is:

a.|about 4.99%.|

b.|about 4.88%.|

c.|about 4.65%.|

d.|about 4.43%.|

ANS: C

SOLUTION:|Bid-ask percentage spread = ($.0043 - $.0041)/$.0043 = 4.65%|

PTS: 1

3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent.

a.|3 to 7|

b.|.01 to .03|

c.|10 to 15|

d.|.5 to 1|

ANS: A PTS: 1

4. ____ is not a factor that affects the bid/ask spread.

a.|Order costs|

b.|Inventory costs|

c.|Volume|

d.|All of the above factors affect the bid/ask spread|

ANS: D PTS: 1

5. The forward rate is the exchange rate used for immediate exchange of currencies.

a. True

b. False

ANS: F PTS: 1

6. The ask quote is the price for which a bank offers to sell a currency.

a. True

b. False

ANS: T PTS: 1

7. According to the text, the forward rate is commonly used for:

a.|hedging.|

b.|immediate transactions.|

c.|previous transactions.|

d.|bond transactions.|

ANS: A PTS: 1

8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90 days, it could:

a.|obtain a 90-day forward purchase contract on euros.|

b.|obtain a 90-day forward sale contract on euros.|

c.|purchase euros 90 days from now at the spot rate.|

d.|sell euros 90 days from now at the spot rate.|

ANS: B PTS: 1

9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:

a.|obtain a 90-day forward purchase contract on Canadian...