Q&A Hero

Q: Which of the following statements is true of Eurocurrency? A) The Eurocurrency market is a relatively high-cost source of funds. B) It is produced and banked within European countries. C) Eurocurrency can be created anywhere in the world. D) It is used only for internal transactions within European Union.

Q: Eurodollars are A) the exchange value of the dollar with the euro. B) used to pay for imports from Europe. C) dollars banked outside of the United States. D) the exchange buffer that the euro has against dollar.

Q: _____ are normally underwritten by an international syndicate of banks. A) Samurai bonds B) Eurobonds C) Yankee bonds D) Foreign bonds

Q: Foreign bonds sold in the United States are A) Yankee bonds. B) Uncle Sam s bonds. C) Bulldogs. D) Eagles.

Q: Investors who purchase a fixed-rate bond receive A) incremental payouts until the bonded money runs out. B) cash payoffs only at maturity. C) a full cash payoff on demand. D) a fixed set of cash payoffs.

Q: Companies receive _____ when using the Eurocurrency market. A) a lower interest rate on deposits and pay more for loans B) tax incentives C) a higher interest rate on deposits and pay less for loans D) liquid asset reserve waiver

Q: _____ deposits are regulated in all industrialized countries. A) U.S. currency B) Domestic currency C) Foreign currency D) Eurocurrency

Q: _____ is characterized by a lack of government regulation. A) The Eurocurrency market B) A money market fund C) The New Your Stock Exchange D) A hedge fund

Q: The Eurocurrency market is attractive to both depositors and borrowers because A) it allows fair trade within the European Union. B) it has strong government regulations and safeguards. C) of its commitment to economic growth in underdeveloped nations. D) of its lack of government regulation.

Q: A Eurocurrency is A) the currency used by the countries of the European Union. B) the currency formerly used in many European countries before the formation of the European Union and the institution of the euro. C) any currency banked outside of its country of origin. D) any currency banked within a European country.

Q: Harvard economist Martin Feldstein argues that the lack of patient money is due to A) the flood of information, due to the Internet, that investors receive about current events in other countries. B) money owners and managers preferring to keep their money home. C) the relative scarcity of information that investors have about foreign investments. D) money owners and managers preferring to place their money in foreign investments.

Q: According to some analysts, deregulation and reduced controls on cross-border capital flows are A) having a stabilizing effect on national economies. B) making individual nations more vulnerable to speculative capital flows. C) making investors nervous and causing them to pull their money out of foreign nations. D) allowing undeveloped nations to enter the global market.

Q: What is a disadvantage of the global capital market? A) Foreign investments may be driven by speculative flows in the market. B) A truly global market reduces the liquidity of investments. C) The availability of capital is low in a global capital market. D) The cost of capital is more in a global market than a domestic market.

Q: Some analysts, who believe that globalization of capital has serious risks, argue that A) capital does not shift in and out of countries as quickly as conditions change. B) individual nations are becoming more vulnerable to speculative capital flows. C) deregulation of trade is helpful for the economic growth in a country. D) most of the capital that moves internationally is pursuing long-term gains.

Q: Hedge funds A) are public investment funds that invest in corporate bonds and shares. B) make long bets rather than short bets. C) are investment funds managed by the government. D) make short bets on assets that they think will decline in value.

Q: Which of the following statements is true of the deregulation of the financial industry? A) Countries can strengthen the global capital market by encouraging strict regulations. B) Financial services have historically been the most deregulated of all industries. C) Deregulation helped the development of an international capital market. D) Deregulation compels financial services companies to remain as domestic companies.

Q: Hedge funds position themselves to make ________ bets on assets that they think will ________. A) long; weather a volatile market B) long; increase in value C) short; weather a volatile market D) short; increase in value

Q: What is a disadvantage of the integration of the international capital market facilitated by technology? A) Segregated international capital markets will emerge as a result of technology. B) Complexity in processing large volumes of data will increase. C) Shocks that occur in one financial center will spread globally. D) Systems integration hinders real-time data transfer across different countries.

Q: A _____ market benefits investors by providing a wider range of investment opportunities, thereby allowing them to build portfolios of international investments that diversify their risks. A) foreign exchange B) global capital C) domestic exchange D) domestic capital

Q: Investors are able to reduce risks by diversifying an investment portfolio internationally, and the risk reduction effects would be greater if not for A) volatile exchange rates associated with the current floating exchange risk regime. B) the different kinds of tax regimes in different countries. C) the inaccessibility of foreign stock exchanges to most investors. D) the poor quality of many stocks in international start-up firms.

Q: In _____, the limited pool of investors implies that borrowers must pay more to persuade investors to lend them their money. A) a purely domestic market B) a mixed market C) an international market D) a purely Euro market

Q: ________ is made when a corporation sells stock to investors. A) A corporate bond sale B) A debt loan C) A Eurobond investment D) An equity loan

Q: The element of risk into investing in foreign assets is greater with _____ exchange rates. A) floating B) pegged C) fixed D) managed

Q: Systematic risk refers to movements in a stock portfolio s value that are A) attributable to macroeconomic forces affecting an economy. B) specific to the firm or individuals who invest in a portfolio. C) attributable to factors pertaining to an individual firm. D) specific to the company that facilitates the investment portfolio.

Q: As investors increase the number of stocks in their portfolio, the portfolio s risk A) increases initially and declines later. B) declines slowly and steadily. C) increases exponentially. D) declines rapidly in the beginning.

Q: The cost of capital is the A) interest received on investments made by the company. B) price of borrowing money. C) difference between cost of inputs and outputs. D) total value of raw materials that a company uses.

Q: A purely domestic capital market faces the problem of A) foreign exchange risk. B) limited liquidity. C) lack of regulation. D) deregulated markets.

Q: An important drawback of a purely domestic capital market is that the A) investment does not receive protection from governments. B) investments are riskier than in global capital markets. C) market lacks a strong regulatory mechanism. D) cost of capital tends to be higher than it is in a global market.

Q: An equity loan is made when A) a corporation pledge equities or other assets to borrow money. B) corporations avail cash loans from individuals. C) a corporation sells stock to investors. D) corporations issue bonds to individual investors.

Q: Market makers are A) financial service companies that connect investors and borrowers. B) nonbank financial institutions who want to invest money. C) high net worth individuals with surplus cash to reinvest. D) those who want to borrow money including individuals, companies, and governments.

Q: The systematic risk of the stock market is the A) movement in a stock portfolio s value that is attributable to the individual selections made for that portfolio. B) level of diversifiable risk in an economy. C) movement of the economy of a country. D) level of nondiversifiable risk in an economy.

Q: The risk associated with a portfolio A) declines exponentially as the number of stocks purchased increases and continues to decline until a point of zero risk is reached. B) decreases as the investor increases the number of stocks in her portfolio. C) grows exponentially with the number of stocks purchased. D) increases as the investor increases the number of stocks in her portfolio.

Q: The cost of capital is A) higher in a purely domestic capital market than in a global market. B) lower in a domestic capital market than in an international market. C) higher in a global market than in a purely domestic capital market. D) the same in either a global market or a purely domestic capital market.

Q: The liquidity of the market is _____ in a purely domestic capital market. A) held in reserves B) unlimited C) based upon the stock market D) limited

Q: _____ requires a corporation to repay a predetermined portion of the loan amount at regular intervals regardless of how much profit it is making. A) An equity loan B) A stock loan C) A debt loan D) A bonded loan

Q: _____ perform a direct connection function in capital markets. A) Insurance brokers B) Investment banks C) Pension fund managers D) Commercial banks

Q: Market makers are the financial service companies that connect investors and borrowers. Those who want to borrow money typically include A) governments. B) corporations with surplus cash. C) pension funds. D) insurance companies.

Q: How does growth in global capital markets impact investing firms?

Q: Briefly describe the trends observed in the global deregulation of financial services.

Q: There is a low correlation between the movement of stock markets in two different countries. What are the two factors that influence this?

Q: Firms cannot utilize the forward exchange market when they are faced with uncertainty about the future value of currencies. ⊚ true ⊚ false

Q: The definition of moral hazard is when people behave recklessly without regard for the consequences. ⊚ true ⊚ false

Q: In 2002, the IMF stepped in to help stabilize the value of the Brazilian currency on foreign exchange markets by lending it foreign currency. This constitutes a foreign debt crisis. ⊚ true ⊚ false

Q: The IMF does not expect governments to meet any obligations except to pay back the money it borrows. ⊚ true ⊚ false

Q: The International Monetary Fund s original function was to provide a pool of money from which members could borrow in the short term. ⊚ true ⊚ false

Q: Interest rates adjust automatically under a strict currency board system. ⊚ true ⊚ false

Q: The World Bank offers low-interest loans to risky customers whose credit rating is often poor. ⊚ true ⊚ false

Q: After the agreement reached at Bretton Wood, the dollar was the only currency that could be convertible into gold. ⊚ true ⊚ false

Q: One aspect of the international monetary system is the institutional arrangements that can govern or set exchange rates. ⊚ true ⊚ false

Q: It is difficult if not impossible to get adequate insurance coverage for exchange rate changes that A) will occur in the next few weeks. B) might occur in the next few months. C) might occur several years in the future. D) might occur in the coming days.

Q: In the face of unpredictable movements in exchange rates, businesses should A) pursue strategies that will reduce their economic exposure. B) pursue strategies that will decrease their strategic flexibility. C) pursue strategies that will reduce their foreign market exposure. D) sell off investments in foreign subsidiaries and consolidate domestic facilities.

Q: Countries that require substantial loans from the International Monetary Fund to survive will probably _____ due to IMF-mandated economic policies. A) benefit from a sharp expansion of demand in the long term B) endure a sharp contraction of demand in the long term C) benefit from a sharp expansion of demand in the short term D) endure a sharp contraction of demand in the short term

Q: Contracting out manufacturing allows companies to reduce economic exposure because A) multiple suppliers attract subsidies from government. B) it reduces the pressure on them to maintain a trade surplus. C) it allows companies to shift suppliers from country to country. D) quality issues are insignificant when manufacturing is contracted to others.

Q: A _____ crisis refers to a loss of confidence in the banking system that leads to a run on banks as individuals and companies withdraw their deposits. A) currency B) banking C) foreign debt D) domestic debt

Q: Which of the following is a common underlying cause of financial crises? A) a narrowing current account deficit B) excessive expansion of domestic borrowing C) low relative price inflation rates D) asset price deflation

Q: The Asian economic crisis and the global financial crisis of 2008 2009 were caused by A) high inflation rates. B) excessive debt. C) low inflation rates. D) a huge trade surplus.

Q: Loans issued by the IMF A) are conditional loans. B) are unconditional loans. C) include a macroeconomic policy that calls for lower interest rates. D) include a macroeconomic policy that calls for increases in public spending to improve infrastructure in a country.

Q: A _____ is a situation in which a country cannot service its foreign debt obligations. A) currency crisis B) banking crisis C) foreign debt crisis D) moral crisis

Q: Which of the following is a common criticism against the powerful International Monetary Fund? A) IMF lacks any real mechanism for accountability. B) It is hesitant to help banks when they are in crisis. C) IMF has not intervened to resolve the Asian crisis. D) It did not try to resolve the Mexican currency crisis.

Q: Moral hazard arises when people behave recklessly because A) of the restrictions that exist in a country's monetary policy. B) of the restrictions the IMF has imposed on them. C) they know they will be saved if things go wrong. D) they face financial difficulties arising out of external factors.

Q: A currency crisis occurs due to A) the loss of confidence in a country s banking system. B) heavy foreign debt obligations. C) high levels of trade deficit. D) a speculative attack on the exchange value.

Q: The International Monetary Fund has been criticized for exacerbating moral hazard A) with its rescue programs. B) by increasing the probability of debt default. C) making loans to countries that are trying to reduce national debt by playing the market. D) by refusing to bail out banks that made loans to overleveraged Asian companies during the 1990s.

Q: Currencies of countries with currency boards will become uncompetitive and overvalued if A) local inflation rates remain higher than the inflation rate in the country to which the currency is pegged. B) the country to which the currency is pegged experiences a trade deficit. C) local inflation rates are lower than the inflation rate in the country to which the currency is pegged. D) the country to which the currency is pegged experiences a trade surplus.

Q: _____ limits the ability of the government to print money and, thereby, create inflationary pressures. A) A dirty-float system B) A managed-float system C) The European Monetary System D) A currency board system

Q: The great virtue claimed for a _____ is that it imposes monetary discipline on a country and leads to low inflation. A) fixed exchange rate B) managed-float system C) pegged exchange rate D) floating exchange rate

Q: Exchange rates are _____ under a pure free float system. A) completely balanced B) determined by market forces C) wildly variable and unpredictable D) determined by the government

Q: Under a currency board system A) inflation rates are maintained at a high level. B) countries issue domestic notes at will. C) interest rates remain constant. D) the government lacks the ability to set interest rates.

Q: The monetary autonomy argument holds that A) each country should be allowed to choose its own inflation rate. B) inflation is beneficial to a country s economy and growth. C) inflation is detrimental to a country s economy and growth. D) countries should restrict inflation based on the global standards.

Q: Supporters of floating exchange rates A) argue that floating rates help adjust trade imbalances. B) argue that floating rates lead to a more stable world monetary system. C) claim that trade deficits are determined by the balance between savings and investment in a country. D) claim that trade deficits are not determined by the external value of currency.

Q: The monetary autonomy argument is supported by the advocates of A) a dirty-float system. B) fixed exchange rates. C) pegged exchange rates. D) floating exchange rates.

Q: Advocates of a _____ argue that removal of the obligation to maintain exchange rate parity would restore monetary control to a government. A) fixed exchange rate regime B) dirty-float system C) floating exchange rate regime D) pegged exchange rate regime

Q: What was the World Bank s initial mission? A) implementing a rigid fixed exchange rate regime B) promoting the gold standard across the world C) providing low-interest loans to help finance the building of Europe s economy D) implementing a flexible fixed exchange rate regime

Q: Identify the currency that was directly linked to gold under the Bretton Woods system. A) pound B) yen C) euro D) dollar

Q: The World Bank was established at the at Bretton Woods conference to A) establish an international monetary system. B) promote general economic development. C) establish the gold standard across the world. D) fund the initiatives of the United Nations.

Q: Which of the following statements is true of the Bretton Woods agreement? A) All countries agreed to fix the value of their currency in terms of gold under the agreement. B) The system accepted the British pound as the official reference currency against gold. C) The agreement established a floating system of monetary exchange. D) Two multinational institutions, the World Economic Forum and WTO, were formed under the agreement.

Q: The agreement reached at Bretton Woods established the A) International Monetary Fund. B) World Economic Forum. C) United Nations. D) International Atomic Energy Agency.

Q: International Development Association loans A) receive direct funding from the World Bank. B) must be countersigned by a partnering, wealthy country such as the United States, Japan, or Germany. C) are funded through subscriptions from wealthy members. D) receive direct funding from the International Monetary Fund.

Q: A country s trade balance is in surplus when A) its exports are more than its imports. B) it experiences negative inflation. C) its exports equal the imports. D) the prices of commodities are low in the country.

Q: A country is said to be in balance-of-trade equilibrium when A) it has the potential to produce all goods that its residents want without engaging in foreign trade. B) the income its residents earn from exports is equal to the money its residents pay for imports. C) the country imports all goods that its residents want by engaging in foreign trade. D) it has the potential to balance the production and procurement of the basic amenities that it needs.

Q: Gold par value refers to the A) ratio of the price of gold in a currency to the price of gold in U.S. dollars. B) amount of a currency needed to purchase one ounce of gold. C) ratio of price of gold in a currency to the price of gold in euros. D) amount of gold required to equal the reference currency that a nation is using.