International Business: Environments and Operations, 16e (Daniels et al.

)
Chapter 9 Global Foreign-Exchange Markets

1) Historically, what is the top remittance-receiving country in Latin America?

A) Brazil
B) Mexico
C) Uruguay
D) Venezuela
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

2) Which of the following is the largest source of foreign-exchange income in Mexico?

A) FDI
B) tourism
C) foreign aid
D) remittance income
Answer: D
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Application of knowledge

3) Which term refers to money denominated in the currency of another nation or group of
nations?
A) foreign exchange
B) foreign subsidy
C) export tariff
D) quota
Answer: A
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

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4) A(n) ________ is the price of a currency.
A) tariff
B) quota
C) exchange rate
D) subsidy
Answer: C
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

5) If Toranaga-san, who works for a Japanese trading company that operates in Japanese yen,
wanted to purchase Spanish castanets from a company in Barcelona and needed euros to
complete the transaction, he would use the ________ to gain access to spot euros.
A) stock market
B) foreign-exchange market
C) New York Stock Exchange
D) international export market
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Application of knowledge

6) The relationship between the value of the Brazilian and Chinese currencies is known as the
________.
A) stock price
B) exchange rate
C) foreign-exchange market
D) purchasing power parity
Answer: B
Diff: 2
Learning Outcome: Define the fundamental concepts of international business
Skill: Application
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Application of knowledge

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7) In foreign-exchange markets, reporting dealers are ________.
A) financial institutions that actively participate in local and global foreign-exchange markets
B) located primarily in New York City since U.S. dollars are the most widely traded currency
C) controlled by the Bank for International Settlements located in Switzerland
D) hedge funds and pension funds monitored by the World Bank
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

8) Which of the following would have the LEAST influence on price setting in the foreign-
exchange market?
A) Morgan Stanley
B) Deutsche Bank
C) Western Union
D) JP Morgan
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

9) Stella, who works and lives in San Diego, wants to send money to her mother who lives in a
small village south of Puerto Vallarta, Mexico. Stella typically uses Western Union to handle the
transaction. Which of the following is the most likely reason that Stella uses Western Union?
A) no fees
B) convenience
C) low exchange rates
D) cross rate capability
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Application of knowledge

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10) An exchange rate is the number of units that buys one unit of another currency.
Answer: TRUE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

11) A tariff is the price of a currency.

Answer: FALSE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

12) In foreign-exchange markets, reporting dealers trade more foreign exchange with other
reporting dealers than with any other category of users.
Answer: TRUE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market
AACSB: Analytical thinking

13) Most foreign exchange is handled through voice brokers.

Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market

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14) What is the Bank for International Settlements? What three categories does the BIS designate
in the foreign-exchange market? Briefly describe each category.
Answer: The foreign-exchange market is made up of many different players. The Bank for
International Settlements (BIS), a central banking institution in Basel, Switzerland, owned and
controlled by 56 member central banks, divides the market into three major categories: reporting
dealers, other financial institutions, and nonfinancial institutions. Reporting dealers, also known
as money center banks, are financial institutions that actively participate in local and global
foreign exchange and derivative markets. They are mainly the large commercial and investment
banks and are widely assumed to include the 10 largest banks and financial institutions in terms
of overall market share in foreign-exchange trading: Deutsche Bank, Barclays Capital, UBS,
Citi, JP Morgan, HSBC, RBS, Credit Suisse, Goldman Sachs, and Morgan Stanley. The other
financial institutions are financial institutions not classified as reporting dealers. They include
smaller commercial banks, investment banks and securities houses, hedge funds, pension funds,
money market funds, currency funds, mutual funds, specialized foreign-exchange trading
companies, and so forth. Nonfinancial customers are any counterparty other than those described
above and include any nonfinancial end user, such governments and companies (MNEs as well
as small and medium-size corporations and firms).
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Critical Thinking
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market

15) What is remittance income? What institutions in Mexico can handle remittance accounts?
Why are some institutions used more frequently than others?
Answer: Remittance income refers to money that an individual makes in one country and sends
back to friends and family members in another country in a different currency. Wells Fargo and
other U.S. banks, including Citi and Bank of America, have established alliances with Mexican
banks to offer remittance accounts to the immigrant workers in the United States. Although
immigrant workers complain about the high transfer fees and exchange-rate spread associated
with Western Union, many continue to use this service instead of the lower-cost method of
remitting money through banks. Mexico has a history of unstable currencies and widespread
inflation, resulting in a traditional mistrust of banks. Other immigrants base their choice on word
of mouth or convenience and location. Many are simply unaware of the variety of choices
available for sending money and do not know how to get the best deal. Others need the
convenience offered by Western Union.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Synthesis
Objective: 9-1 Define what foreign exchange is and who the major players are in the foreign-
exchange market

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16) An example of an electronic brokerage system used to trade foreign exchange is ________.
A) Reuters
B) Interbank Traders Ltd.
C) Bank for International Settlements
D) the reporting dealers clearing house
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

17) ________ involve the exchange of currency the second day after the date on which the two
foreign-exchange traders agree to the transaction.
A) Spot transactions
B) Outright forward transactions
C) FX swaps
D) Reverse transactions
Answer: A
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

18) Outright forward transactions involve the exchange of currency on a future date beyond two
business days at a fixed exchange rate, known as the ________.
A) spot rate
B) forward rate
C) option rate
D) reverse transaction rate
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

6
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19) In which of the following transactions is a currency switched with another on one date and
then switched back on a future date?
A) reverse transaction
B) spot transaction
C) FX swap
D) outright forward transaction
Answer: C
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

20) A foreign-exchange contract that is an agreement between two parties to buy or sell a
particular currency at a particular price at a particular date as specified in a standardized contract
to all participants in the specified market is known as a(n) ________.
A) spot contract
B) forward contract
C) futures contract
D) equity currency contract
Answer: C
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

21) In which of the following transactions is one currency swapped for another on one date and
then swapped back on a future date?
A) reverse transaction
B) spot transaction
C) FX swap
D) outright forward transaction
Answer: C
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market

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22) The U.S. dollar is most likely traded widely because it is ________.
A) a reserve currency held by many central banks
B) one of the oldest and most stable currencies in the world
C) monitored by the Bank of International Settlements and the U.S. Federal Reserve
D) based on prices of the NYSE, which is the world's largest foreign-exchange center
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

23) Albert, an employee at Morgan Stanley, has been given the task of handling the foreign
exchange for a customer who is moving from Brazil to Switzerland in one week. Which of the
following should Albert most likely use when exchanging the client's Brazilian reais for Swiss
francs?
A) spot rate
B) cross rate
C) currency option
D) current U.S. rate
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Application of knowledge

24) The ________ is the most widely traded currency in the world.
A) pound
B) yen
C) euro
D) U.S. dollar
Answer: D
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market

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25) As a trading currency, the euro is ________.
A) more widely traded than the U.S. dollar in seven of the top ten currency markets in the world
B) widely traded in London but not in any other major foreign-exchange markets in the world
C) becoming more popular than the U.S. dollar because of its global acceptance
D) gaining ground against the U.S. dollar in Eastern European countries
Answer: D
Diff: 2
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

26) Why is London most likely the top market for trading foreign exchange?
A) The British pound is the world's top trading currency.
B) Most multinational firms are headquartered in London.
C) London is uniquely positioned geographically in terms of time zones.
D) British traders have always been the most sophisticated in the world.
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

27) Which of the following is NOT one of the top four locations for trading foreign exchange?
A) London
B) New York
C) Tokyo
D) Hong Kong
Answer: D
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market

28) Which of the following handles the majority of all foreign-exchange activities?
A) multinational enterprises
B) commodities exchanges
C) commercial banks
D) regional banks
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

9
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29) Which of the following is NOT one of the top exchanges that trade in foreign currency
futures and options?
A) CME
B) UBS
C) NYSE Liffe
D) NASDAQ OMX
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

30) In an FX swap, one currency is swapped for another on one date and then swapped back on a
future date.
Answer: TRUE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

31) Outright forward transactions involve the exchange of currency the second day after the date
on which the two foreign-exchange traders agree to the transaction.
Answer: FALSE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

32) The U.S. dollar is important as a vehicle for foreign-exchange transactions between two
countries other than the United States.
Answer: TRUE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Diverse and multicultural work environments

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33) The U.S. dollar is so widely traded partially because the New York Stock Exchange is the
biggest foreign-exchange center in the world.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Application of knowledge

34) Hong Kong is one of the top four largest markets in the world in foreign-exchange trades and
the largest in Asia.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Application of knowledge

35) The U.S. dollar is widely traded because it is a transaction currency in many international
commodity markets.
Answer: TRUE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

36) A major challenge faced by Western Union in transferring money between the United States
and Mexico is that Mexican citizens trust the banks but do not trust Western Union due to its
reliance on global banks.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Application of knowledge

37) According to 2010 surveys, the most frequently traded currency pair is the U.S. dollar and
Japanese yen.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market

11
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38) What are the two major segments of the foreign-exchange market? What types of foreign-
exchange instruments are traded within these markets?
Answer: The foreign-exchange market has two major segments: the over-the-counter market
(OTC) and the exchange-traded market. The OTC market is comprised of banks, both
commercial banks and investment banks, as well as other financial institutions, and is where
most of the foreign-exchange activity takes place. The exchange-traded market is composed of
securities exchanges, such as the Philadelphia Stock Exchange and the Chicago Mercantile
Exchange, where certain types of foreign-exchange instruments, such as exchange-traded options
and futures, are traded. Several different types of foreign-exchange instruments are traded in
these markets, but the traditional foreign-exchange instruments that comprise the bulk of foreign-
exchange trading are spot transactions, outright forwards, and FX swaps. Spot transactions
involve the exchange of currency the second day after the date on which the two foreign-
exchange traders agree to the transaction. The rate at which the transaction is settled is the spot
rate. Outright forward transactions involve the exchange of currency three or more days after the
date on which the traders agree to the transaction. It is the single purchase or sale of a currency
for future delivery. The rate at which the transaction is settled is the forward rate and is a
contract rate between the two parties. In an FX swap, one currency is swapped for another on
one date and then swapped back on a future date. Although an FX swap is both a spot and a
forward transaction, it is accounted for as a single transaction.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Critical Thinking
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

39) How is foreign exchange traded? What methods are available?

Answer: Foreign exchange is traded using electronic methods, customer direct, interbank direct,
or voice broker. There are different kinds of electronic methods. One is an electronic broking
system where trades are matched up for foreign-exchange dealers using electronic systems such
as EBS, Reuters, and Bloomberg. Another is an electronic trading system that is executed on a
single-bank proprietary system or a multibank dealing system. Customer direct refers to trades
between a reporting dealer and either a non-reporting dealer or customer, without a third party
being involved. Usually trades are executed by telephone or direct electronic trading. Interbank
direct refers to trades between dealer banks via telephone or direct electronic trading. Voice
broker is a trade via telephone communication with a foreign-exchange voice broker. Although
connection by voice with a broker is still important for some types of transactions, high touch
trades by voice (where the broker provides research and advice) is giving way to low touch voice
(which involves a voice transaction combined with eTrading).
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Critical Thinking
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

12
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40) What is a futures contract? What institutions handle futures contracts?
Answer: A foreign currency futures contract resembles a forward contract insofar as it specifies
an exchange rate some time in advance of the actual exchange of currency. However, a future is
traded on an exchange, not OTC. Instead of working with a bank or other financial institution,
companies work with exchange brokers when purchasing futures contracts.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Synthesis
Objective: 9-2 Summarize the major characteristics of the foreign-exchange market
AACSB: Analytical thinking

41) In the spot market, the ________ is the difference between the bid and offer rates and is the
trader's profit margin.
A) bid
B) offer
C) cross rate
D) spread
Answer: D
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

42) Which of the following is the price at which the trader is willing to sell foreign currency?
A) offer
B) bid
C) spread
D) cross rate
Answer: A
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

13
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43) Melissa, a foreign-exchange trader, wants to buy euros from Stephanie. Which of the
following is the price at which Melissa is willing to buy euros?
A) spread
B) offer
C) bid
D) cross rate
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Application of knowledge

44) In the foreign-exchange market, the bid is the rate at which ________.
A) the trader is willing to sell foreign exchange
B) the buyer is willing to swap foreign exchange
C) the trader is willing to buy foreign exchange
D) the trader earns a profit
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

45) If a foreign currency is quoted in American terms (the direct quote) and the forward rate for a
foreign currency is less than the spot rate, the foreign currency is selling at a ________.
A) forward premium
B) backward discount
C) backward premium
D) forward discount
Answer: D
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

14
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46) If a foreign currency is quoted in American terms (the direct quote) and the forward rate is
greater than the spot rate, the foreign currency is selling at a ________.
A) forward premium
B) forward discount
C) backward discount
D) discounted premium
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

47) The pound-dollar forward rate for pounds is $1.9068, and the spot rate is $1.9059. Pounds
are selling at a ________.
A) discounted premium
B) backward discount
C) forward premium
D) forward discount
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Reflective thinking

48) The pound-dollar forward rate for pounds is $1.9068, and the spot rate is $1.9100. Pounds
are selling at a ________.
A) discounted premium
B) backward discount
C) forward discount
D) forward premium
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Reflective thinking

15
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49) A(n) ________ is the right but not the obligation to buy or sell a foreign currency within a
certain time period or on a specific date at a specific exchange rate.
A) forward rate
B) bid
C) offer
D) option
Answer: D
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

50) Which of the following is most likely true regarding options?

A) An option can only be purchased from a commercial bank.
B) Options are never used with foreign currency.
C) An option is a right to sell foreign currency.
D) Options do not provide firms with flexibility.
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

51) Why are options most likely so attractive to companies?

A) The writer of the option does not charge the company any fee for writing the option.
B) Options provide companies with more flexibility than a forward contract.
C) Options are usually cheaper than forward contracts.
D) Options can be used for only foreign-exchange deals.
Answer: B
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Application of knowledge

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52) Compared with a forward contract, a futures contract ________.
A) is more flexible
B) is normally available through commercial banks
C) does not guarantee a future exchange rate
D) is only traded on an exchange
Answer: D
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

53) The bid is the price at which the trader is willing to sell foreign currency.
Answer: FALSE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

54) In the spot market, the spread is the difference between the bid and offer rates and is the
trader's profit margin.
Answer: TRUE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

55) If the forward rate for a foreign currency is less than the spot rate, the foreign currency is
selling at a forward premium.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

56) A currency sells at a forward premium when the forward rate is greater than the spot rate.
Answer: TRUE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Reflective thinking

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57) Options are more flexible than forward contracts.
Answer: TRUE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Application of knowledge

58) An offer is the right but not the obligation to buy or sell foreign currency.
Answer: FALSE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

59) What are the characteristics of the forward market? Why do companies participate in the
forward market? Provide an example to illustrate your answer.
Answer: The spot market is for foreign-exchange transactions that occur within two business
days, but in some transactions a seller extends credit to the buyer for a period that is longer than
two days. The forward rate is the rate quoted today for future delivery. The most widely traded
currencies in the forward market are the British pound, Canadian dollar, Japanese yen, and Swiss
franc. Many currencies do not have a forward market due to the small size and volume of
transactions in that currency. The difference between the spot and forward rates is either the
forward discount or the forward premium. If the forward rate for a foreign currency is less than
the spot rate, the foreign currency is selling at a forward discount. If the forward rate is greater
than the spot rate, the foreign currency is selling at a forward premium. For example, a Japanese
exporter of consumer electronics might sell television sets to a U.S. importer with immediate
delivery but payment due in 30 days. The U.S. importer is obligated to pay in yen in 30 days and
may enter into a contract with a currency dealer to deliver the yen at a forward rate–the rate
quoted today for future delivery.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Synthesis
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

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60) What is currency speculation? Why is it risky?
Answer: Speculation is the buying or selling of a commodity that has both an element of risk
and the chance of great profit. For example, an investor could buy euros in anticipation of the
euro's strengthening against other currencies. If it strengthens, the investor earns a profit; if it
weakens, the investor incurs a loss. Speculators are important in the foreign-exchange market
because they spot trends and try to take advantage of them. They create demand for a currency
by purchasing it in the market, or they can create a supply of the currency by selling it in the
market. Speculation is a very risky business. In recent years, the advent of e-trading has attracted
a lot of day traders in foreign exchange. The problem is that day traders rarely make money
speculating in exchange rates because forecasting currency movements is a risky business.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Critical Thinking
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

61) What are the characteristics of the spot market? What institutions handle spot exchanges?
Answer: Most foreign currency transactions take place between foreign-exchange traders, so the
traders, who work for foreign-exchange brokerage houses or commercial banks, quote the rates.
The traders always quote a bid and offer rate. The bid is the price at which the trader is willing to
sell foreign currency. In the spot market, the spread is the difference between the bid and offer
rates and is the trader's profit margin. The method of quoting exchange rates is called the direct
quote, also known in the foreign-exchange industry as "American terms." It represents a quote
from the point of view of someone in the United States. The other convention for quoting foreign
exchange is "European terms," which means a direct quote from the perspective of someone in
Europe. From a U.S. point of view, this means the number of units of the foreign currency per
U.S. dollar. This is also sometimes called the indirect quote in the United States, although
American terms and European terms are the most accurate way to describe the quotes.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Synthesis
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

62) Why would companies become involved in arbitrage? What is the difference between
arbitrage and interest arbitrage?
Answer: As with most types of foreign exchange activities, companies attempt to earn money
through arbitrage and interest arbitrage. One type of profit-seeking activity is arbitrage, which is
the purchase of foreign currency on one market for immediate resale on another market (in a
different country) to profit from a price discrepancy. Interest arbitrage is the investing in debt
instruments, such as bonds, in different countries.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Synthesis
Objective: 9-3 Compare and contrast spot, forward, options and futures markets
AACSB: Analytical thinking

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Copyright © 2018 Pearson Education, Inc.
63) Western Union's role in foreign-exchange trading is best described as ________.
A) setting a fair exchange rate in multiple currencies
B) transferring currency from one country to another
C) transferring Mexican pesos from the United States to Mexico
D) handling all money transfers that occur between North and South America
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets
AACSB: Application of knowledge

64) A major challenge faced by Western Union in wiring money between the United States and
Mexico is that ________.
A) it can only transfer funds in one direction
B) it is facing competition from some commercial banks
C) Mexican citizens do not like to use its services because it does not have strong ties with
Mexican banks
D) Mexican citizens trust the banks but do not trust Western Union due to its heritage as a
Western bank
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets
AACSB: Application of knowledge

65) The interbank market in foreign exchange is where ________.

A) electronic brokerage systems are required
B) banks trade currency with each other
C) reporting dealers set exchange terms
D) remittance payments are made
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets
AACSB: Analytical thinking

20
Copyright © 2018 Pearson Education, Inc.
66) When selecting a commercial and/or investment bank to deal in foreign exchange,
corporations are most likely to use ________.
A) the exchange-based market rather than the over-the-counter market
B) more than one bank to meet different needs
C) banks located in the home country
D) investment banks only
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets
AACSB: Analytical thinking

67) Companies most likely use the foreign-exchange market to ________.

A) diversify their expenses from other sources
B) convert money for use in financial transactions
C) increase their presence on the black market
D) acquire currency from emerging markets
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets
AACSB: Application of knowledge

68) Commercial banks look at foreign-exchange trading as a service extended primarily to

important customers, not as a major business activity of its own.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets
AACSB: Application of knowledge

69) The Chicago Mercantile Exchange and NASDAQ are part of the OTC market.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets
AACSB: Analytical thinking

21
Copyright © 2018 Pearson Education, Inc.
70) Although most foreign-exchange activity takes place through big money center banks, the
use of electronic trading has allowed even regional banks to deal directly in foreign-exchange
markets.
Answer: TRUE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-4 Explain some of the major aspects of the foreign-exchange markets

71) Jason works in finance at an MNE. Part of his job is to invest large sums of money in various
markets. His latest transaction was investing $10,000 in British pounds for 120 days, then taking
the British pounds and investing them in euros for 90 days, and then converting it all back to
U.S. dollars. Jason is most likely participating in ________.
A) interest arbitrage
B) speculation
C) cryptocurrency
D) options
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Application of knowledge

72) If a company from Country A decides to sell merchandise to a company from Country B,
then the company from Country A ________.
A) will denominate the sale in its own currency since it is too hard to convert foreign currency
B) will denominate the sale in the currency of the buyer since it is too hard for them to convert
foreign currency
C) can denominate the sale in either currency and use the foreign-exchange market to convert
currency
D) can use the OTC market to convert receipts in the future and the exchange markets to convert
receipts in the spot market
Answer: C
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Application of knowledge

22
Copyright © 2018 Pearson Education, Inc.
73) Which of the following is NOT a reason a company would deal in foreign exchange?
A) to pay or receive dividends in a foreign currency
B) to speculate on possible future movements in a currency
C) to buy and sell merchandise denominated in a foreign currency
D) to import merchandise denominated in its currency rather than the currency of the exporter
Answer: D
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

74) In a ________, one party directs another party to make payment.

A) reverse letter of credit
B) commercial bill of exchange
C) commercial bill of trade
D) confirmed irrevocable foreign-exchange transaction
Answer: B
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

75) Gomez Enterprises, a firm based in Mexico City, exported 1,000 circuit boards to Taylor
Industries, a firm based in Chicago. Taylor received a document from Gomez that requests
immediate payment for the goods. Gomez has most likely sent a ________.
A) time draft
B) sight draft
C) spot draft
D) futures draft
Answer: B
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Application of knowledge

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Copyright © 2018 Pearson Education, Inc.
76) A document requesting payment 30 days after delivery is known as a ________.
A) time draft
B) sight draft
C) spot draft
D) futures draft
Answer: A
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

77) An irrevocable letter of credit ________.

A) is issued by a global credit agency
B) is the basis for multilateral credit netting
C) can be amended only if all parties involved agree
D) obligates the exporter's bank to pay interest to the importer
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

78) Companies most likely use the foreign-exchange market to ________.

A) establish fair currency trading policies
B) facilitate regular business transactions
C) establish a global market presence
D) diversify their hedge funds
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade

79) A letter of credit that provides an exporter with the guarantee of another bank in addition to
the importer's bank is called ________.
A) a confirmed letter of credit
B) a time draft letter of credit
C) an amendable letter of credit
D) a cash in advance letter of credit
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

24
Copyright © 2018 Pearson Education, Inc.
80) A speculator is someone who ________.
A) trades foreign exchange illegally
B) deals in the black market in currency
C) takes positions in foreign-exchange markets to earn a profit
D) works for OTC financial institutions rather than non-financial corporations
Answer: C
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

81) Anita, an employee at ABX Partners, a hedge fund firm, has purchased euros because she
believes that the euro will strengthen against other currencies. Which term best describes Anita's
activities?
A) arbitrage
B) speculation
C) spot transaction
D) outright forward
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Application of knowledge

82) Which of the following best describes arbitrage?

A) using foreign exchange to fund new foreign direct investments
B) purchasing foreign currency in anticipation of long-term trends
C) using foreign-exchange instruments to speculate for profit
D) purchasing foreign currency on one market for immediate resale on another market
Answer: D
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

25
Copyright © 2018 Pearson Education, Inc.
83) Ryan, a foreign-exchange dealer, sold U.S. dollars for Swiss francs in the United States, then
sold Swiss francs for Japanese yen in Switzerland, and then sold the Japanese yen for U.S.
dollars in the United States. Ryan hopes that he will end up with more U.S. dollars than when he
began. Which term best describes Ryan's actions?
A) arbitrage
B) speculation
C) spot transaction
D) outright forward
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Application of knowledge

84) Which of the following is an example of interest arbitrage?

A) investing in debt instruments in different currencies or different countries
B) selling U.S. dollars for Swiss francs, then selling Swiss francs for British pounds, then selling
British pounds for U.S. dollars
C) investigating different commercial banks to find the best exchange rate
D) an American investing in a London-based company
Answer: A
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Application of knowledge

85) How does arbitrage differ from speculation?

A) Speculation, unlike arbitrage, is never used to protect against risk.
B) A speculator buys or sells foreign currency with the hope that that currency will either
weaken or strengthen in the future, resulting in a profit.
C) Speculation is the purchase of foreign currency on one market for the immediate resale on
another market.
D) Arbitrage is another way to speculate for profit or protect against risk.
Answer: B
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

26
Copyright © 2018 Pearson Education, Inc.
86) Which of the following is an example of cryptocurrency?
A) U.S. dollar
B) Japanese yen
C) Euro
D) Bitcoin
Answer: D
Diff: 2
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

87) One reason that companies use the foreign-exchange market is to diversify their expenses
from other sources.
Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

88) Companies use the foreign-exchange market to convert money for use in financial
transactions.
Answer: TRUE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

89) An irrevocable letter of credit is the basis for multilateral netting.

Answer: FALSE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

90) A confirmed letter of credit may obligate the exporter's bank to honor a draft presented to it.
Answer: TRUE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

27
Copyright © 2018 Pearson Education, Inc.
91) Arbitrage is the purchase of foreign currency on one market for immediate resale on a
foreign market in order to profit from a price discrepancy.
Answer: TRUE
Diff: 1
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Concept
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

92) An American investing in a London-based company is an example of interest arbitrage.

Answer: FALSE
Diff: 2
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Application
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Application of knowledge

93) In a short essay, discuss how companies use foreign exchange.

Answer: There are a number of reasons why companies use the foreign-exchange market. The
most obvious is for import and export transactions. Companies also use the foreign-exchange
market for financial transactions, such as those in FDI. Sometimes companies, but mostly traders
and investors, deal in foreign exchange solely for profit. One type of profit-seeking activity is
arbitrage, which is the purchase of foreign currency on one market for immediate resale on
another market (in a different country) to profit from a price discrepancy.
Diff: 3
Learning Outcome: Describe the functions of the foreign-exchange market
Skill: Critical Thinking
Objective: 9-5 Show how companies use foreign exchange to facilitate international trade
AACSB: Analytical thinking

28
Copyright © 2018 Pearson Education, Inc.