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CHAPTER 7
The Foreign Exchange Market
EASY (definitional)
7.1 Exports of goods and services by the United States by 2008 total more than _________ of
gross domestic product.
a) 10%
b) 20%
c) 50%
d) 75%
Ans: a
Section: Introduction
Level: Easy
7.2 Most currency transactions are channeled through the worldwide ________ market which
accounts for _______ of foreign exchange transactions.
a) stock, 50%
b) interbank, 50%
c) interbank, 95%
d) internet, 30%
Ans: c
Section: Organization of the foreign exchange market
Level: Easy
7.3 The overwhelming majority of foreign exchange transactions involve
a) multinational corporations buying and selling foreign exchange
b) importers and exporters buying and selling foreign exchange
c) banks buying and selling foreign exchange
d) governments buying and selling foreign exchange
Ans: c
Section: The participants
Level: Easy
7.4 The world's largest currency trading market is
a) New York
b) Frankfurt
c) Tokyo
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d) London
Ans: d
Section: Size
Level: Easy
7.5 American terms refers to the
a) number of U.S. dollars per unit of foreign currency
b) number of foreign-currency units per U.S. dollar
c) quotation system found in the United States
d) bid-ask spread on the U.S. dollar
Ans: a
Section: Spot quotations
Level: Easy
7.6 Trading on the foreign exchange market is
a) located in a physical headquarters in London
b) takes place within an organized exchange
c) conducted by licensed brokers from the London stock exchange
d) an electronically linked network of banks, brokers, and dealers
Ans: d
Section: Organization
Level: Easy
7.7 Traders on the foreign exchange market use ___________ to eliminate or cover the risk of
loss on export or import orders denominated in foreign currencies.
a) currency options
b) forward contracts
c) money-market hedges
d) currency futures contracts
Ans: b
Section: The participants
Level: Easy
7.8 Hedgers, mostly _____________, engage in forward contracts on the foreign exchange
markets to protect the home currency value of various foreign currency-denominated assets and
liabilities on their balance sheets.
a) commercial banks
b) public utilities
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c) multinational corporations
d) speculators
Ans: c
Section: The participants
Level: Easy
7.9 A ___________ between a bank and a customer calls for a fixed delivery date, at a fixed
exchange rate for a specified amount of one currency against another currency payment.
a) spot quotation
b) currency option
c) currency swap
d) forward contract
Ans: d
Section: The forward market
Level: Easy
7.10 The risk that a central bank will not make the necessary transfer of foreign currency to
complete a currency settlement is known as ________ risk.
a) exchange rate
b) Herstatt
c) Interest-rate
d) settlement
Ans: b
Section: The mechanics of spot transactions
Level: Easy
MEDIUM (applied)
7.11 The spot and 30-day forward rates for the Dutch euro are $1.4757 and $1.48, respectively.
The guilder is said to be selling at a forward
a) premium of 1.2%
b) premium of 3.5%
c) discount of 3.5%
d) discount of 1.2%
Ans: b
Section: Forward quotations
Level: Medium
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7.12 Suppose the spot direct quotes for the pound sterling and euro are $1.3981-89 and
$.1230-33, respectively. What is the direct quote for the pound in Paris?
a) €1.1339-73/£
b) €.8793-.8819/£
c) £.0808-12/€
d) £.0976-87/€
Ans: a
Section: Spot quotations
Level: Medium
7.13 Suppose it is 1995 and the following direct quotes are received for spot and one- month
French francs in New York: .1160-684-6. Then the outright 30- day forward quote for the
French franc was:
a) .1156-62
b) .1164-74
c) .1166-72
d) .1154-64
Ans: b
Section: Forward quotations
Level: Medium
7.14 Suppose it is 1990 and the spot direct quotes for the Swedish krona and French franc are
$.1395-99 and $.1130-33, respectively. What is the direct quote for the krona in Paris?
a) 1.2312-81
b) 1.2435-37
c) .0806-11
d) .0973-81
Ans: a
Section: Spot quotations
Level: Medium
7.15 Suppose pound sterling is quoted at $1.4419-36, and the Swiss franc is quoted at $0.6250-
67. What is the direct quote for the pound in Zurich?
a) 2.3035-70
b) 2.3018- 88
c) 2.3008-98
d) 2.3020-50
Ans: c
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Section: Spot quotations
Level: Medium
7.16 Suppose the Brazilian Real is quoted at $0.9455-9510, and the Thai baht is quoted at
$25.2513-3986. What is the direct quote for the Real in Bangkok?
a) 27.1267-5673
b) 26.7801-9801
c) 25.2597-2700
d) 26.5524-8626
Ans: d
Section: Spot quotations
Level: Medium
7.17 If the direct price of the dollar is DM2.5 in 1990 Frankfurt and transaction costs were .4%
of the amount transacted, then the minimum-maximum direct quotes for the DM in New York
were:
a) $.3968-4032
b) $2.4800-2.5200
c) $.3984-.4016
d) $2.4900-2.5100
Ans: a
Section: Spot quotations
Level: Medium
7.18 It is 1985 and suppose the 90-day forward quotes on the DM and the French franc are
$.4002-10 and $.1180-90, respectively. What is the direct 90-day forward quote for the franc in
Frankfurt?
a) 3.3625-54
b) 3.3631-92
c) .2943-74
d) .2949-68
Ans: c
Section: Forward quotations
Level: Medium
7.19 The spot and 180-day forward rates for the euro are $1.3310 and $1.3402, respectively.
The euro is said to be selling at a forward
a) discount of 6.9%
b) premium of 6.9%
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c) discount of 1.4%
d) premium of 1.4%
Ans: d
Section: Forward quotations
Level: Medium
7.20 Suppose the spot direct quotes for the Italian euro and Swiss franc are $1.2509-51 and
$.1201-10, respectively. What is the direct quote for the Swiss franc in Milan?
a) €.00413-25/SFr
b) €.00422-31/SFr
c) €.0957-67/SFr
d) SFr.0957-67/€
Ans: c
Section: Forward quotations
Level: Medium
7.21 Suppose the direct quote for sterling in New York is $1.3110-5. Then the direct quote for
dollars in London is:
a) .7110-5
b) 2.6220-30
c) .7625-8
d) 1.3110-5
Ans: c
Section: Spot quotations
Level: Medium
7.22 An American company that imports leather goods from England is most likely to be
a) long pounds
b) short pounds
c) can't tell
Ans: b
Section: Spot quotations
Level: Medium
DIFFICULT (applied)
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7.23 On December 3,2001, spot Japanese yen were sold at $0.008058. Suppose the 180-day
forward Japanese yen was selling at a 1.91% annualized premium, what is the 180-day forward
rate of the yen?
a) 0.008245
b) 0.008135
c) 0.008457
d) 0.010638
Ans: b
Section: Forward quotations
Level: Difficult
7.24 Suppose the spot rate and forward rate for the British pound are $1.4248 and $1.4179
respectively. Assume the forward pound is selling at a 1.94% annualized discount, what is the
number of days of the forward contract?
a) 180 days
b) 120 days
c) 90 days
d) 60 days
Ans: c
Section: Forward quotations
Level: Difficult
7.25 Suppose one observed the following direct spot quotations in New York and London,
respectively: $1.2500-60 and £.8000-50. Arbitrage profits per $1 million equal
a) $637
b) $0
c) $1,268
d) $4,492
Ans: b
Section: Currency arbitrage
Level: Difficult
7.26 Suppose it is January 1980 and the $/DM exchange rate is DM1 = $.35 and the DM/FF
exchange rate is FF1 = DM.31. What is the FF/$ exchange rate?
a) 3.226 French francs per dollar
b) 1.129 French francs per dollar
c) .886 French francs per dollar
d) 9.217 French francs per dollar
Ans: d
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Section: Cross rates
Level: Difficult
7.27 Suppose the following direct quotes are received for spot and one-month French francs in
New York: .1260-684-6. Then the outright 30-day forward quote for the French is:
a) .1256-62
b) .1264-74
c) .1266-72
d) .1254-64
Ans: b
Section: Forward quotations
Level: Difficult
7.28 If the direct price of the dollar is DKK5 in Copenhagen and transaction costs are .5%, then
the minimum-maximum direct quotes for the Danish krone in New York are
a) 4.9750-5.0250
b) 4.9500-5.0500
c) .1980-.2020
d) .1990-.2010
Ans: c
Section: The spot quotations
Level: Difficult
7.29 Suppose the pound sterling is selling for $1.62 and the buying rate for the Swiss franc is
$0.71. Then the £/SFr cross rate is
a) £1 = SFr 0.4383
b) SFr 1 = £2.2817
c) £1 = SFr 2.2817
d) SFr 1 = £1.2817
Ans: c
Section: Cross rates
Level: Difficult
7.30 Suppose the quote for euro is $.9865-92/€. The percent spread is
a) 2.31%
b) 0.97%
c) 0.62%
d) 0.27%
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Ans: d
Section: Transaction costs
Level: Difficult