Multinational Business Finance – Exam 1, 2026 – Study
Material and Practice Questions
Foreign exchange market - ANS✔✔ 1. allows for the exchange of one currency for another.
2. Exchange rate specifies the rate at which one currency can be exchanged for another.
Gold Standard - ANS✔✔ Each currency was convertible into gold at a specified rate. When
World War I began in 1914, the gold standard was suspended.
Agreements on Fixed Exchange Rates - ANS✔✔ a. Bretton Woods Agreement
b. Smithsonian Agreement
Floating Exchange Rate System - ANS✔✔ Widely traded currencies were allowed to fluctuate in
accordance with market forces.
Over-the-counter market - ANS✔✔ The telecommunications network where companies
normally exchange one currency for another.
Foreign exchange dealers - ANS✔✔ Serve as intermediaries in the foreign exchange market.
Spot market - ANS✔✔ A foreign exchange transaction for immediate exchange.
-USD is the commonly accepted medium of exchange.
Spot rate - ANS✔✔ The exchange rate in the spot market.
Interbank market - ANS✔✔ Trading between banks.
, Spot market time zones - ANS✔✔ Foreign exchange trading is conducted only during normal
business hours in a given location. Thus, at any given time on a weekday, somewhere around
the world a bank is open and ready to accommodate foreign exchange requests.
Spot market liquidity - ANS✔✔ More buyers and sellers means more liquidity.
Attributes of banks that provide foreign exchange - ANS✔✔ 1. competitiveness of quote
2. special relationship with the bank
3. speed of execution
4. advice about current market conditions
5. forecasting advice
Foreign exchange quotations - ANS✔✔ 1. at any given point in time, a bank's bid (buy) quote for
a foreign currency will be less than its ask (sell) quote.
2. The bid/ask spread covers the bank's cost of conducting foreign exchange transactions.
Bid/Ask Spread - ANS✔✔ (ask rate - bid rate) / ask rate
Factors that affect the spread - ANS✔✔ Order costs, inventory costs, competition, volume,
currency risk
Order costs - ANS✔✔ Costs of processing orders, including clearing costs and the costs of
recording transactions.
Inventory costs - ANS✔✔ Costs of maintaining an inventory of a particular currency.
Material and Practice Questions
Foreign exchange market - ANS✔✔ 1. allows for the exchange of one currency for another.
2. Exchange rate specifies the rate at which one currency can be exchanged for another.
Gold Standard - ANS✔✔ Each currency was convertible into gold at a specified rate. When
World War I began in 1914, the gold standard was suspended.
Agreements on Fixed Exchange Rates - ANS✔✔ a. Bretton Woods Agreement
b. Smithsonian Agreement
Floating Exchange Rate System - ANS✔✔ Widely traded currencies were allowed to fluctuate in
accordance with market forces.
Over-the-counter market - ANS✔✔ The telecommunications network where companies
normally exchange one currency for another.
Foreign exchange dealers - ANS✔✔ Serve as intermediaries in the foreign exchange market.
Spot market - ANS✔✔ A foreign exchange transaction for immediate exchange.
-USD is the commonly accepted medium of exchange.
Spot rate - ANS✔✔ The exchange rate in the spot market.
Interbank market - ANS✔✔ Trading between banks.
, Spot market time zones - ANS✔✔ Foreign exchange trading is conducted only during normal
business hours in a given location. Thus, at any given time on a weekday, somewhere around
the world a bank is open and ready to accommodate foreign exchange requests.
Spot market liquidity - ANS✔✔ More buyers and sellers means more liquidity.
Attributes of banks that provide foreign exchange - ANS✔✔ 1. competitiveness of quote
2. special relationship with the bank
3. speed of execution
4. advice about current market conditions
5. forecasting advice
Foreign exchange quotations - ANS✔✔ 1. at any given point in time, a bank's bid (buy) quote for
a foreign currency will be less than its ask (sell) quote.
2. The bid/ask spread covers the bank's cost of conducting foreign exchange transactions.
Bid/Ask Spread - ANS✔✔ (ask rate - bid rate) / ask rate
Factors that affect the spread - ANS✔✔ Order costs, inventory costs, competition, volume,
currency risk
Order costs - ANS✔✔ Costs of processing orders, including clearing costs and the costs of
recording transactions.
Inventory costs - ANS✔✔ Costs of maintaining an inventory of a particular currency.
