FIN 558 Exam 1 | Questions and Answers

FIN 558 Exam 1 | Questions and Answers What best describes the type of investment that occurs when a firm builds a new factory overseas? Greenfield Which organization has a dispute settlement mechanism to help member countries resolve disagreements of international agreements? The World Trade Organization Which international organization develops and analyzes potential policies and treaties that are intended to promote economic growth? The Organization for Economic Cooperation and Development Spain imports USD50 million in automobiles in a given year. This would result in a _______ in Spain's ________ account. Debit, current The U.S. is a net _______ of goods and a net ________ of services. Importer, exporter The primary concern with a growing negative net international investment position is that the future _______ may reduce consumption by the debtor country. interest payments paid The goal of a multinational firm is to maximize the firm's value Which organization seeks to reduce the amount of poverty in the world by providing grants, loans, and technical assistance to low-income countries? The World Bank Ford builds a factory in Mexico. This is best described as a _____ in the U.S. ______ account. Deficit, capital The ______ is/are a record of all of a country's transactions with the rest of the world. Balance of Payments If Mexico has a current account surplus, then it will have a capital account ____. Deficit Which organization promotes international monetary cooperation by hosting regular meetings of central banks from around the world? The Bank for International Settlements Foreign direct investment occurs when a firm buys a minimum of ____ of a firm in another country 10% When someone in the currency market can buy a currency at a low price and sell it for a higher price, it is known as Arbitrage What is the name of the computer network in which member banks globally send and receive messages pertaining to foreign exchange transactions? SWIFT When a central bank buys foreign currency, its international reserves _______ Increase What is the name of the unit of account created by the IMF which is sometimes used to denominate contracts? special drawing right Which account should NOT be included in the asset section of a central bank balance sheet? Currency in circulation What are the three major components of the official reserves account? foreign exchange reserves, gold, and IMF-related reserve assets Which account should be included in the asset section of a central bank balance sheet? International Reserves, Domestic Credit, Government Bonds Exchange rates between 2 counties that do not involve the dollar are______ Cross rates Keeps cross-rates in line with exchange rates quoted relative to the USD Triangular Arbitrage Bid ask spreads are larger in the forward market than spot because The forward market is less liquid than the spot market The fourth decimal place in a dealer's quote in the trade jargon is known as the pip Name of the exchange rate system in which countries allow the value of their currency to be determined freely in the foreign exchange markets around the world without any government restrictions is ______ Floating currencies The exchange rate system in which a country allows the value of the currency to be determined by the market forces of supply and demand is known as a Floating exchange rate In the ________ exchange rate system, the currency has limited flexibility and the rate is kept within a fixed band. Target zone Suppose a central bank conducts a policy to appreciate its own currency. This action will lead to a _______ its foreign currency reserves Decrease One of the major reasons for the existence of the forward market is to _______ manage currency risk especially risk associated with a transaction "Covered" in "covered interest parity" implies that transaction foreign exchange risk is _________ from an investment in a foreign currency. Eliminated A bond that promises to pay a single payment at maturity is known as a ________ bond. pure discount One of the major reasons for the existence of the forward market is to ________. manage currency risk especially risk associated with a transaction What is meant by the conditional future spot rate? the conditional mean of the probability distribution of future spot rates The _____ includes no cash flows between the deposit date and the maturity date. spot interest rate Interbank interest rates in various cities around the world are often the basis for interest rates in contractual loan agreements. What is the most important of these rates? London Interbank Offer Rate (LIBOR) It is 1998. The spot and 30-day forward rates for the Dutch guilder are $.3075 and $.3120, respectively. The guilder is said to be selling at a forward premium