Test Bank FIN405 PDF

Test Bank for Final Revision... FIN 405 PART I: MC QUESTIONS 1. What does "International Finance" primarily focus on? A) Exchange rate fluctuations and risk management B) Local economic policies C) Government subsidies D) National debt 2. Free trade allows for the move...

Test Bank for Final Revision... FIN 405 PART I: MC QUESTIONS 1. What does "International Finance" primarily focus on? A) Exchange rate fluctuations and risk management B) Local economic policies C) Government subsidies D) National debt 2. Free trade allows for the movement of which of the following without restrictions? A) Goods, services, and inputs like labor and capital B) Only goods C) Goods and capital D) Only labor 3. ……………. is a commerce activity that are not subject to any market frictions (tariffs, quotas,...etc.) when such activities cross borders. A) Free trade B) Comparative advantage C) Absolute advantage D) Current Account E) None of the above 4. Which of the following is an example of "Free Trade" in practice? A) Saudi Arabia removes tariffs and quotas on imported goods from its trade partners. B) The United States imposes a 25% tariff on steel imports from other countries. C) India restricts the import of luxury goods to protect its domestic industry. D) A country imposes strict controls on the movement of foreign currency. 5. Which of the following is NOT a feature of Free Trade? A) Elimination of tariffs, quotas, and non-tariff barriers. B) Free movement of goods, services, capital, and labor. C) Protection of domestic industries by imposing high tariffs. D) Absence of government restrictions on trade. 6. The theory suggesting countries should specialize in goods they produce most efficiently is called ……………….... A) Economic parity B) Free trade C) Comparative advantage D) Purchasing Power Parity (PPP) E) None of the above 7. The measure of all economic transactions between residents of a country and the rest of the world is known as the ………….... A) Balance of Payments B) Current Account C) Balance of Trade D) Capital Account E) None of the above 8. Which term describes a situation where the total payments for imports exceed the receipts from exports? A) Trade deficit B) Trade surplus C) Balanced trade D) Capital surplus 9. Which of the following is an example of a "Current Account" transaction in the Balance of Payments? A) Export of oil to Japan by Saudi Arabia. B) A foreign investor buying shares in a Saudi company. C) A Saudi company acquiring a factory in Germany. D) A Saudi bank giving a loan to a company in India. 10. Which of the following is an example of a "Debit" in the current account of the Balance of Payments? A) Payment for imports of cars from Germany. B) Export of crude oil to the United States. C) Repatriation of dividends from a foreign subsidiary. D) Foreign tourists paying for hotel stays in the country. 11. Which of the following is a "Credit" in the current account of the Balance of Payments? A) Exports of goods and services. B) Payments for imported raw materials. C) Wages paid to expatriate workers sent back to their home countries. D) Payments for interest on loans to foreign investors. 12. Which of the following explains a "surplus" in the Balance of Payments? A) The value of total exports is greater than the value of total imports B) The country’s imports exceed its exports. C) The value of its currency appreciates against other currencies. D) The government increases its spending on infrastructure development. 13. A Saudi bank lends $50 million to a company in India for a five-year period. How is this transaction recorded in Saudi Arabia's Balance of Payments? A) Debit in the financial account B) Credit in the financial account C) Debit in the current account D) Credit in the current account 14. Which of the following would improve a country's current account balance? A) A decrease in imports of luxury cars B) An increase in wages paid to foreign workers in the country C) An increase in the repayment of foreign loans D) A rise in remittances sent by residents to their families abroad 15. When a country has a surplus in its Balance of Payments, it usually means….………... A) Imports are greater than exports B) There is no change in currency value C) Exports are greater than imports D) Both imports and exports are equal E) None of the above. 16. Which of the following terms best describes the difference in interest rates between two countries affecting currency demand? A) Inflation effect B) Balance of Payments C) Interest Rate Parity (IRP) D) Purchasing Power Parity (PPP) E) None of the above 17. ……………. is the risk that exchange rate changes between the initiation of a contract and its settlement can increase or decrease the cost of international transactions. A) Translation risk B) Economic risk C) Transaction risk D) Currency risk E) Inflation risk 18. ……………. arises when a company’s financial statements are consolidated from foreign subsidiaries. The exchange rate fluctuations affect the value of these foreign operations.. A) Translation risk B) Economic risk C) Transaction risk D) Currency risk E) Inflation risk 19. ……………. relates to long-term changes in exchange rates, which affect a country's international competitiveness and economic structure. A) Translation risk B) Economic risk C) Transaction risk D) Currency risk E) Inflation risk 20. Which of these is NOT considered part of the current account in the Balance of Payments? A) Goods and services trade B) Income receipts C) Foreign direct investment D) Current transfers 21. What impact would a devaluation of currency have according to the J-Curve? A) Immediate improvement in trade balance B) Immediate worsening with no improvement C) Constant trade balance D) Initial worsening, then eventual improvement in trade balance 22. When a country's inflation rate is higher than that of its trade partners, its exports become …………... A) More competitive B) Cheaper for foreign buyers C) Unaffected by inflation D) More expensive 23. Which of the following best describes a “trade deficit”? A) When exports exceed imports B) When exports and imports are equal C) When there is no trade at all D) When imports exceed exports 24. In fixed exchange rate ……………… A) The currency value changes according to supply and demand B) The currency value only changes once a year C) The currency value is influenced by seasonal trends D) The currency value is set by the government and does not fluctuate 25. Exchange rates refer to ………………… A) The rate at which goods are exchanged within a country B) The rate of exchange between different companies C) The price set for exporting goods D) The price of one country’s currency in terms of another currency E) All of the above 26. Which of the following is a feature of a "Fixed Exchange Rate" system? A) The value of the currency is pegged to another currency or basket of currencies. B) The currency value fluctuates according to market supply and demand. C) The currency is allowed to freely float without any government intervention. D) The exchange rate changes daily based on inflation differences. E) All of the above 27. Which of the following is a key role of a country's central bank in a fixed exchange rate system? A) To intervene in the foreign exchange market to maintain the peg. B) To allow the currency to float freely according to supply and demand. C) To print additional currency as needed. D) To ensure there is no intervention in the forex market. 28. Which of the following describes a "Managed Float Exchange Rate" system? A) The central bank allows the currency to float, but intervenes when necessary to stabilize it. B) The currency is fixed to the value of another currency. C) The exchange rate is fixed, and there is no market influence on its value. D) The currency is freely determined by supply and demand without any intervention. 29. Which of the following is the main advantage of a "Floating Exchange Rate" system? A) The government does not need to maintain large foreign currency reserves. B) It creates certainty and stability in foreign trade. C) It reduces currency volatility in the forex market. D) It provides complete control to the central bank over exchange rate movements. 30. Which of the following is an example of "Currency Depreciation"? A) A decrease in the value of the SAR relative to the USD. B) A decrease in inflation in the domestic economy. C) A fall in the unemployment rate in the local economy. D) An increase in the purchasing power of the domestic currency. 31. Which of the following is an example of "Currency Appreciation"? A) The value of the USD increases relative to the Euro. B) The value of the USD decreases relative to the Euro. C) The value of the SAR falls relative to the USD. D) The USD is pegged at 3.75 against the SAR. 32. Which of the following is a characteristic of a "Currency Crisis"? A) A sharp depreciation of a country's currency relative to other major currencies. B) The appreciation of a currency due to foreign investment inflows. C) The stabilization of the exchange rate through central bank intervention. D) The use of forward contracts to hedge exchange rate risk. 33. Which of the following correctly describes the spot rate? A) The exchange rate at which a currency can be immediately exchanged. B) The exchange rate agreed today for a future currency transaction. C) The interest rate charged by a central bank. D) The price at which a company buys currency from a foreign subsidiary. 34. Which of the following is NOT a method of managing foreign exchange risk? A) Buying forward contracts. B) Buying put or call options. C) Borrowing only in the domestic currency. D) Buying stocks of foreign companies. 35. If the SAR/USD exchange rate changes from 3.75 to 4.00, what has happened to the value of the SAR relative to the USD? A) The SAR has depreciated. B) The SAR has appreciated. C) The SAR is now fixed. D) The SAR is now in a forward contract. 36. If the real interest rate in Saudi Arabia is 3% and the inflation rate is 2%, what is the nominal interest rate according to the Fisher Effect? A) 5% B) 6% C) 2% D) 3% 37. Which of the following conditions links inflation, interest rates, and exchange rates? A) Fisher Effect B) Relative Purchasing Power Parity (PPP) C) Absolute Purchasing Power Parity (PPP) D) Interest Rate Parity (IRP) 38. Which of the following would be classified as a Credit in the Financial Account of the Balance of Payments? A) A foreign investor buys shares in a Saudi company listed on the stock market. B) A Saudi investor buys foreign government bonds. C) A Saudi citizen sends remittances to their family in Yemen. D) A Saudi company makes a payment for imports from Germany. 39. A Saudi government bond is purchased by a foreign investor. How is this transaction recorded in the Saudi Balance of Payments? A) Credit in the financial account B) Debit in the financial account C) Debit in the current account D) Credit in the current account 40. …………….. is a financial strategy used by individuals, businesses, and financial institutions to protect themselves against potential losses caused by unfavourable changes in market conditions. a. Forward Contracts b. Hedging c. Interest rates d. None of all the above 41. Which of the following is the main objective of hedging foreign exchange risk? a. To protect a company from potential losses due to unfavorable currency movements. b. To maximize profits from currency fluctuations. c. To ensure that the company only operates in one currency. d. To increase foreign direct investment. 42. If a Saudi importer agrees to pay €1 million in six months to avoid the risk of the euro strengthening against the SAR, this is called …………… a. Foreign Exchange Hedging b. Commodity Hedging c. Interest Rate Hedging d. All of the above 43. If a Saudi airline hedges against rising jet fuel prices by entering into futures contracts for fuel at a fixed price, this is called …………. a. Foreign Exchange Hedging b. Commodity Hedging c. Interest Rate Hedging d. All of the above 44. If a Saudi bank hedges its exposure to rising interest rates by using interest rate swaps, this is called ………….. a. Foreign Exchange Hedging b. Commodity Hedging c. Interest Rate Hedging d. All of the above 45. ………….. is a private agreement between two parties to exchange a fixed amount of currency at a predetermined rate on a specified future date. a. Forward Contract b. Option contract c. Spot exchange rate d. All of the above 46. …………… gives the holder the right, but not the obligation, to buy or sell a currency at a predetermined rate on or before a specific date. a. Interest rate b. Option contract c. Spot exchange rate d. All of the above 47. ………… involves transferring the responsibility of foreign exchange risk to another party, typically a trading partner, through contractual terms. a. Risk shifting b. Risk sharing c. Exposure netting d. All of the above 48. …………… is a collaborative approach where both parties agree to share the burden of exchange rate fluctuations beyond a certain range. a. Risk shifting b. Risk sharing c. Exposure netting d. All of the above 49. …………. involves consolidating and offsetting multiple currency exposures within a company to determine the net exposure that needs to be hedged. a. Risk shifting b. Risk sharing c. Exposure netting d. All of the above 50. Which of the following instruments allows a company to limit its maximum loss from unfavorable exchange rate movements while still benefiting from favorable movements? a. Currency Option b. Forward Contract c. Currency Swap d. Currency Future Explanation: A currency option gives the company the right, but not the obligation, to buy or sell currency at a predetermined rate. This allows the company to benefit from favorable movements while limiting its loss. PART II: PROBLEMS 1. Consider two trade partners: Saudi Arabia and Malaysia. Each country produces dates and coffee. The following data represents the production output per hour for each country. Saudi Arabia Malaysia Dates (units/hour) 40 units/hrs 8 units/hrs Coffee (units/hour) 0.80 units/hrs 0.06units/hrs Wages: ✓ Saudi Arabia: SAR 8/hour ✓ Malaysia: MYR 10/hour Questions: i. Identify the comparative advantage for each country. Opportunity Cost of Dates 1) For Saudi Arabia: 40 units of Dates = 0.80 units of Coffee 40 0.8 𝐷𝑎𝑡𝑒𝑠 = 𝑐𝑜𝑓𝑓𝑒𝑒 40 40 1 unit of Dates = 0.02 units of coffee 2) For Malaysia: 8 units of Dates = 0.06 units of Coffee 8 0.06 𝐷𝑎𝑡𝑒𝑠 = 𝑐𝑜𝑓𝑓𝑒𝑒 8 8 1 unit of Dates = 0.0075 units of coffee ✓ Malaysia has a comparative advantage in Dates because its opportunity cost (0.0075) is lower than Saudi Arabia’s (0.02).  Opportunity Cost of Coffee 1) For Saudi Arabia: 0.80 units of Coffee = 40 units of Dates 0.8 40 𝐶𝑜𝑓𝑓𝑒𝑒= 𝐷𝑎𝑡𝑒𝑠 0.8 0.8 1 unit of Coffee = 50 units of Dates 2) For Malaysia: 0.06 units of Coffee = 8 units of Dates 0.06 8 𝐶𝑜𝑓𝑓𝑒𝑒= 𝐷𝑎𝑡𝑒𝑠 0.06 0.06 1 unit of Coffee = 133.33 units of Dates ✓ Saudi Arabia has a comparative advantage in Coffee because its opportunity cost (50) is lower than Malaysia’s (133.33). ii. Which product should each country specialize in after trade? Malaysia should specialize in Dates. Saudi Arabia should specialize in Coffee. iii. Calculate the cost of 1 unit of dates and 1 unit of coffee in terms of wages in each country. Cost of 1 unit of Dates: 1) For Saudi Arabia: Wage 8 SAR Cost = Productivity = = 0.20 𝑆𝐴𝑅 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 40 units 2) For Malaysia: Wage 10 MYR Cost = Productivity = = 1.25 𝑀𝑌𝑅 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 8 units Cost of 1 unit of Coffee: 3) For Saudi Arabia: Wage 8 SAR Cost = Productivity = = 10 𝑆𝐴𝑅 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 0.8 units 4) For Malaysia: Wage 10 MYR Cost = = = 166.67 𝑀𝑌𝑅 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 Productivity 0.06 units 2. A country’s BOP has the following transactions (all values in million USD): Exports of goods = 1500 Imports of goods = 1700 Net income (outflow) = 50 Net transfers (outflow) = 20 FDI inflow = 500 FDI outflow = 300 Portfolio investment inflow = 250 Portfolio investment outflow = 100 i. Calculate the Current Account Balance. Exports of goods 1500 Imports of goods -1700 Goods Trade Balance -200 Exports of services 0 Imports of services 0 Services Trade Balance 0 Net income (outflow) -50 Net transfers (outflow) -20 Current Account Balance -270 million USD (deficit) ii. Calculate the Financial Account Balance. Purchase fixed assets abroad (Real state) 0 Sale of fixed assets in the USA (Real state) 0 Capital Account Balance 0 FDI inflow 500 FDI outflow -300 Net Direct Investment 200 Portfolio investment inflow 250 Portfolio investment outflow -100 Net Portfolio Investment 150 Financial Account Balance 350 (surplus)  iii. Calculate the overall Balance of Payments (BOP). A Current Account Balance -270 B Capital Account Balance 0 C Financial Account Balance 350 D Net error and omissions (missing data) 0 E Balance of Payments (BOP) 80 (surplus) …………………………………………………………………………………………… 3. The current spot rate (S) for USD/SAR is 3.75, and the 6-month (t) forward rate (F) for the same currency pair is 3.80 SAR per dollar. i. Determine whether the Saudi Riyal (SAR) is trading at a premium or discount against the USD ✓ Spot rate (S) = 3.75, Forward rate (F) = 3.80, Time (t) = 6 ✓ Since the forward rate (3.80) is higher than the spot rate (3.75), the Saudi Riyal (SAR) is trading at a premium against the USD in the forward market. ii. Calculate the percentage of the forward premium. 𝐹−𝑆 12 Forward Premium (%) = ( )× × 100 𝑆 𝑡 3.80−3.75 12 Forward Premium (%) = ( )× × 100 3.75 6 Forward Premium (%) = 2.67% …………………………………………………………………………………………… 4. The current spot rate for EUR/USD is 1.15. The 3-month forward rate for the same currency pair is 1.12 EUR/USD. i. Determine whether the Saudi Riyal (SAR) is trading at a premium or discount against the USD i. Spot rate (S) = 1.15, Forward rate (F) = 1.12, Time (t) = 3 ii. Since the forward rate (1.12) is lower than the spot rate (1.15), the EUR is trading at a discount against the USD in the forward market. ✓  ii. Calculate the percentage of the forward discount. 𝐹−𝑆 12 Forward discount (%) = ( )× × 100 𝑆 𝑡 1.12−1.15 12 Forward discount (%) = ( )× × 100 1.15 3 Forward discount (%) = -10.4% Key Takeaways 1) If the forward rate is higher than the spot rate, the currency trades at a premium. 2) If the forward rate is lower than the spot rate, the currency trades at a discount. 3) Formula for Forward Premium/Discount: 𝐹−𝑆 12 Forward Premium/Discount (%) = ( )× × 100 𝑆 𝑡 …………………………………………………………………………………………… 5. A currency broker in Egypt is quoting the following exchange rates for USD/EGP: Bid Price (price at which the broker buys USD from a customer) = 49.80 per $ Ask Price (price at which the broker sells USD to a customer) = 50.20 per $ The broker facilitates the following transactions: A customer sells $20000 to the broker. Another customer buys $20000 from the broker. i. Calculate the spread (the broker's profit margin per USD traded). Spread = Ask Price − Bid Price Spread = 50.20 – 49.80 = 0.40 EGP per $ ii. Determine how much EGP the broker pays for the $20000 purchase (when a customer sells USD). When a customer sells $20000 to the broker, the broker pays the bid price (49.80) Amount Paid by Broker = Amount in USD × Bid Price Amount Paid by Broker = $20000 × 49.80 = 996,000 EGP  iii. Determine how much EGP the broker receives for selling $20000 (when a customer buys USD). When another customer buys $20000 from the broker, the broker charges the ask price (50.20): Amount Received by Broker= Amount in USD × Ask Price Amount Paid by Broker = $20000 × 50.20 = 1,004,600 EGP iv. Calculate the broker's profit from these two transactions. Broker's profit = Amount Received − Amount Paid Broker's profit = 1,004,000 × 996,400 = 8000 EGP............................................................... 6. Suppose the spot rate for USD/SAR is 3.75, and the annual Interest Rate in Saudi Arabia equals 3% or 0.03, and annual Interest Rate in the United States (USD) equals 5% or 0.05. Calculate the one-year forward rate for USD/SAR using Interest Rate Parity (IRP) 1+ 𝑖𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 Forward Rate (F) = Spot Rate (S) × 1+ 𝑖𝑓𝑜𝑟𝑒𝑖𝑔𝑛 1+0.03 Forward Rate (F) = 3.75 × 1+ 0.05 = 3.68 SAR Note: The forward rate is lower than the spot rate because the interest rate in Saudi Arabia (3%) is lower than the interest rate in the U.S. (5%). This reflects the cost of holding USD in a forward contract due to higher interest rates in the U.S................................................................ 7. The United States Balance of Payment in 2005 / (billions of U.S. dollars) Exports of goods 898 Sale of fixed assets in the USA (Real state) 1 Imports of goods 1677 Direct investment abroad 9 377 Direct investment in the USA 110 Exports of services 315 Portfolio investment assets (equity 180 securities and debt securities) Imports of services Income receipts (investment 474 Portfolio investment liabilities (equity 909 income & compensation) securities and debt securities) Income payments (investment 463 Other investment assets (equity securities 252 income & compensation) and debt securities) Transfers to USA from other 16 Other investment liabilities (equity 194 countries securities and debt securities) Transfers from USA to other 102 Net error and omissions (missing data) 10 countries Purchase fixed assets abroad 5 (Real state) Calculate: i. Current Account and Balance of Trade (BOT) Exports of goods 898 Imports of goods -1677 Goods Trade Balance or Balance of Trade (BOT) -779 Exports of services 377 Imports of services -315 Services Trade Balance 62 Income receipts 474 Income payments -463 Income Balance 11 Transfers to USA from other countries 16 Transfers from USA to other countries -102 Net Transfers -86 Current Account Balance -792 ii. Capital Account and Financial Account Purchase fixed assets abroad (Real state) -5 Sale of fixed assets in the USA (Real state) 1 Capital Account Balance -4 Direct investment abroad -9 Direct investment in the USA 110 Net Direct Investment 101 Portfolio investment assets (equity securities and debt securities) -180 Portfolio investment liabilities (equity securities and debt securities) 909 Portfolio Investment 729 Other investment assets (equity securities and debt securities) -252 Other investment liabilities (equity securities and debt securities) 194 Other Investment -58 Financial Account Balance 772 iii. Balance of Payment (BOP) A Current Account Balance -792 B Capital Account Balance -4 C Financial Account Balance 772 D Net error and omissions (missing data) 10 Balance of Payment (BOP) -14 (Deficit) All the best