Test Bank Docx International Finance And Trade Chapter 6

Chapter 6

International Finance and Trade

TRUE-FALSE QUESTIONS

1. Under the system of flexible exchange rates, exchange rates are determined by the actual process of supply and demand in the foreign exchange market.

Difficulty Level: Medium

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

2. The international monetary system consists of institutions and mechanisms that foster international trade, manage the flow of financial capital, and determine currency exchange rates.

Difficulty Level: Medium

Subject Heading: International Monetary System

L.O. 6.1

3. The International Monetary Fund (IMF) was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payment problems.

Difficulty Level: Medium

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

4. The International Bank for Reconstruction and Development (World Bank) was created to provide banking services for U.S. firms operating overseas.

Difficulty Level: Medium

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

5. Prior to the start of World War I in 1914, the international monetary system operated mostly under a silver standard.

Difficulty Level: Medium

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

6. In mid-1944, authorities from all major nations met in Bretton Woods, New Hampshire, to formulate a post–World War II international monetary system.

Difficulty Level: Medium

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

7. Under the Bretton Woods system, individual currencies would be tied to silver through the U.S. dollar via fixed, or pegged, exchange rates.

Difficulty Level: Medium

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

8. Beginning in March 1973, major currencies were allowed to “float” against one another.

Difficulty Level: Medium

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

9. The 1991 Maastricht Treaty formally committed the countries of the European Union to economic and monetary union.

Difficulty Level: Easy

Subject Heading: European Unification

L.O. 6.2

10. The European Economic Organization (EEO) is an organization of twelve European countries that agreed to have a common overall monetary policy and the euro as their common currency.

Difficulty Level: Medium

Subject Heading: European Unification

L.O. 6.2

11. The European Monetary Union (EMU) began as a 14-member subset of the 1995 15-member EU.

Difficulty Level: Medium

Subject Heading: Eurozone Members

L.O. 6.2

12. On January 1, 1999, the euro became the official currency of all European Monetary Union members.

Difficulty Level: Medium

Subject Heading: The Euro

L.O. 6.2

13. Foreign exchange markets are electronic communication systems connecting the major financial centers of the world.

Difficulty Level: Easy

Subject Heading: Currency Exchange Markets

L.O. 6.3

14. Arbitrage is the simultaneous buying of securities in one market and selling them in another to make a profit from price differences in the two markets.

Difficulty Level: Easy

Subject Heading: Arbitrage

L.O. 6.3

15. In foreign exchange, variations in quotations among countries at any time are quickly brought into alignment through arbitrage activities.

Difficulty: Easy

Subject Heading: Arbitrage

L.O. 6.3

16. An indirect exchange rate quotation is simply the reciprocal of a direct exchange rate quotation.

Difficulty Level: Easy

Subject Heading: Exchange Rate Quotations

L.O. 6.3

17. The direct quotation method expresses the number of foreign currency units needed to buy one U.S. dollar.

Difficulty Level: Medium

Subject Heading: Exchange Rate Quotations

L.O. 6.3

18. The direct quotation method indicates the amount of a foreign currency necessary to purchase one unit of the home country’s currency.

Difficulty Level: Medium

Subject Heading: Exchange Rate Quotations

L.O. 6.3

19. The ultimate effect of large-scale arbitrage activities on exchange rates is the elimination of the variation between the two markets.

Difficulty Level: Medium

Subject Heading: Arbitrage

L.O. 6.3

20. A currency exchange rate indicates the value of one currency relative to the U.S. dollar.

Difficulty Level: Easy

Subject Heading: Exchange Rate Quotations

L.O. 6.3

21. The spot exchange rate is the rate being quoted for delivery of the currency at a particular spot in the future.

Difficulty Level: Easy

Subject Heading: Currency Exchange Rate Appreciation and Depreciation

L.O. 6.3

22. Under a floating exchange rate system, the value of one currency relative to another is determined by the forces of supply and demand.

Difficulty Level: Easy

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

23. The exchange value of the U.S. dollar relative to other currencies does not impact international trade balances.

Difficulty: Easy

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

24. A nation with a relatively lower inflation rate than other countries will have a relatively stronger currency holding other factors constant.

Difficulty Level: Medium

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

25. A nation with relatively lower interest rate levels than other countries will have a relatively stronger currency.

Difficulty Level: Medium

Subject Heading: Foreign Exchange

L.O. 6.4

26. Interest rate parity states that a country with a relatively higher expected inflation rate will have its currency depreciate relative to a country with a relatively lower inflation rate.

Difficulty Level: Medium

Subject Heading: Foreign Exchange

L.O. 6.4

27. Purchasing power parity (PPP) states that the currency of a country with relatively higher inflation will depreciate relative to the currency of a country with a relatively lower inflation rate.

Difficulty Level: Medium

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

28. Interest rate parity (IRP) states that the currency of a country with relatively higher interest rate will appreciate relative to the currency of a country with a relatively lower interest rate.

Difficulty Level: Medium

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

29. Political risk is the risk associated with possible actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investors.

Difficulty Level: Easy

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

30. Political risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability.

Difficulty Level: Easy

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

31. Economic risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability.

Difficulty Level: Easy

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

32. Slow economic growth in investments in another country would be an example of political risk.

Difficulty Level: Medium

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

33. Economic risk is the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners.

Difficulty Level: Medium

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

34. The equilibrium exchange rate is the currency exchange rate where the supply and demand for a currency are in balance.

Difficulty Level: Easy

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

35. An expected decline in a country’s currency may lead to an attempt to accelerate collection of accounts receivable from that country for transfer to another country with a more stable currency.

Difficulty Level: Medium

Subject Heading: Foreign Exchange

L.O. 6.5

36. International financial markets strongly influence domestic interest rates.

Difficulty: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

37. Holding demand constant, an increase in supply for one currency relative to another will cause its value to appreciate relative to that currency.

Difficulty Level: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

38. Holding demand constant, an increase in supply for one currency relative to another will cause its value to depreciate relative to that currency.

Difficulty Level: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

39. A contract for the purchase or sale of a currency where delivery will take place at a future date is called a forward contract.

Difficulty Level: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

40. An increase in demand for a currency relative to other currencies will cause it to appreciate in value.

Difficulty: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

41. Holding demand constant, a decrease in supply for one currency relative to another will cause its value to depreciate relative to that currency.

Difficulty: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

42. A decrease in demand for a currency relative to other currencies will cause it to depreciate in value.

Difficulty: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

43. Hedging is action taken to reduce risk or insure against a possible negative outcome.

Difficulty: Medium

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

44. An instrument requiring immediate payment is classified as a time draft.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

45. The order bill of lading represents the written acceptance of goods for shipment by a transportation company and the terms under which the goods are to be transported to their destination.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.6

46. A sight draft is one that is not accompanied by any special documents and is generally used when the exporter has confidence in the importer’s ability to meet the draft when presented.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.6

47. The bankers’ acceptance is a draft drawn on and accepted by a bank rather than the importing firm.

Difficulty Level: Medium

Subject Heading: Banker’s Acceptance

L.O. 6.6

48. A trust receipt is an instrument through which a bank retains title to goods until they are paid for.

Difficulty Level: Medium

Subject Heading: Financing by the Importer

L.O. 6.6

49. The Board of Governors of the Federal Reserve System authorizes member banks to accept drafts that arise in the course of certain types of international transactions.

Difficulty Level: Medium

Subject Heading: Banker’s Acceptance

L.O. 6.6

50. The Export-Import Bank is a corporation owned by the Federal Reserve Banks.

Difficulty Level: Medium

Subject Heading: Other Aids to International Trade

L.O. 6.6

51. The traveler’s letter of credit is issued by a bank to banks in other countries authorizing foreign banks to cash checks or purchase drafts presented by the bearer.

Difficulty Level: Medium

Subject Heading: Other Aids to International Trade

L.O. 6.6

52. A traveler’s letter of credit is issued by a bank in one country and addressed to a list of foreign banks which are usually correspondents of the issuing bank and have agreed to purchase sight drafts presented to them by persons with appropriate letters of credit.

Difficulty Level: Medium

Subject Heading: Other Aids to International Trade

L.O. 6.6

53. A documentary draft is a draft that is accompanied by an order bill of lading and other documents.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

54. An order bill of lading is a document given by a transportation company that lists goods to be transported and terms of the shipping agreement.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

55. A clean draft is accompanied by an order bill of lading along with other papers such as insurance receipts, certificates of sanitation, and consular invoices.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.6

56. The balance of payments is a record of all economic transactions between one country and the rest of the world.

Difficulty Level: Easy

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

57. The capital account balance includes all foreign private and government investment in the United States netted against U.S. investments in foreign countries.

Difficulty: Easy

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

58. The current account balance shows the flow of income into and out of the United States during a specified time period.

Difficulty Level: Easy

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

59. The United Nations operates a world central bank that provides a world monetary unit to accommodate commerce across national boundaries.

Difficulty Level: Medium

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

60. The international monetary system consists of institutions and mechanisms that foster oversees the World Bank, sets international trade policy, and determines the exchange rate regime for all participating countries.

Difficulty Level: Medium

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

61. Foreign exchange markets are the same thing as as currency exchange markets.

Difficulty Level: Medium

Subject Heading: Currency Exchange Markets

L.O. 6.3

62. A quotation differential of as little as one-sixteenth of one cent may be sufficient to encourage arbitrage activities.

Difficulty Level: Easy

Subject Heading: Arbitrage

L.O. 6.4

63. A draft and a bill of exchange are the same thing.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.5

64. A time draft must be paid quicker than a sight draft.

Difficulty Level: Hard

Subject Heading: Financing by the Exporter

L.O. 6.6

65. The World Bank is also called the International Bank for Reconstruction and Development.

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

66. The World Bank is also called the United National International Bank.

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

MULTIPLE-CHOICE QUESTIONS

67. _________________________ was an international monetary system in which the U.S. dollar was valued in gold and other exchange rates were pegged to the dollar.

a. The gold standard

b. The flexible exchange rate system

c. The Bretton Woods System

d. The Taft-Hartley Act

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

68. The ___________________ shows the flow of income into and out of the United States during a specified period.

a. balance of payments

b. capital account balance

c. current account balance

d. merchandise trade balance

Difficulty Level: Easy

Subject Heading: Balance-of-Payments Accounts

L.O. 6.1

69. When the flow of income into the United States exceeds the flow of income out of the United States, it creates a

a. current account surplus

b. current account deficit

c. capital account surplus

d. capital account deficit

Difficulty Level: Easy

Subject Heading: Balance-of-Payments Accounts

L.O. 6.1

70. Which of the following statements is false?

a. Foreign banks, in addition to having correspondent relation with United States banks, are permitted to set up subsidiaries in this country.

b. The trust receipt is used by a bank in releasing shipping documents to a customer when the bank wishes to retain title to the merchandise.

c. A nation with relatively lower interest rate levels will have a relatively stronger currency.

d. A nation with a relatively lower inflation rate will have a relatively stronger currency.

Difficulty Level: Medium

Subject Heading: Multiple Topics

L.O. 6.1

71. Which of the following statements is most correct?

a. A weaker dollar results in less imports of foreign merchandise since it requires fewer dollars for purchase.

b. A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase.

c. A stronger dollar results in more imports of foreign merchandise since it requires more dollars for purchase.

d. A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase.

Difficulty Level: Hard

Subject Heading: Exchange Rate Developments for the U.S. Dollar

L.O. 6.1

72. _________________________ was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payments problems.

a. The World Bank

b. The International Monetary Fund

c. The International Bank for Reconstruction and Development

d. None of the above

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

73. _________________________ was created to help economic growth in developing countries.

a. The World Bank

b. The International Monetary Fund

c. The Export-Import Bank

d. The Agency for International Development.

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

74. It was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries facing balance of trade and payments problems.

a. United National International Bank

b. International Monetary Fund

c. Bretton Woods system

d. World Bank

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

75. It was created to help economic growth in developing countries.

a. United National International Bank

b. International Monetary Fund

c. Bretton Woods system

d. World Bank

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

76. It is also called the International Bank for Reconstruction and Development.

a. United National International Bank

b. International Monetary Fund

c. Bretton Woods system

d. World Bank

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

77. It is a system in which individual currencies would be tied to gold through the U.S. dollar via fixed, or pegged, exchange rates.

a. United National International Bank

b. International Monetary Fund

c. Bretton Woods system

d. World Bank

Difficulty Level: Easy

Subject Heading: How the International Monetary System Evolved

L.O. 6.1

78. The official currency of the EMU is what?

a. Pound

b. Dollar

c. Yen

d. Euro

Difficulty Level:

Subject Heading:

L.O.

79. Foreign exchange markets may be described as

a. specific locations in major industrial cities.

b. major financial centers connected by good communications systems.

c. money markets outside of the United States.

d. facilities of central banks for foreign exchange.

Difficulty Level: Easy

Subject Heading: Currency Exchange Markets

L.O. 6.3

80. The exchange rate is the rate at which a given unit of foreign currency is quoted in terms of

a. commodity prices.

b. the domestic currency.

c. the foreign currency.

d. gold.

Difficulty Level: Easy

Subject Heading: Exchange Rate Quotations

L.O. 6.3

81. The currency quotation method that indicates the amount of a home country’s currency needed to purchase one unit of a foreign currency is called the

a. direct quotation method.

b. indirect quotation method.

c. floating exchange rate method.

d. variable rate method.

Difficulty Level: Easy

Subject Heading: Exchange Rate Quotations

L.O. 6.3

82. If the U.S. inflation rate is expected to be 3 percent next year, the European inflation rate is expected to be 4% next year, and the spot rate between the euro and dollar is $1.30, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $1.30 to __________.

a. appreciate, $1.2875

b. appreciate, $1.3126

c. depreciate, $1.2875

d. depreciate, $1.3126

Difficulty Level: Hard

Subject Heading: Currency Exchange Rate Appreciation and Depreciation

L.O. 6.3

83. If U.S. interest rates are expected to be 6 percent next year, European interest rates are expected to be 4 percent next year, and the spot rate between the euro and dollar is $1.30, then according to interest rate parity, we would expect the dollar to _________ against the euro from $1.30 to __________.

a. appreciate, $1.275

b. appreciate, $1.325

c. depreciate, $1.275

d. depreciate, $1.3256

Difficulty Level: Hard

Subject Heading: Currency Exchange Rate Appreciation and Depreciation

L.O. 6.3

84. Quotations of foreign exchange rates in the many cities of the world are identical or nearly so because of

a. central bank control.

b. price fixing.

c. clearinghouse activities.

d. arbitrage activities.

Difficulty Level: Easy

Subject Heading: Arbitrage

L.O. 6.4

85. If the exchange rate in New York for British pounds sterling is quoted at 1 pound = $1.60, and in London the rate is quoted at 1 pound = $1.62, financial arbitragers might

a. buy pounds in New York.

b. sell dollars in London.

c. simultaneously sell pounds in New York and buy dollars in London.

d. simultaneously buy pounds in New York and sell dollars in London.

Difficulty Level: Medium

Subject Heading: Arbitrage

L.O. 6.4

86. The effect of arbitrage activities in foreign exchange markets is to

a. create disparity among the rates of various currencies.

b. eliminate or reduce exchange rate quotation differentials.

c. hinder the otherwise smooth functioning of the exchange markets.

d. create wide swings in quotations from period to period.

Difficulty Level: Easy

Subject Heading: Arbitrage

L.O. 6.4

87. Key factors that influence currency exchange rates include which of the following

a. production cost relationships

b. inflation rates

c. shipping rates

d. reserve requirements

Difficulty Level: Easy

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

88. Key factors that influence currency exchange rates include all of the following except

a. supply and demand relationships.

b. legal constraints.

c. interest rates.

d. inflation rates.

Difficulty Level: Easy

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

89. Purchasing commodities, securities, or bills of exchange in one market and immediately selling them in another to make a profit from price differences in the two markets is called

a. profiteering.

b. skimming.

c. arbitrage.

d. hedging.

Difficulty Level: Easy

Subject Heading: Arbitrage

L.O. 6.4

90. Before arbitragers take action with respect to exchange rate differentials

a. central bank approval must be obtained.

b. loans to cover transactions must be obtained.

c. a market differential of at least 1¢ must exist between two currencies.

d. a differential of as little as 1/16 of 1¢ may trigger action.

Difficulty Level: Medium

Subject Heading: Arbitrage

L.O. 6.4

91. Under conditions of purchasing power parity (PPP), a country with a relatively _______ expected inflation rate will have its currency _______ relative to a country with a relatively _______ inflation rate.

a. higher, depreciate, lower

b. lower, depreciate, higher

c. higher, appreciate, lower

d. lower, appreciate, higher.

Difficulty Level: Hard

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

92. Which of the following statements is false?

a. The prices quoted to the individual buyer of foreign exchange are always in favor of the seller.

b. An indirect quote is in terms of units of foreign currency per unit of the home country’s currency.

c. Economic risk reflects the uncertainty associated with national government action that might affect asset values.

d. political risk exists when dealing financially in international markets.

Difficulty Level: Medium

Subject Heading: Multiple Topics

L.O. 6.4

93. This theory states that a country with a relatively lower nominal interest rate will have its currency appreciate relative to a country with a relatively higher interest rate.

a. Purchasing power parity

b. International Fisher effect

c. Theory of equilibrium

d. Dynamic balancing effect

Difficulty Level: Hard

Subject Heading: Factors that Affect Currency Exchange Rates

L.O. 6.4

94. A stronger U.S. dollar generally

a. results in more imports of foreign merchandise

b. leads to concern about worsening trade surpluses

c. results in higher domestic inflation

d. results in more exports

Difficulty Level: Medium

Subject Heading: Exchange Rate Developments for the U.S. Dollar

L.O. 6.5

95. Foreign exchange hedging by a multinational corporation is

a. a normal responsibility of foreign exchange specialists.

b. not ordinarily considered to be prudent business.

c. usually described in speculative terms.

d. permitted only for defensive purposes.

Difficulty Level: Easy

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

96. Which of the following statements is most correct?

a. A weaker dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase.

b. A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase.

c. A stronger dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase.

d. A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase.

Difficulty Level: Hard

Subject Heading: Exchange Rate Developments for the U.S. Dollar

L.O. 6.5

97. Large multinational corporations enjoy special opportunities for risk reduction or speculative gains from currency activities

a. because of their influence on currency developments in the various countries.

b. since they can move balances from one country to another as monetary conditions seem to warrant.

c. because of their generally stronger credit ratings.

d. because they always deal in currencies denominated in U.S. dollars.

Difficulty Level: Hard

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

98. To protect against loss as a result of adverse currency fluctuations, an export firm may

a. demand no cash at settlement.

b. use a futures contract as a hedge.

c. require the customer to make payment in the purchaser’s currency.

d. a Federal Reserve credit letter.

Difficulty Level: Hard

Subject Heading: Managing Currency Exchange Risk

L.O. 6.5

99. In the field of foreign trade, the most common form of credit instrument is the

a. bankers’ acceptance.

b. trust receipt.

c. sight draft.

d. travelers letter of credit.

Difficulty Level: Easy

Subject Heading: Banker’s Acceptance

L.O. 6.6

100. For most of the remainder of the decade after the September 11th terrorist attacks

a. the Fed then maintained a high liquidity, low interest rate environment.

b. the Fed then maintained a low liquidity, low interest rate environment.

c. the Fed then maintained a low liquidity, high interest rate environment.

d. the Fed then maintained a high liquidity, high interest rate environment.

Difficulty Level: Hard

Subject Heading: Exchange Rate Developments for the U.S. Dollar

L.O. 6.5

101. Traveler’s letters of credit are

a. issued by a bank and addressed to a list of banks in other countries.

b. especially popular with tourists.

c. convertible into cash at most large banks.

d. of special value to exporters.

Difficulty Level: Easy

Subject Heading: Other Aids to International Trade

L.O. 6.6

102. An unconditional order for the payment of money from one person to another is called

a(n)

a. bill of exchange.

b. sight draft.

c. time draft.

d. documentary draft.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

103. A draft that is accompanied by an order bill of lading and other documents is called a(n)

a. bill of exchange.

b. sight draft.

c. time draft.

d. documentary draft.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

104. A draft requiring immediate payment is called a(n)

a. bill of exchange.

b. sight draft.

c. time draft.

d. documentary draft.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

105. A statement by a bank guaranteeing acceptance and payment of a draft up to a stated amount is called a(n)

a. bill of exchange.

b. commercial letter of credit.

c. time draft.

d. documentary draft.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

106. An instrument through which a bank retains title to goods until they are paid for is called a(n)

a. bill of exchange.

b. commercial letter of credit.

c. trust receipt.

d. documentary draft.

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

107. A promise of future payment issued by a firm guaranteed by a bank is called a(n)

a. bill of exchange.

b. commercial letter of credit.

c. banker’s acceptance.

d. documentary draft.

Difficulty Level: Easy

Subject Heading: Banker’s Acceptance

L.O. 6.6

108. The banker’s acceptance and the commercial letter of credit involve four principal parties. Which of the following is not one of those parties?

a. The importer

b. The exporter

c. The receiving country’s customs office

d. The exporter’s bank

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

109. Should a business fail after receiving shipping documents from its bank on the basis of a trust receipt, the bank

a. becomes a preferred creditor to the extent of the amount due less cash deposits with the bank.

b. repossesses the merchandise on the basis of a specific lien thereon.

c. repossesses the merchandise on the basis of its holding of title to the merchandise.

d. has a prior claim relative to other general creditors.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.6

110. The traveler’s letter of credit is usually used by

a. purchasing agents making purchases in foreign countries.

b. individuals traveling abroad.

c. importers’ banks.

d. correspondent banks, in order to reduce shipment of gold between countries.

Difficulty Level: Medium

Subject Heading: Other Aids to International Trade

L.O. 6.6

111. A purchasing agent for a domestic art gallery touring foreign countries for possible acquisitions might find it convenient to have

a. travelers’ checks.

b. a commercial letter of credit.

c. regular checkbook drafts.

d. a traveler’s letter of credit.

Difficulty Level: Medium

Subject Heading: Other Aids to International Trade

L.O. 6.6

112. The maturity of a banker’s acceptance arising out of international transactions may not exceed what?

a. 30 days

b. 45 days

c. Three months

d. Six months

Difficulty Level: Medium

Subject Heading: Banker’s Acceptance

L.O. 6.6

113. In recent years, the principal market for bankers’ acceptances has been

a. domestic banks.

b. domestic and foreign business corporations.

c. foreign banks.

d. none of the above.

Difficulty Level: Medium

Subject Heading: Banker’s Acceptance

L.O. 6.6

114. A domestic importer ordering foreign merchandise from a specific supplier would probably obtain

a. a brokers’ acceptance.

b. a traveler’s letter of credit.

c. a commercial letter of credit.

d. travelers’ checks.

Difficulty Level: Medium

Subject Heading: Financing by the Importer

L.O. 6.6

115. The exporter’s bank may offer considerable assistance to the exporter by

a. accepting a bill of lading as security for a loan.

b. arranging credit with the import’s bank.

c. allowing the exporter to borrow against the security of a documentary draft.

d. issuing a letter of credit to the exporter.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.6

116. Loans by an exporter’s bank based on the security of a documentary draft

a. are supported entirely by the strength of the importer.

b. are subject to the approval of the importer’s bank.

c. are available only to exporters with strong credit ratings.

d. have not only the financial strength of the exporter to support them, but also that of the importer.

Difficulty Level: Medium

Subject Heading: Financing International Trade

L.O. 6.6

117. An importer will generally try to avoid making payment for a purchase before the goods are actually shipped by

a. purchasing a letter of credit.

b. having payment sent to a bank in the exporter’s country to be held until proper shipment is made.

c. post-dating a check.

d. insisting on payment only upon delivery.

Difficulty Level: Medium

Subject Heading: Financing by the Importer

L.O. 6.6

118. The commercial letter of credit is of special usefulness in international transactions when the

a. importer’s credit rating is either weak or not well known.

b. exporter’s credit rating is weak, but the importer’s credit reputation is strong.

c. bank financing the importer’s transaction has very little confidence in the customer’s ability to meet payments.

d. exporter’s bank has little confidence in its customer’s ability to meet its financial obligations.

Difficulty Level: Medium

Subject Heading: Financing International Trade

L.O. 6.6

119. A trust receipt as used in financing international transactions

a. is issued by bonded warehouses for merchandise stored therein.

b. allows the release of merchandise on a consignment basis by the bank that issued the letter of credit.

c. is evidence of ownership of funds held in escrow by the importer’s bank.

d. is a negotiable instrument that trades freely in the money market.

Difficulty Level: Medium

Subject Heading: Financing by the Importer

L.O. 6.6

120. In effect, the commercial letter of credit enables the importer to

a. substitute the bank’s financial strength for his or her own.

b. shift the burden of financing the transaction to the exporter.

c. borrow from his or her bank on the basis of merchandise importer.

d. have ample of time to sell the imported merchandise and meet payment obligations.

Difficulty Level: Medium

Subject Heading: Financing by the Importer

L.O. 6.6

121. The attitude of central banks and commercial banks toward bankers’ acceptances

a. has been favorable regarding bankers’ acceptances as attractive short-term commitments.

b. has never been constructive and has, in fact, been in opposition to their use at times.

c. is one of approval provided that before investing in such instruments guarantees can be obtained from the Export-Import Bank.

d. is irrelevant, since they are prevented from investing in such instruments by regulations or laws.

Difficulty Level: Medium

Subject Heading: Banker’s Acceptance

L.O. 6.6

122. Which of the following statements is most correct?

a. Exporters may use sight or time drafts in billing foreign customers when they have confidence in the purchaser’s ability and willingness to pay.

b. A time draft becomes a banker’s acceptance when the customer receives, signs, and returns the draft to the exporter.

c. The currency rate is the rate at which a given unit of a foreign currency is quoted in terms of gold.

d. All of the above statements are correct.

Difficulty Level: Medium

Subject Heading: Multiple Topics

L.O. 6.6

123. Which of the following statements is false?

a. An order bill of lading carries title to the goods being shipped.

b. There are no foreign offices of U.S. banks in foreign countries.

c. In dealing with a foreign bank, an exporter generally works through a local subsidiary of that bank.

d. The Ex-Im Bank is authorized by Congress.

Difficulty Level: Medium

Subject Heading: Multiple Topics

L.O. 6.6

124. A draft that is not accompanied by any special documents and generally used when the exporter has confidence in the importer’s ability to meet the draft when presented is known as

a. an order bill of lading.

b. a clean draft.

c. a documentary sight draft.

d. traveling draft.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.6

125. A documentary draft is accompanied, among other things, by a(n)

a. order bill of lading.

b. manifest.

c. trust receipt.

d. letter of credit.

Difficulty Level: Medium

Subject Heading: Financing by the Exporter

L.O. 6.6

126. Commercial letter of credit are

a. customarily required by importers of their suppliers.

b. negotiable in the money markets of major cities.

c. customarily provided by banks to their customers to accommodate their import activities.

d. ordinarily provided by issuing bank at no charge to customers.

Difficulty Level: Medium

Subject Heading: Financing by the Importer

L.O. 6.6

127. The Export-Import Bank

a. makes loans and offers guarantees to foreign exporters to the United States.

b. may offer emergency credits to assist other countries to maintain their level of imports from the United States.

c. makes loans or offers guarantees when the soundness of the transaction is in doubt.

d. makes loans to domestic exporters to encourage foreign trade.

Difficulty Level: Medium

Subject Heading: Other Aids to International Trade

L.O. 6.6

128. Which of the following statements is false?

a. The Board of Governors of the Federal Reserve System does not allow member banks to accept drafts that arise in the course of certain types of international transactions.

b. Multinational corporations may engage in foreign exchange management for speculative purposes, as well as for defensive purposes.

c. Arbitrage in the foreign exchange market is the simultaneous purchasing of commodities or securities in one market and selling them in another where the price is higher.

d. Companies dealing internationally must consider political risk.

Difficulty Level: Medium

Subject Heading: Multiple Topics

L.O. 6.6

129. A document given by a transportation company that lists goods to be transported and terms of the shipping agreement.

a. Order bill of lading

b. Bill of shipping

c. Bill of ordering

d. Shipping bill

Difficulty Level: Easy

Subject Heading: Financing by the Exporter

L.O. 6.6

130. The _______ includes all international transactions.

a. balance of trade

b. balance of payments

c. current account balance

d. capital account balance

Difficulty Level: Easy

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

131. The U.S balance of payments involves all of the following except

a. foreign investment.

b. private grants.

c. government grants.

d. commercial bank deposits in dollars from foreigners.

Difficulty Level: Medium

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

132. Which factor does not impact international trade balances?

a. The exchange value of the U.S. dollar relative to other currencies

b. How often the government sells treasury bills

c. Relative inflation rates

d. Economic growth

Difficulty Level: Medium

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7

133. All of the following affect the balance of the capital account except

a. bank deposits.

b. purchases of government and corporate securities.

c. purchases of goods and services.

d. loans.

Difficulty Level: Medium

Subject Heading: Balance-of-Payments Accounts

L.O. 6.7