Business - Multiple Choice Questions

1. Comparative advantage (Points : 5)
A. is also known as relative efficiency.
B. can lead to trade even in the face of absolute efficiency.
C. exists when one party can produce a good or service at a lower opportunity cost than another party.
D. all of the above

2. The theory of comparative advantage (Points : 5)
A. claims that economic well-being is enhanced if each country's citizens produce only a single product.
B. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries.
C. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production.
D. claims that no country has an absolute advantage over another country in the production of any good or service.

3. The forward market (Points : 5)
A. involves contracting today for the future purchase or sale of foreign exchange at the spot rate that will prevail at the maturity of the contract.
B. involves contracting today for the future purchase or sale of foreign exchange at a price agreed upon today.
C. involves contracting today for the right but not obligation to the future purchase or sale of foreign exchange at a price agreed upon today.
D. none of the above

4. What is "transaction exposure?" (Points : 5)

5. What is the most direct and popular way of hedging transaction exposure? (Points : 5)

6. Option premium is a combination of __________ value + time value.
(Points : 5)

7. Translation exposure refers to (Points : 5)
A. accounting exposure.
B. the effect that an unanticipated change in exchange rates will have on the consolidated financial reports of an MNC.
C. the change in the value of a foreign subsidiaries assets and liabilities denominated in a foreign currency, as a result of exchange rate change fluctuations, when viewed from the perspective of the parent firm.
D. all of the above

8. _____________ exposure is the extent to which a firm's value would be affected by unexpected changes in the exchange rate.

9. How are international banks different from domestic banks? (Points : 5)

10. The four currencies in which the majority of domestic and international bonds are denominated are
A. U.S. dollar, the euro, the Indian rupee, and the Chinese Yuan.
B. U.S. dollar, the euro, the pound sterling, and the Swiss franc.
C. U.S. dollar, the euro, the Swiss franc, and the yen.
D. U.S. dollar, the euro, the pound sterling, and the yen.

11. The doctrine of comparative advantage was first put forth by whom? (Points : 5)

12. Which of the following are reasons why a bank may establish a multinational operation? (Points : 5)
A. Low marginal and transaction costs
B. Home nation information services, and prestige
C. Growth and risk reduction
D. All of the above

13. The bid price is the price at which a dealer is willing to sell an investment security, currency, etc. (Points : 5)
True
False

14. An investor believes that the price of a stock, say IBM's shares, will increase in the next 60 days. If the investor is correct, which combination of the following investment strategies will show a profit in all the choices?
(i) - buy the stock and hold it for 60 days
(ii) - buy a put option
(iii) - sell (write) a call option
(iv) - buy a call option
(v) - sell (write) a put option

A. (i), (ii), and (iii)
B. (i), (ii), and (iv)
C. (i), (iv), and (v)
D. (ii) and (iii)

15. During the period of the classical gold standard (1875-1914) there were (Points : 5)
A. highly volatile exchange rates.
B. volatile exchange rates.
C. moderately volatile exchange rates.
D. stable exchange rates.
E. no exchange rates.

16. A "bearer bond" is one that (Points : 5)
A. shows the owner's name on the bond.
B. the owner's name is recorded by the issuer.
C. possession is evidence of ownership.
D. both a) and b)

17. International trade is a "zero-sum" game in which one country benefits only at the expense of another country. (Points : 5)
True
False

18. Which of the following options combinations are internally consistent (i.e., both positions would be profitable or unprofitable at the same time) ? (Points : 5)

A. Sell puts and buy calls
B. Buy puts and sell calls
C. Buy puts and buy calls
D. Both a) and b)

19. With currency futures options the underlying asset is (Points : 5)

A. foreign currency.
B. a call or put option written on foreign currency.

C. a futures contract on the foreign currency.

D. none of the above

20. Gresham's Law states that (Points : 5)

A. bad money drives good money out of circulation.

B. good money drives bad money out of circulation.

C. if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate.

D. none of the above.

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