A balance of payments deficit would be widened by which of the following?
I Increased levels of U.S. imports
II Decreased sales of U.S. securities to foreign holders
III Decreased levels of foreign tourists visiting the United States
IV Decreased dividends paid to foreign holders of U.S. securities



A. I and III only
B. II and IV only
C. I, II, III
D. I, II, III, IV

The best answer is C.
As the deficit widens, more dollars are being spent abroad and fewer are being spent in the U.S.
•Increased levels of U.S. imports will cause more dollars to go outside the U.S., weakening the dollar and widening the deficit.
•Decreased sales of U.S. securities to foreign holders will decrease the value of the dollar (foreigners have to spend their currency to buy dollar-denominated securities and if demand is weakening, fewer dollars are being bought and fewer purchases in the United States are being made), widening the balance of payments deficit.
•Decreased levels of foreign tourists visiting the U.S. will widen the deficit, since fewer dollars are being spent in the U.S. by foreigners.
•Finally, decreased dividends paid to foreign holders of U.S. securities will cause more dollars to stay in the U.S., narrowing the deficit.

The dollar has depreciated against foreign currencies. The likely result is a(n):
I increasing trade surplus
II decreasing trade surplus
III increasing trade deficit
IV decreasing trade deficit



StatusA A. I and III
StatusB B. I and IV
StatusC C. II and III
StatusD D. II and IV

The best answer is B. If the dollar depreciates, U.S. goods become cheaper to foreigners and foreign goods become more expensive in the U.S. Thus, we are likely to export more, increasing any trade surpluses or decreasing any trade deficits

If the U.S. economy runs a balance of trade deficit, which of the following statements are TRUE?
I U.S. currency values will increase relative to that of foreign countries
II U.S. currency values will decrease relative to that of foreign countries
III U.S. exports should become more expensive to foreign countries
IV U.S. exports should become less expensive to foreign countries



StatusA A. I and III
StatusB B. I and IV
StatusC C. II and III
StatusD D. II and IV

The best answer is D. If our economy consistently runs balance of trade deficits, then the country is becoming "poorer" and its currency value decreases relative to that of foreign countries. As the currency value decreases, exports become less expensive to foreign countries, so exports increase and the deficit should dissipate over time.

Transactions in the interbank market cause direct movements in the prices of:


StatusA A. currencies
StatusB B. currency options
StatusC C. equities
StatusD D. equity options

The best answer is A. Foreign currencies trade in the interbank market.

Which statements are TRUE about the interbank market?
I Trades settle on a forward contract basis
II Trades occur in large blocks
III Trades settle on a spot contract basis
IV Trades take place 24 hours a day



StatusA A. I and II only
StatusB B. III and IV only
StatusC C. II, III, IV
StatusD D. I, II, III, IV

The best answer is D. Trading in the interbank market takes place 24 hours a day at trading desks across the world. There is no trading floor for this market. Trades occur in large blocks and settle either on a spot (1 or 2 business day settlement) or forward contract (settlement on a mutually agreed date in the future) basis.

Trading in the Interbank market will DIRECTLY affect:
I American Depositary Receipt prices in terms of U.S. dollars
II Foreign Currency prices in terms of U.S. dollars
III Future trade deficit or surplus figures
IV Future economic growth

The best answer is C.
Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries.

American Depositary Receipts are vehicles for foreign securities to be traded in the United States. ADRs are only traded in the United States, and are denominated in U.S. dollars, so there is no direct effect of foreign currency price movements on ADR prices (though an argument can be made that the foreign stock held in trust pays dividends in the foreign currency; and that these dividends are converted to U.S. dollars to be paid to ADR holders; that currency price movements have some impact on ADR values).

Trades of foreign currencies in the interbank market settle:
I Spot
II Cash
III Forward
IV Future



StatusA A. I and III
StatusB B. III and IV
StatusC C. I and IV
StatusD D. II and III

The best answer is A. Trades of foreign currencies either settle "spot" - with settlement taking place in 1 or 2 days (the more actively traded currencies settle next day; the less actively traded currencies settle 2 business days) or on a "forward" basis, with settlement taking place on an agreed upon date in the future. There is no "cash" settlement (same day settlement) for foreign currencies as there is for stocks; and there is no such thing as future settlement

Speculators in foreign currencies would be subject to all of the following risks EXCEPT:


StatusA A. political risk
StatusB B. market risk
StatusC C. reinvestment risk
StatusD D. exchange rate risk

The best answer is C.
Reinvestment risk only affects securities that pay an income stream. If interest rates fall over the time period that an investment is held; any dividends or interest payments received over this time period are reinvested at lower rates, lowering the overall rate of return. This risk would not affect foreign currencies, which do not give investors an income stream.

Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.

The Federal Reserve Bank has made a policy decision to try to strengthen the U.S. Dollar versus the Japanese Yen. Which of the following intervention actions would increase the U.S. Dollar's exchange value?
I Buy U.S. Dollars
II Sell U.S. Dollars
III Buy Japanese Yen
IV Sell Japanese Yen



StatusA A. I and III
StatusB B. I and IV
StatusC C. II and III
StatusD D. II and IV

The best answer is B. If the Federal Reserve wishes to strengthen the U.S. Dollar against the Japanese Yen (which would make our goods more expensive to the Japanese and would decrease exports), it would buy U.S. Dollars and sell Japanese Yen. To decrease the value of the dollar, it would do just the opposite - sell the dollar and buy the yen.

Currency valuation in the interbank market is affected by all of the following EXCEPT:


StatusA A. Intervention
StatusB B. Revaluation
StatusC C. Devaluation
StatusD D. Intermediation

The best answer is D. Currency values in the interbank market are affected by central bank intervention (e.g., the Bank of Japan bolsters the yen by making large purchases); by currency revaluation (e.g., Mexico revalues the Peso against the dollar, changing the official exchange rate); and by devaluation of the currency (which is simply the market mechanism pushing values down). Intermediation is a U.S. banking term that describes periods when deposits flow into "time accounts" at banks - this typically occurs when interest rates are low. Deposits flow out of banks when interest rates are high (e.g., money funds paying higher rates) - this is known as "disintermediation".

Foreign currency values are affected by all of the following EXCEPT:


StatusA A. currency devaluation
StatusB B. central bank intervention
StatusC C. floating exchange rates
StatusD D. fixed exchange rates

The best answer is D. Fixed exchange rates have no effect on foreign currency values There is no market mechanism for adjusting the value of a currency with a fixed exchange rate - resulting in "black markets" for the currency. Currency values are affected by currency devaluation imposed by Governments; by central bank intervention directing the buying or selling of that currency; and by floating exchange rates. A floating exchange rate is one that changes in response to market conditions. All major Western currencies have floating exchange rates.

If the dollar appreciates against foreign currencies, which of the following statements are TRUE?
I Foreign currencies buy fewer dollars
II U.S. exports are likely to rise
III Foreign imports are likely to rise
IV Foreign goods are more expensive in the U.S.



StatusA A. I and III only
StatusB B. II and IV only
StatusC C. I, II, IV
StatusD D. I, II, III, IV

The best answer is A. If the dollar rises, then the U.S. dollar becomes more "expensive" to buy using a foreign currency. U.S. goods become more expensive to foreigners and foreign goods become cheaper in the U.S. Thus, U.S. exports are likely to fall and foreign imports are likely to rise.

If the dollar falls against foreign currencies, all of the following statements are true EXCEPT:


StatusA A. U.S. goods are cheaper to foreign countries
StatusB B. U.S. exports are likely to rise
StatusC C. foreign currencies buy fewer dollars
StatusD D. foreign imports are likely to fall

The best answer is C. If the dollar falls, U.S. goods become cheaper to foreigners and foreign goods become more expensive in the U.S. Thus, exports are likely to rise and imports are likely to fall. Since the dollar is cheaper, foreign currencies buy more dollars and/or goods.

An investor has purchased shares of an international bond fund. The fund will have inferior performance if the value of the:
I U.S. Dollar increases
II U.S. Dollar decreases
III foreign currency increases
IV foreign currency decreases



StatusA A. I and III
StatusB B. I and IV
StatusC C. II and III
StatusD D. II and IV

The best answer is B. An international bond fund will have securities that are denominated in foreign currencies. If the foreign currency value falls against the dollar, then when the fund's NAV is converted into dollars, proportionately fewer dollars will be created, since each unit of foreign currency buys less dollars. Similarly, if the U.S. Dollar rises against the foreign currency, when the fund's NAV is converted into dollars, proportionately fewer dollars will be created, since each unit of foreign currency buys fewer dollars.

Which of the following economic events would have a positive long term impact on common stock prices?
I Falling interest rates
II Falling capital gains tax rates
III Rising employment rates
IV Rising inflation rates



StatusA A. I and II only
StatusB B. III and IV only
StatusC C. I, II, III
StatusD D. I, II, III, IV

The best answer is C.
Falling interest rates are good for stock prices. More investors will switch from low yielding bonds to stock investments.

A falling capital gains tax rate also makes stocks attractive to investors.

Rising employment indicates that the economy is expanding. This is bullish for corporate profits and hence, stock prices.

Rising inflation means that interest rates are likely to rise. This makes long term debt unattractive due to their greater price volatility in response to market interest rate changes and also makes stocks unattractive since corporations are not able to increase prices in line with rising costs, hurting profits. In inflationary times, investors switch from stocks and long term bonds to money market instruments which are paying current high rates of interest; and "hard" assets such as gold and real estate that tend to keep up with inflation.

The largest component of the Dow Jones Averages is:


StatusA A. banking and finance
StatusB B. transportations
StatusC C. utilities
StatusD D. industrials

The best answer is D. The Dow Jones Averages is the oldest and most widely quoted of the indexes. It consists of 65 stocks in total. The components are 30 Industrials; 20 Transportations; and 15 Utilities. Thus, the industrials are the largest component.

Which index is the narrowest measure of the market?


StatusA A. Wilshire Index
StatusB B. Value Line Index
StatusC C. NYSE Composite Index
StatusD D. Dow Jones Industrial Average

The best answer is D.
The Dow Jones Industrial Average consists of 30 stocks (principally NYSE listed issues). This is the narrowest measure of the market.

The Value Line Index is broader, including 1,700 issues.

The NYSE Composite Index consists of the approximately 2,500 issues listed on the NYSE.

The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE-MKT (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public."