Question 1

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

Accepted Answer

A)  externally convertible 
B)  nonconvertible 
C)  leading 
D)  freely convertible 
E)  lagging 
A)  externally convertible 
B)  nonconvertible 
C)  leading 
D)  freely convertible 
E)  lagging

Question 2

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Accepted Answer

A) True 
 B)False

Question 3

Assume that a Big Mac costs $4.93 in the United States and that the Brazilian real is undervalued by 23 percent. According to the Big Mac Index published by The Economist, a Big Mac would

Accepted Answer

A)  cost a bit more in Brazil than in the United States. 
B)  cost less in Brazil than in the United States. 
C)  cost the same in both countries. 
D)  would cost twice as much in Brazil. 
E)  would cost less than half of the United States price in Brazil. 
A)  cost a bit more in Brazil than in the United States. 
B)  cost less in Brazil than in the United States. 
C)  cost the same in both countries. 
D)  would cost twice as much in Brazil. 
E)  would cost less than half of the United States price in Brazil.

Question 4

According to the Fisher effect, if the "real" rate of interest in a country is 3 percent and the expected annual inflation is 8 percent, what would the "nominal" interest rate be?

Accepted Answer

A)  5.5 percent 
B)  11 percent 
C)  9 percent 
D)  24 percent 
E)  2.25 percent 
A)  5.5 percent 
B)  11 percent 
C)  9 percent 
D)  24 percent 
E)  2.25 percent

Question 5

The yen/dollar exchange rate is ¥120 = $1 in London and ¥123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ¥123,000,000 in New York and engages in arbitrage by selling it in London?

Accepted Answer

A)  $34,000 
B)  $20,390 
C)  $25,000 
D)  $46,666 
E)  $39,454 
A)  $34,000 
B)  $20,390 
C)  $25,000 
D)  $46,666 
E)  $39,454

Question 6

If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be?

Accepted Answer

A)  $1 = €1.20 
B)  $1 = €1 
C)  $1 = €0.80 
D)  $1 = €0.90 
E)  $1 = €1.10 
A)  $1 = €1.20 
B)  $1 = €1 
C)  $1 = €0.80 
D)  $1 = €0.90 
E)  $1 = €1.10

Question 7

Jin-Lo is investing money for his company. He notices that the interest rate on borrowing in Jakarta is 2 percent and the interest rate on bank deposits in Warsaw is 7.5 percent. In this situation, a carry trade would occur when Jin-Lo

Accepted Answer

A)  borrows money in Warsaw currency, converts it into Jakarta currency, and deposits it in a Jakarta bank. 
B)  borrows money in Jakarta currency and invests in stocks with good growth potential in Jakarta. 
C)  borrows money in Jakarta currency, converts it into Warsaw currency, and deposits it in a Warsaw bank. 
D)  invests in bank deposits of Warsaw and reinvests the earnings in Jakarta. 
E)  invests in bank deposits of Jakarta and reinvests the earnings in Warsaw. 
A)  borrows money in Warsaw currency, converts it into Jakarta currency, and deposits it in a Jakarta bank. 
B)  borrows money in Jakarta currency and invests in stocks with good growth potential in Jakarta. 
C)  borrows money in Jakarta currency, converts it into Warsaw currency, and deposits it in a Warsaw bank. 
D)  invests in bank deposits of Warsaw and reinvests the earnings in Jakarta. 
E)  invests in bank deposits of Jakarta and reinvests the earnings in Warsaw.

Question 8

A company's translation exposure is based on the

Accepted Answer

A)  long-run effect of changes in exchange rates on future prices, sales, and costs. 
B)  impact of currency exchange rate changes on the reported financial statements of a company. 
C)  extent to which a firm's future international earning power is affected by changes in exchange rates. 
D)  extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. 
E)  obligations for the purchase or sale of goods and services at previously agreed prices. 
A)  long-run effect of changes in exchange rates on future prices, sales, and costs. 
B)  impact of currency exchange rate changes on the reported financial statements of a company. 
C)  extent to which a firm's future international earning power is affected by changes in exchange rates. 
D)  extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. 
E)  obligations for the purchase or sale of goods and services at previously agreed prices.

Question 9

How are spot exchange rates determined?

Accepted Answer

A)  using historical average prices of different currencies 
B)  the interaction between demand and supply of a currency relative to other currencies 
C)  taking the average of a basket of currencies 
D)  by government decree 
E)  predicting future currency movements in nonmember countries 
A)  using historical average prices of different currencies 
B)  the interaction between demand and supply of a currency relative to other currencies 
C)  taking the average of a basket of currencies 
D)  by government decree 
E)  predicting future currency movements in nonmember countries

Question 10

One way a business can deal with nonconvertibility of a currency is to engage in

Accepted Answer

A)  price discrimination. 
B)  countertrade. 
C)  arbitrage. 
D)  price skimming. 
E)  currency speculation. 
A)  price discrimination. 
B)  countertrade. 
C)  arbitrage. 
D)  price skimming. 
E)  currency speculation.

Question 11

Describe the Fisher effect.

Accepted Answer

Economic theory tells us that interest r

Question 12

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should

Accepted Answer

A)  appreciate by 3 percent against the Japanese yen. 
B)  depreciate by 3 percent against the Japanese yen. 
C)  appreciate by 1.5 percent against the Japanese yen. 
D)  depreciate by 1.5 percent against the Japanese yen. 
E)  appreciate by 15 percent against the Japanese yen. 
A)  appreciate by 3 percent against the Japanese yen. 
B)  depreciate by 3 percent against the Japanese yen. 
C)  appreciate by 1.5 percent against the Japanese yen. 
D)  depreciate by 1.5 percent against the Japanese yen. 
E)  appreciate by 15 percent against the Japanese yen.

Question 13

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the

Accepted Answer

A)  purchasing power parity puzzle. 
B)  lead strategy. 
C)  Fisher effect. 
D)  bandwagon effect. 
E)  international Fisher effect. 
A)  purchasing power parity puzzle. 
B)  lead strategy. 
C)  Fisher effect. 
D)  bandwagon effect. 
E)  international Fisher effect.

Question 14

Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

Accepted Answer

Empirical evidence suggests that neither

Question 15

The spot exchange rate is the rate at which the foreign exchange dealer will convert one currency into another on a particular day.

Accepted Answer

A) True 
 B)False

Question 16

Assume that the yen/dollar exchange rate quoted in Tokyo at 5 p.m. is ¥120 = $1, and the New York yen/dollar exchange rate at the same time (noon New York time) is ¥123 = $1. What action should a broker take to yield immediate profit?

Accepted Answer

A)  forward exchange 
B)  carry trade 
C)  currency swap 
D)  arbitrage 
E)  currency speculation 
A)  forward exchange 
B)  carry trade 
C)  currency swap 
D)  arbitrage 
E)  currency speculation

Question 17

Why do governments limit convertibility of their currency?

Accepted Answer

A)  to encourage foreign investments 
B)  to control currency appreciation 
C)  to encourage capital flight 
D)  to preserve their foreign exchange reserves 
E)  to promote neo-mercantilism 
A)  to encourage foreign investments 
B)  to control currency appreciation 
C)  to encourage capital flight 
D)  to preserve their foreign exchange reserves 
E)  to promote neo-mercantilism

Question 18

Explain when a business would use countertrade. Provide an example.

Accepted Answer

Companies can deal with the nonconvertib

Question 19

________ refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

Accepted Answer

A)  Translation exposure 
B)  Economic exposure 
C)  Purchasing power parity 
D)  Transaction exposure 
E)  Forward exchange rate 
A)  Translation exposure 
B)  Economic exposure 
C)  Purchasing power parity 
D)  Transaction exposure 
E)  Forward exchange rate

Question 20

Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Accepted Answer

A firm needs to develop a mechanism for

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Assume that a Big Mac costs $4.93 in the United States and that the Brazilian real is undervalued by 23 percent. According to the Big Mac Index published by The Economist, a Big Mac would

According to the Fisher effect, if the "real" rate of interest in a country is 3 percent and the expected annual inflation is 8 percent, what would the "nominal" interest rate be?

The yen/dollar exchange rate is ¥120 = $1 in London and ¥123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ¥123,000,000 in New York and engages in arbitrage by selling it in London?

If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be?

Jin-Lo is investing money for his company. He notices that the interest rate on borrowing in Jakarta is 2 percent and the interest rate on bank deposits in Warsaw is 7.5 percent. In this situation, a carry trade would occur when Jin-Lo

A company's translation exposure is based on the

How are spot exchange rates determined?

One way a business can deal with nonconvertibility of a currency is to engage in

Describe the Fisher effect.

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the

Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

The spot exchange rate is the rate at which the foreign exchange dealer will convert one currency into another on a particular day.

Assume that the yen/dollar exchange rate quoted in Tokyo at 5 p.m. is ¥120 = $1, and the New York yen/dollar exchange rate at the same time (noon New York time) is ¥123 = $1. What action should a broker take to yield immediate profit?

Why do governments limit convertibility of their currency?

Explain when a business would use countertrade. Provide an example.

________ refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Globalization

National Differences in Political, Economic, and Legal Systems

National Differences in Economic Development

Differences in Culture

Ethics, Corporate Social Responsibility, and Sustainability

International Trade Theory

Government Policy and International Trade

Foreign Direct Investment

Regional Economic Integration

The International Monetary System

The Strategy of International Business

Entering Foreign Markets

Exporting, Importing, and Countertrade

Global Production and Supply Chain Management

Global Marketing and RD

Global Human Resource Management

Filters

Exam 10: The Foreign Exchange Market

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Assume that a Big Mac costs $4.93 in the United States and that the Brazilian real is undervalued by 23 percent. According to the Big Mac Index published by The Economist, a Big Mac would

According to the Fisher effect, if the "real" rate of interest in a country is 3 percent and the expected annual inflation is 8 percent, what would the "nominal" interest rate be?

The yen/dollar exchange rate is ¥120 = $1 in London and ¥123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ¥123,000,000 in New York and engages in arbitrage by selling it in London?

If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be?

Jin-Lo is investing money for his company. He notices that the interest rate on borrowing in Jakarta is 2 percent and the interest rate on bank deposits in Warsaw is 7.5 percent. In this situation, a carry trade would occur when Jin-Lo

A company's translation exposure is based on the

How are spot exchange rates determined?

One way a business can deal with nonconvertibility of a currency is to engage in

Describe the Fisher effect.

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the

Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

The spot exchange rate is the rate at which the foreign exchange dealer will convert one currency into another on a particular day.

Assume that the yen/dollar exchange rate quoted in Tokyo at 5 p.m. is ¥120 = $1, and the New York yen/dollar exchange rate at the same time (noon New York time) is ¥123 = $1. What action should a broker take to yield immediate profit?

Why do governments limit convertibility of their currency?

Explain when a business would use countertrade. Provide an example.

________ refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Globalization

National Differences in Political, Economic, and Legal Systems

National Differences in Economic Development

Differences in Culture

Ethics, Corporate Social Responsibility, and Sustainability

International Trade Theory

Government Policy and International Trade

Foreign Direct Investment

Regional Economic Integration

The International Monetary System

The Strategy of International Business

Entering Foreign Markets

Exporting, Importing, and Countertrade

Global Production and Supply Chain Management

Global Marketing and RD

Global Human Resource Management

Filters