Question 1

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

Accepted Answer

A) Increase in risk appetite making the carry trade less attractive 
B) Decrease in interest rate differentials as the U.S. rates came down 
C) Increase in interest rate differentials as Japanese interest rates came down 
D) Decrease in interest rate differentials as the U.S. interest rates went up 
E) Decrease in interest rate differentials as the Japanese rates went up 
A) Increase in risk appetite making the carry trade less attractive 
B) Decrease in interest rate differentials as the U.S. rates came down 
C) Increase in interest rate differentials as Japanese interest rates came down 
D) Decrease in interest rate differentials as the U.S. interest rates went up 
E) Decrease in interest rate differentials as the Japanese rates went up

Question 2

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the:

Accepted Answer

A) currency crisis. 
B) banking crisis. 
C) purchasing power parity puzzle. 
D) bandwagon effect. 
E) foreign exchange risk. 
A) currency crisis. 
B) banking crisis. 
C) purchasing power parity puzzle. 
D) bandwagon effect. 
E) foreign exchange risk.

Question 3

Technical analysis, an approach to foreign exchange forecasting, does not rely on a consideration of economic fundamentals.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?

Accepted Answer

A) Government intervention in cross-border trade 
B) The relationship between money supply and price inflation 
C) The impact of increase in currency on relative demand and supply conditions of currencies 
D) Excessive growth in money supply 
E) The insignificant impact of transportation costs on international trade 
A) Government intervention in cross-border trade 
B) The relationship between money supply and price inflation 
C) The impact of increase in currency on relative demand and supply conditions of currencies 
D) Excessive growth in money supply 
E) The insignificant impact of transportation costs on international trade

Question 5

Which of the following is a key feature of the foreign exchange market?

Accepted Answer

A) The foreign exchange market never sleeps. 
B) The foreign exchange market is located in London. 
C) The foreign exchange market is characterized by high transaction costs. 
D) The foreign exchange market is shut for two hours every day. 
E) The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities. 
A) The foreign exchange market never sleeps. 
B) The foreign exchange market is located in London. 
C) The foreign exchange market is characterized by high transaction costs. 
D) The foreign exchange market is shut for two hours every day. 
E) The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities.

Question 6

For price discrimination to work, arbitrage opportunities must be unlimited.

Accepted Answer

A) True 
 B)False

Question 7

In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements?

Accepted Answer

A) Technical analysis 
B) Fractional integration models 
C) Markov switching models 
D) Fundamental analysis 
E) Chart analysis 
A) Technical analysis 
B) Fractional integration models 
C) Markov switching models 
D) Fundamental analysis 
E) Chart analysis

Question 8

Which of the following refers to currency speculation?

Accepted Answer

A) The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates 
B) The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day 
C) Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates 
D) The purchase of securities in one market for immediate resale in another to profit from a price discrepancy 
E) The growth in a country's money supply exceeding the growth in its output, leading to price inflation 
A) The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates 
B) The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day 
C) Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates 
D) The purchase of securities in one market for immediate resale in another to profit from a price discrepancy 
E) The growth in a country's money supply exceeding the growth in its output, leading to price inflation

Question 9

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to:

Accepted Answer

A) borrow money in Maritian currency, convert it into Rhodian currency, and deposit it in a Rhodian bank. 
B) borrow money in Rhodian currency and invest in stocks with good growth potential in Rhodia. 
C) borrow money in Rhodian currency, convert it into Maritian currency, and deposit it in a Maritian bank. 
D) invest in bank deposits of Maritia and reinvest the earnings in Rhodia. 
E) invest in bank deposits of Rhodia and reinvest the earnings in Maritia. 
A) borrow money in Maritian currency, convert it into Rhodian currency, and deposit it in a Rhodian bank. 
B) borrow money in Rhodian currency and invest in stocks with good growth potential in Rhodia. 
C) borrow money in Rhodian currency, convert it into Maritian currency, and deposit it in a Maritian bank. 
D) invest in bank deposits of Maritia and reinvest the earnings in Rhodia. 
E) invest in bank deposits of Rhodia and reinvest the earnings in Maritia.

Question 10

Which of the following is true of the differences in relative demand and supply of currencies?

Accepted Answer

A) They cannot be used to explain the determination of exchange rates. 
B) While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors. 
C) They provide a high-level understanding of exchange rates. 
D) While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. 
E) They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa. 
A) They cannot be used to explain the determination of exchange rates. 
B) While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors. 
C) They provide a high-level understanding of exchange rates. 
D) While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. 
E) They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

Question 11

In countries where inflation is expected to be high, interest rates also will be high.

Accepted Answer

A) True 
 B)False

Question 12

Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?

Accepted Answer

A) A loss of $62,500 
B) A loss of $66,667 
C) A gain of $50,000 
D) A gain of $62,500 
E) A loss of $50,000 
A) A loss of $62,500 
B) A loss of $66,667 
C) A gain of $50,000 
D) A gain of $62,500 
E) A loss of $50,000

Question 13

The law of one price states that:

Accepted Answer

A) by comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient. 
B) a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). 
C) a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. 
D) when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled. 
E) in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency. 
A) by comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient. 
B) a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). 
C) a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. 
D) when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled. 
E) in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

Question 14

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see:

Accepted Answer

A) appreciation in its currency exchange rate. 
B) a decrease in interest rates. 
C) the collapse of the gold standard. 
D) depreciation in its currency exchange rate. 
E) a decrease in its money supply. 
A) appreciation in its currency exchange rate. 
B) a decrease in interest rates. 
C) the collapse of the gold standard. 
D) depreciation in its currency exchange rate. 
E) a decrease in its money supply.

Question 15

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

Accepted Answer

A) The impact of investor psychology on short-run exchange rate movements 
B) The strong relationship between inflation rates and interest rates 
C) The impact of interest rates and short-term exchange rate movements 
D) The strong relationship between interest rate differentials and subsequent changes in spot exchange rates 
E) Government intervention in cross-border trade that violates the assumption of efficient markets 
A) The impact of investor psychology on short-run exchange rate movements 
B) The strong relationship between inflation rates and interest rates 
C) The impact of interest rates and short-term exchange rate movements 
D) The strong relationship between interest rate differentials and subsequent changes in spot exchange rates 
E) Government intervention in cross-border trade that violates the assumption of efficient markets

Question 16

Currency swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 17

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 18

How do foreign exchange markets benefit international businesses?

Accepted Answer

International businesses have four main

Question 19

The forward exchange rate refers to the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Accepted Answer

A) True 
 B)False

Question 20

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ×123 = $1. Which of the following transactions would 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

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the:

Technical analysis, an approach to foreign exchange forecasting, does not rely on a consideration of economic fundamentals.

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?

Which of the following is a key feature of the foreign exchange market?

For price discrimination to work, arbitrage opportunities must be unlimited.

In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements?

Which of the following refers to currency speculation?

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to:

Which of the following is true of the differences in relative demand and supply of currencies?

In countries where inflation is expected to be high, interest rates also will be high.

Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?

The law of one price states that:

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see:

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

Currency swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

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

How do foreign exchange markets benefit international businesses?

The forward exchange rate refers to the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ×123 = $1. Which of the following transactions would yield immediate profit?

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

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Exam 10: The Foreign Exchange Market

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the:

Technical analysis, an approach to foreign exchange forecasting, does not rely on a consideration of economic fundamentals.

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?

Which of the following is a key feature of the foreign exchange market?

For price discrimination to work, arbitrage opportunities must be unlimited.

In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements?

Which of the following refers to currency speculation?

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to:

Which of the following is true of the differences in relative demand and supply of currencies?

In countries where inflation is expected to be high, interest rates also will be high.

Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?

The law of one price states that:

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see:

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

Currency swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

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

How do foreign exchange markets benefit international businesses?

The forward exchange rate refers to the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ×123 = $1. Which of the following transactions would yield immediate profit?

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