Exam 10: The Foreign Exchange Market

Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m. is ×120 = $1, and the yen/dollar exchange rate quoted in New York at the same time is ×123 = $1. A dealer in New York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo, thereby making a profit. The dealer has engaged in a(n) _____.

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa.

When two parties agree to exchange currency and execute the deal at some specific time in the future, a _____ occurs.

_____ uses price and volume data to determine past trends, which are expected to continue into the future.

Assume that the current exchange rate is €1 = $1.50. If you exchange 1,000 euros for dollars, you will receive ____.

Assume that the interest rate on borrowings in Japan is 1 percent, while the interest rate on deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. Which type of trade is this an example of?

How can a firm minimize its foreign exchange exposure?

Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be:

There are no impediments to the free flow of goods and services in an efficient market.

It follows from the Fisher effect that if the real interest rate is the same worldwide; any difference in interest rates between countries reflects differing expectations about _____.

According to the law of one price, if the exchange rate between the British pound and the dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for _____ in London.

A lag strategy involves:

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

Where is the foreign exchange market located? What is the nature of the market? Is the market growing or shrinking on a global basis?

The foreign exchange market is:

Why do governments limit currency convertibility?

If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it, what will happen?

Governments allow convertibility to preserve their foreign exchange reserves.

The _____ states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney.