Exam 10: The Foreign Exchange Market

Which of the following involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high?

A(n) _____ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

Compare and contrast the Fisher Effect and the International Fisher Effect.

When a tourist goes to a bank in a foreign country to convert money into the local currency, the exchange rate used is the _____.

Inflation occurs when:

Discuss the failure of PPP theory to predict exchange rates accurately. What is the purchasing power puzzle?

The rate at which one currency is converted into another is known as the _____.

There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates.

The purchasing power parity (PPP) theory argues that the exchange rate will:

The _____ states that a country's "nominal" interest rate is the sum of the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent.

The _____ is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

_____ is the impact of short-run currency exchange rates changes on the reported financial statements of a company.

The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

What is the law of one price?

Capital flight is most likely to occur when:

_____ are exchange rates governing some specific future date foreign exchange transactions.

International businesses use foreign exchange markets for many reasons. Which of the following is one of these reasons?

The _____ suggests that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country.

Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60 in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming away transportation costs and trade barriers, this creates a profit-making opportunity called ____.