Question 1

Companies engage in currency speculation to get minimal but assured returns from idle cash.

Accepted Answer

A) True 
 B)False

Question 2

When a firm enters into a spot exchange contract,it is taking out insurance against adverse future exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 3

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)  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)  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 4

Which of the following is a reason why 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 5

What is meant by translation exposure?

Accepted Answer

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

Question 6

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 7

During inflation,an increase in the amount of currency available leads to:

Accepted Answer

A)  overheating of the economy thereby reducing the production levels in the economy. 
B)  changes in the relative demand and supply conditions in the foreign exchange market. 
C)  a reduction in the rate of inflation thus leading to an appreciation of the currency. 
D)  decreased lending by banks thereby resulting in more savings. 
E)  a decrease in the demand of goods and services which drives currency value higher. 
A)  overheating of the economy thereby reducing the production levels in the economy. 
B)  changes in the relative demand and supply conditions in the foreign exchange market. 
C)  a reduction in the rate of inflation thus leading to an appreciation of the currency. 
D)  decreased lending by banks thereby resulting in more savings. 
E)  a decrease in the demand of goods and services which drives currency value higher.

Question 8

In terms of exchange rate forecasting,the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 9

Companies can deal with the problem of nonconvertibility of currency by engaging 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 10

According to the Fischer effect,if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent,the "nominal" interest rate will be _____.

Accepted Answer

A)  5 percent 
B)  13 percent 
C)  9 percent 
D)  36 percent 
E)  2.25 percent 
A)  5 percent 
B)  13 percent 
C)  9 percent 
D)  36 percent 
E)  2.25 percent

Question 11

The government of Beryllia tightly controls the ability of its residents to convert its currency into other currencies.However,all foreign businesses with deposits in banks of Beryllia may,at any time,convert all their currency into foreign currency and take them out of the country.Beryllia's currency is said to be _____.

Accepted Answer

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

Question 12

The Fisher effect states that:

Accepted Answer

A)  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). 
B)  by comparing the prices of identical products in different currencies, it is possible to determine the "real" or purchasing power parity exchange rate that would exist if markets were efficient. 
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. 
A)  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). 
B)  by comparing the prices of identical products in different currencies, it is possible to determine the "real" or purchasing power parity exchange rate that would exist if markets were efficient. 
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.

Question 13

_____ refers to the adverse consequences of unpredictable changes in exchange rates.

Accepted Answer

A)  Countertrade 
B)  Foreign exchange risk 
C)  Currency speculation 
D)  Forward exchange 
E)  Floating exchange rate 
A)  Countertrade 
B)  Foreign exchange risk 
C)  Currency speculation 
D)  Forward exchange 
E)  Floating exchange rate

Question 14

An American company imports laptop computers from Japan.The company knows that after a shipment arrives,it must pay in yen to the Japanese supplier within 30 days.In a particular exchange,the American company must pay the Japanese supplier ¥150,000 for each computer at the current dollar/yen spot exchange rate of $1 = ¥110.The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold.Which of the following will happen if the exchange rate after 30 days is $1 = ¥90?

Accepted Answer

A)  The importer will earn a profit of approximately $236 per computer. 
B)  The importer will earn a profit of approximately $67 per computer. 
C)  The importer will incur a loss of approximately $236 per computer. 
D)  The importer will incur a loss of approximately $67 per computer. 
E)  The importer will incur a loss of approximately $90 per computer. 
A)  The importer will earn a profit of approximately $236 per computer. 
B)  The importer will earn a profit of approximately $67 per computer. 
C)  The importer will incur a loss of approximately $236 per computer. 
D)  The importer will incur a loss of approximately $67 per computer. 
E)  The importer will incur a loss of approximately $90 per computer.

Question 15

Unlike the purchasing power parity theory,the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Accepted Answer

A) True 
 B)False

Question 16

Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.

Accepted Answer

A) True 
 B)False

Question 17

In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate.The average price of a Big Mac in the United States is $3.58.This suggests that the Korean won is overvalued against the U.S.dollar.

Accepted Answer

A) True 
 B)False

Question 18

When a firm insures itself against foreign exchange risk,it is said to be engaging in _____.

Accepted Answer

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

Question 19

When dominant enterprises in an industry exercise a degree of pricing power,setting different prices in different markets to reflect varying demand conditions,it is referred to as _____.

Accepted Answer

A)  price discrimination 
B)  premium pricing 
C)  psychological pricing 
D)  price skimming 
E)  price leadership 
A)  price discrimination 
B)  premium pricing 
C)  psychological pricing 
D)  price skimming 
E)  price leadership

Question 20

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market.Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

Accepted Answer

A)  The dollar will depreciate against the euro. 
B)  The market is undecided about the direction of currency movement. 
C)  The dollar will appreciate against the euro. 
D)  The dollar/euro exchange rate will be steady. 
E)  The dollar will buy more euros with a spot exchange than with a 30-day forward exchange. 
A)  The dollar will depreciate against the euro. 
B)  The market is undecided about the direction of currency movement. 
C)  The dollar will appreciate against the euro. 
D)  The dollar/euro exchange rate will be steady. 
E)  The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.

Companies engage in currency speculation to get minimal but assured returns from idle cash.

When a firm enters into a spot exchange contract,it is taking out insurance against adverse future exchange rate movements.

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

Which of the following is a reason why governments limit convertibility of their currency?

What is meant by translation exposure?

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:

During inflation,an increase in the amount of currency available leads to:

In terms of exchange rate forecasting,the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Companies can deal with the problem of nonconvertibility of currency by engaging in _____.

According to the Fischer effect,if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent,the "nominal" interest rate will be _____.

The Fisher effect states that:

_____ refers to the adverse consequences of unpredictable changes in exchange rates.

Unlike the purchasing power parity theory,the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.

In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate.The average price of a Big Mac in the United States is $3.58.This suggests that the Korean won is overvalued against the U.S.dollar.

When a firm insures itself against foreign exchange risk,it is said to be engaging in _____.

When dominant enterprises in an industry exercise a degree of pricing power,setting different prices in different markets to reflect varying demand conditions,it is referred to as _____.

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market.Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

Globalization

National Differences in Political Economy

Political Economy and Economic Development

National Differences in Culture

Ethics in International Business

International Trade Theory

The Political Economy of 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, Outsourcing, and Logistics

Global Marketing and R-D

Global Human Resource Management

Filters

Exam 10: The Foreign Exchange Market

Companies engage in currency speculation to get minimal but assured returns from idle cash.

When a firm enters into a spot exchange contract,it is taking out insurance against adverse future exchange rate movements.

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

Which of the following is a reason why governments limit convertibility of their currency?

What is meant by translation exposure?

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:

During inflation,an increase in the amount of currency available leads to:

In terms of exchange rate forecasting,the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Companies can deal with the problem of nonconvertibility of currency by engaging in _____.

According to the Fischer effect,if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent,the "nominal" interest rate will be _____.

The Fisher effect states that:

_____ refers to the adverse consequences of unpredictable changes in exchange rates.

Unlike the purchasing power parity theory,the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.

In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate.The average price of a Big Mac in the United States is $3.58.This suggests that the Korean won is overvalued against the U.S.dollar.

When a firm insures itself against foreign exchange risk,it is said to be engaging in _____.

When dominant enterprises in an industry exercise a degree of pricing power,setting different prices in different markets to reflect varying demand conditions,it is referred to as _____.

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market.Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

Globalization

National Differences in Political Economy

Political Economy and Economic Development

National Differences in Culture

Ethics in International Business

International Trade Theory

The Political Economy of 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, Outsourcing, and Logistics

Global Marketing and R-D

Global Human Resource Management

Filters