Question 1

Discuss how firms can reduce their economic exposure.

Accepted Answer

Reducing economic exposure requires strategic choices that go beyond the realm of financial management. The key to reducing economic exposure is to distribute the firm's productive assets to various locations so the firm's long-term financial well-being is not severely affected by adverse changes in exchange rates. This is a strategy that firms both large and small sometimes pursue.

Question 2

Consider the role of investor psychology and bandwagon effects on how well PPP and the International Fisher Effect explain short-term movements in exchange rates.

Accepted Answer

Neither PPP nor the International Fisher Effect have proven to be good at explaining short-term movements in exchange rates. One reason for their poor explanatory power may be the impact of investor psychology on short-run exchange movements. Studies show that expectations about exchange rates tend to become self-fulfilling prophecies.
A bandwagon effect occurs when investors in increasing numbers start following the lead of someone who may be pushing the value of a currency up or down due to psychological reasons. As a bandwagon effect builds up, the expectations of investors become a self-fulfilling prophecy, and the market moves in the way the investors expected.

Question 3

Which of the following is the most important foreign exchange trading center?

Accepted Answer

A)  London 
B)  New York 
C)  Tokyo 
D)  Singapore 
A)  London 
B)  New York 
C)  Tokyo 
D)  Singapore A

Question 4

The _____ helps us to compare the relative prices of goods and services in different countries.

Accepted Answer

A)  interest rate 
B)  GDP growth rate 
C)  exchange rate 
D)  tariff rate 
A)  interest rate 
B)  GDP growth rate 
C)  exchange rate 
D)  tariff rate

Question 5

The risk that arises from volatile changes in exchange rates is known as foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 6

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about future currency movements.

Accepted Answer

A) True 
 B)False

Question 7

Explain the difference between fundamental analysis and technical analysis.

Accepted Answer

Fundamental analysis draws on economic t

Question 8

Which of the following occurs when the quantity of money in circulation in a country rises faster than the country's stock of goods and services?

Accepted Answer

A)  Inflation 
B)  Credit squeeze 
C)  Deflation 
D)  Production surplus 
A)  Inflation 
B)  Credit squeeze 
C)  Deflation 
D)  Production surplus

Question 9

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

Accepted Answer

The Fisher Effect was put forth by Irvin

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract.

Accepted Answer

A) True 
 B)False

Question 12

Which term refers to the rate at which one currency is converted into another?

Accepted Answer

A)  Basis point 
B)  Spread 
C)  Exchange rate 
D)  Interchange rate 
A)  Basis point 
B)  Spread 
C)  Exchange rate 
D)  Interchange rate

Question 13

A currency swap deal enables companies to insure themselves against foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

What are the two main functions of the foreign exchange market?

Accepted Answer

A)  Trading of equities of foreign companies and currency conversion 
B)  Reducing currency volatility and setting interest rates 
C)  Insuring companies against interest rate risk and enabling imports and exports 
D)  Currency conversion and providing some insurance against foreign exchange risk 
A)  Trading of equities of foreign companies and currency conversion 
B)  Reducing currency volatility and setting interest rates 
C)  Insuring companies against interest rate risk and enabling imports and exports 
D)  Currency conversion and providing some insurance against foreign exchange risk

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Governments allow convertibility to preserve their foreign exchange reserves.

Accepted Answer

A) True 
 B)False

Question 18

Identify the incorrect statement about the PPP theory.

Accepted Answer

A)  It predicts that exchange rates are determined by relative prices. 
B)  It yields accurate predictions of short-run movements in exchange rates. 
C)  It best predicts exchange rate changes for countries with high rates of inflation. 
D)  It assumes away transportation costs and barriers to trade. 
A)  It predicts that exchange rates are determined by relative prices. 
B)  It yields accurate predictions of short-run movements in exchange rates. 
C)  It best predicts exchange rate changes for countries with high rates of inflation. 
D)  It assumes away transportation costs and barriers to trade.

Question 19

Carry trade is non-speculative in nature.

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A)  PPP theory 
B)  efficient market theory 
C)  law of one price 
D)  Fisher Effect 
A)  PPP theory 
B)  efficient market theory 
C)  law of one price 
D)  Fisher Effect

Discuss how firms can reduce their economic exposure.

Consider the role of investor psychology and bandwagon effects on how well PPP and the International Fisher Effect explain short-term movements in exchange rates.

Which of the following is the most important foreign exchange trading center?

The _____ helps us to compare the relative prices of goods and services in different countries.

The risk that arises from volatile changes in exchange rates is known as foreign exchange risk.

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about future currency movements.

Explain the difference between fundamental analysis and technical analysis.

Which of the following occurs when the quantity of money in circulation in a country rises faster than the country's stock of goods and services?

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 forward rate.

To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract.

Which term refers to the rate at which one currency is converted into another?

A currency swap deal enables companies to insure themselves against foreign exchange risk.

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

What are the two main functions of the foreign exchange market?

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

Governments allow convertibility to preserve their foreign exchange reserves.

Identify the incorrect statement about the PPP theory.

Carry trade is non-speculative in nature.

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.

Globalization

National Differences in Political Economy

Political Economy and Economic Development

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 Global Capital Market

The Strategy of International Business

The Organization of International Business

Entry Strategy and Strategic Alliances

Exporting, Importing, and Countertrade

Global Production, Outsourcing, and Logistics

Global Marketing and RD

Global Human Resource Management

Accounting and Finance in the International Business

Filters

Exam 10: The Foreign Exchange Market

Discuss how firms can reduce their economic exposure.

Consider the role of investor psychology and bandwagon effects on how well PPP and the International Fisher Effect explain short-term movements in exchange rates.

Which of the following is the most important foreign exchange trading center?

The _____ helps us to compare the relative prices of goods and services in different countries.

The risk that arises from volatile changes in exchange rates is known as foreign exchange risk.

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about future currency movements.

Explain the difference between fundamental analysis and technical analysis.

Which of the following occurs when the quantity of money in circulation in a country rises faster than the country's stock of goods and services?

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 forward rate.

To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract.

Which term refers to the rate at which one currency is converted into another?

A currency swap deal enables companies to insure themselves against foreign exchange risk.

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

What are the two main functions of the foreign exchange market?

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

Governments allow convertibility to preserve their foreign exchange reserves.

Identify the incorrect statement about the PPP theory.

Carry trade is non-speculative in nature.

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.

Globalization

National Differences in Political Economy

Political Economy and Economic Development

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 Global Capital Market

The Strategy of International Business

The Organization of International Business

Entry Strategy and Strategic Alliances

Exporting, Importing, and Countertrade

Global Production, Outsourcing, and Logistics

Global Marketing and RD

Global Human Resource Management

Accounting and Finance in the International Business

Filters