Exam 10: The Foreign Exchange Market

Describe translation exposure. How can translation exposure be minimized?

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

Currency speculation typically involves the long-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

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

When two parties agree to exchange currency and execute the deal immediately, the transaction is a:

The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

A pair of shoes costs £40 in Britain. An identical pair costs $50 in the United States when the exchange rate is £1 = $1.50. Which of the following is correct?

How can a firm minimize its foreign exchange exposure?

Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

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

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.

Explain PPP. Use an example to show how PPP can help explain exchange rates.

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as:

Technical analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

A lag strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

Compare and contrast currencies that are freely convertible, externally convertible, and nonconvertible.

Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation, or when a country's economic prospects are shaky in other respects.

An inefficient market is one in which prices do not reflect all available information.

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?

A(n) _____ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.