Exam 10: The Foreign Exchange Market

The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.

If a country has an externally convertible currency, neither residents nor nonresidents are allowed to convert it into a foreign currency.

The _____ states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

Which of the following refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates?

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

Discuss the nature of the foreign exchange market. How fast has it been growing? Where are the most important trading centers?

Which of the following occurs when traders start moving as a herd in the same direction at the same time?

If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated.

The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as:

Inflation occurs when output increases faster than the money supply.

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 _____.

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

What is countertrade? Why would a firm engage in countertrade?

Arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time.

If the spot rate is $1 = ¥120, and the 30-day forward rate is $1 = ¥130, the dollar is selling at a discount in the forward market.

The _____ school of thought argues that forward exchange rates do the best possible job of forecasting future spot rates and therefore investing in forecasting services would be a waste of money.

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 ____.

What is a currency swap?

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

With the help of an example, explain how a tourist participates in the foreign exchange market.