Exam 10: The Foreign Exchange Market

The impact of currency exchange rates on the reported financial statements of a company is called economic exposure.

An exchange rate of €1 = $1.30 indicates that:

The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney.

If $1 bought more yen with a spot exchange than with a 30-day forward exchange it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a premium on the 30-day forward market.

Assume that an American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for a period of two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment?

When two parties agree to exchange currency and execute the deal at some specific time in the future, a forward exchange occurs.

Assuming the 30-day forward exchange rate were $1 = ¥130 and the spot exchange rate were $1 = ¥120, the dollar is selling at a _____ on the 30-day forward market.

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.

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

Which of the following is referred to as the purchasing power parity puzzle?

The PPP theory argues that the exchange rate will change even if relative prices remain unchanged.

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

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

_____ 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.

What is the law of one price?

The _____ states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

What is meant by the phrases 'the dollar is selling at a discount' on the 30-day forward market and 'the dollar is selling at a premium' on the 30-day forward market?

What are the main uses of foreign exchange markets for international business?

Where is the foreign exchange market located? What is the nature of the market? Is the market growing or shrinking on a global basis?

Assume that the interest rate on borrowings in Japan is 1 percent, while the interest rate on deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. Which type of trade is this an example of?