Exam 9: The Foreign Exchange Market

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

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.

Economic theory suggests that when inflation is expected to be high:

Price inflation occurs when the quantity of money in circulation rises faster than the stock of goods and services.

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

Explain the notion of economic exposure.How can economic exposure be minimized?

_____ involves dominant enterprises setting different prices in different markets to reflect varying demand conditions.

A range of barter-like agreements by which goods and services can be traded for other goods and services is known as:

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.

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?

The International Fisher Effect 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 for the two countries.

A(n)_____ involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.

According to the _____,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.

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?

What is the law of one price?

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

Assume that the yen/dollar exchange rate quoted in London at 3:00 p.m.is *120 = $1,and the New York yen/dollar exchange rate at the same time is *125 = $1.A dealer makes a profit by buying a currency low and selling it high.The dealer has engaged in a(n):

What is a currency swap?

The Fisher Effect states that a country's real interest rate 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.

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