Exam 10: The Foreign Exchange Market

Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is equivalent to $3.75 at the prevailing euro/dollar exchange rate.Using the concept of purchasing power parity,the euro is:

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.

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?

What is transaction exposure? How can transaction exposure be minimized?

The International Fisher Effect has proven to have substantial power at predicting short-run changes in spot exchange rates.

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

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

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

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

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

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

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

Which of the following involves borrowing in one currency where interest rates are low,and then using the proceeds to invest in another currency where interest rates are high?

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

Describe translation exposure.How can translation exposure be minimized?

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 ______.

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.

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

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

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