Question 1

Slight discrepancies in the rates of appreciation versus depreciation of two currencies are related to:

Accepted Answer

A)  a mathematical quirk that percentage increases are always larger than percentage decreases because, in the first case, the denominator is smaller. 
B)  the imprecise nature of the calculations. 
C)  the lack of reliable information. 
D)  the volatile nature of exchange rates. 
A)  a mathematical quirk that percentage increases are always larger than percentage decreases because, in the first case, the denominator is smaller. 
B)  the imprecise nature of the calculations. 
C)  the lack of reliable information. 
D)  the volatile nature of exchange rates.

Question 2

If the future rate equals the spot rate, then in equilibrium:

Accepted Answer

A)  the exchange rate must depreciate. 
B)  interest rates should be different. 
C)  the exchange rate will appreciate. 
D)  None of these will occur. 
A)  the exchange rate must depreciate. 
B)  interest rates should be different. 
C)  the exchange rate will appreciate. 
D)  None of these will occur.

Question 3

In equilibrium, the expected future spot rate is equal to the:

Accepted Answer

A)  current spot rate. 
B)  current interest rate. 
C)  interest rate spread. 
D)  current forward rate. 
A)  current spot rate. 
B)  current interest rate. 
C)  interest rate spread. 
D)  current forward rate.

Question 4

There can be an opportunity for covered interest arbitrage if:

Accepted Answer

A)  the interest rate is low and the exchange rate is high. 
B)  the forward/spot rate difference is either larger or smaller in percentage terms than the difference in the interest rates on two currencies. 
C)  there is a time lag on the settlement of the transactions. 
D)  the interest rate is high and the exchange rate is low. 
A)  the interest rate is low and the exchange rate is high. 
B)  the forward/spot rate difference is either larger or smaller in percentage terms than the difference in the interest rates on two currencies. 
C)  there is a time lag on the settlement of the transactions. 
D)  the interest rate is high and the exchange rate is low.

Question 5

If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is sold in Mexico for 430 pesos while the exchange rate is E = $0.1100/pesos, what arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you would take advantage of this.

Accepted Answer

Arbitrage opportunities exist in this sc

Question 6

A transaction cost associated with spot trading is:

Accepted Answer

A)  travel to and from the market. 
B)  shipping costs. 
C)  brokerage commissions. 
D)  the spread, which is earned mostly by large banks. 
A)  travel to and from the market. 
B)  shipping costs. 
C)  brokerage commissions. 
D)  the spread, which is earned mostly by large banks.

Question 7

Across the globe, exchange rate regimes are:

Accepted Answer

A)  mostly fixed. 
B)  a mix of fixed and floating. 
C)  mostly floating. 
D)  hard to pinpoint. 
A)  mostly fixed. 
B)  a mix of fixed and floating. 
C)  mostly floating. 
D)  hard to pinpoint.

Question 8

A currency board is set up to:

Accepted Answer

A)  manage free-floating currencies. 
B)  gradually eliminate currency pegs. 
C)  give a peg added durability. 
D)  immediately eliminate currency pegs. 
A)  manage free-floating currencies. 
B)  gradually eliminate currency pegs. 
C)  give a peg added durability. 
D)  immediately eliminate currency pegs.

Question 9

A flexible or floating exchange rate system is one in which the:

Accepted Answer

A)  government closely monitors and controls the value due to trade flows. 
B)  government makes no attempt to fix it against any base currency. 
C)  government actively tries to achieve fluctuations in the rate. 
D)  government fixes the rate against the currency of its largest trading partner. 
A)  government closely monitors and controls the value due to trade flows. 
B)  government makes no attempt to fix it against any base currency. 
C)  government actively tries to achieve fluctuations in the rate. 
D)  government fixes the rate against the currency of its largest trading partner.

Question 10

Whenever there is a difference in the same exchange rate offered in two markets, an arbitrageur would:

Accepted Answer

A)  wait for the markets to come to equilibrium. 
B)  buy in the market where the currency is offered at the cheaper rate, and simultaneously sell the currency where the rates are higher. 
C)  sell the cheaper-rate currency in the home market. 
D)  not consider the trade, since prices would undoubtedly change before it could be executed. 
A)  wait for the markets to come to equilibrium. 
B)  buy in the market where the currency is offered at the cheaper rate, and simultaneously sell the currency where the rates are higher. 
C)  sell the cheaper-rate currency in the home market. 
D)  not consider the trade, since prices would undoubtedly change before it could be executed.

Question 11

A middle-ground exchange rate regime, between fixed and floating, is NOT called:

Accepted Answer

A)  a managed float. 
B)  a dirty float. 
C)  limited flexibility. 
D)  a free float. 
A)  a managed float. 
B)  a dirty float. 
C)  limited flexibility. 
D)  a free float.

Question 12

Interbank trading is:

Accepted Answer

A)  a monopoly business in the United States. 
B)  controlled by just 10 banks. 
C)  a state-mandated business. 
D)  a highly competitive market, with hundreds of banks offering services. 
A)  a monopoly business in the United States. 
B)  controlled by just 10 banks. 
C)  a state-mandated business. 
D)  a highly competitive market, with hundreds of banks offering services.

Question 13

A term that categorizes patterns of exchange rate behavior is known as:

Accepted Answer

A)  exchange rate regimes. 
B)  exchange rate realms. 
C)  exchange rate principles. 
D)  exchange rate observations. 
A)  exchange rate regimes. 
B)  exchange rate realms. 
C)  exchange rate principles. 
D)  exchange rate observations.

Question 14

Arbitrage with two currencies is NOT possible when:

Accepted Answer

A)  there is an exchange rate difference in two markets. 
B)  traders are familiar with markets. 
C)  the exchange rates are in equilibrium, and the same is occurring in all markets. 
D)  the exchange rates are extremely volatile. 
A)  there is an exchange rate difference in two markets. 
B)  traders are familiar with markets. 
C)  the exchange rates are in equilibrium, and the same is occurring in all markets. 
D)  the exchange rates are extremely volatile.

Question 15

A sudden and pronounced loss of value of one nation's currency against others is known as a:

Accepted Answer

A)  currency crisis. 
B)  forced devaluation. 
C)  thinning of value. 
D)  default. 
A)  currency crisis. 
B)  forced devaluation. 
C)  thinning of value. 
D)  default.

Question 16

Foreign exchange is traded:

Accepted Answer

A)  weekly on the Internet in special auctions arranged by the Federal Reserve. 
B)  continuously all over the world 24 hours a day and seven days a week. 
C)  only in officially designated trading centers such as London or New York. 
D)  It is traded in none of these ways or venues. 
A)  weekly on the Internet in special auctions arranged by the Federal Reserve. 
B)  continuously all over the world 24 hours a day and seven days a week. 
C)  only in officially designated trading centers such as London or New York. 
D)  It is traded in none of these ways or venues.

Question 17

Suppose the U.S. dollar interest rate is 3%, while the interest rate in the United Kingdom is 6%. Your friend thinks he can convert his dollars, invest in the United Kingdom and convert his pounds back into dollars at the end of a year, allowing him to make a lot higher return. Assuming uncovered interest parity (UIP), explain why he is incorrect.

Accepted Answer

Uncovered Interest Parity (UIP) is an ec

Question 18

A foreign exchange option is:

Accepted Answer

A)  the right to engage in buying or selling on the spot market. 
B)  the right to purchase or sell foreign currency at a specified price on a specified date in the future. 
C)  when the price of foreign currency exceeds the spot rate. 
D)  when a speculator must decide whether to move into the market. 
A)  the right to engage in buying or selling on the spot market. 
B)  the right to purchase or sell foreign currency at a specified price on a specified date in the future. 
C)  when the price of foreign currency exceeds the spot rate. 
D)  when a speculator must decide whether to move into the market.

Question 19

When we look at exchange rates between two countries, what is the relationship between the exchange rate expressed in units of the domestic currency and the exchange rate expressed in units of the foreign currency?

Accepted Answer

A)  They are both equal to one. 
B)  They cancel each other out. 
C)  One is always the reciprocal of the other. 
D)  They can never coexist. 
A)  They are both equal to one. 
B)  They cancel each other out. 
C)  One is always the reciprocal of the other. 
D)  They can never coexist.

Question 20

Foreign exchange arbitrage refers to:

Accepted Answer

A)  the simultaneous purchase and sale of a foreign currency asset in different markets to take advantage of a price differential. 
B)  actions taken to lower currency trading risks and make the markets safer. 
C)  the forgiving of penalties and other punishments for illegal foreign exchange activities. 
D)  government purchases or sales of a nation's own currency in international markets to change or stabilize the value of the currency. 
A)  the simultaneous purchase and sale of a foreign currency asset in different markets to take advantage of a price differential. 
B)  actions taken to lower currency trading risks and make the markets safer. 
C)  the forgiving of penalties and other punishments for illegal foreign exchange activities. 
D)  government purchases or sales of a nation's own currency in international markets to change or stabilize the value of the currency.

Exam 13: Introduction to Exchange Rates and the Foreign Exchange Market

Slight discrepancies in the rates of appreciation versus depreciation of two currencies are related to:

If the future rate equals the spot rate, then in equilibrium:

In equilibrium, the expected future spot rate is equal to the:

There can be an opportunity for covered interest arbitrage if:

If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is sold in Mexico for 430 pesos while the exchange rate is E = $0.1100/pesos, what arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you would take advantage of this.

A transaction cost associated with spot trading is:

Across the globe, exchange rate regimes are:

A currency board is set up to:

A flexible or floating exchange rate system is one in which the:

Whenever there is a difference in the same exchange rate offered in two markets, an arbitrageur would:

A middle-ground exchange rate regime, between fixed and floating, is NOT called:

Interbank trading is:

A term that categorizes patterns of exchange rate behavior is known as:

Arbitrage with two currencies is NOT possible when:

A sudden and pronounced loss of value of one nation's currency against others is known as a:

Foreign exchange is traded:

A foreign exchange option is:

When we look at exchange rates between two countries, what is the relationship between the exchange rate expressed in units of the domestic currency and the exchange rate expressed in units of the foreign currency?

Foreign exchange arbitrage refers to:

Trade in the Global Economy

Trade and Technology: The Ricardian Model

Gains and Losses From Trade in the Specific-Factors Model

Trade and Resources: the Heckscher-Ohlin Model

Movement of Labor and Capital Between Countries

Increasing Returns to Scale and Monopolistic Competition

Offshoring of Goods and Services

Import Tariffs and Quotas Under Perfect Competition

Import Tariffs and Quotas Under Imperfect Competition

Export Subsidies in Agriculture and High-Technology Industries

International Agreements: Trade, Labor, and the Environment

The Global Macroeconomy

Exchange Rates I: the Monetary Approach in the Long Run

Exchange Rates II: the Asset Approach in the Short Run

National and International Accounts: Income, Wealth, and the Balance of Payments

Balance of Payments I: the Gains From Financial Globalization

Balance of Payments II: Output, Exchange Rates, and Macroeconomic Policies in the Short Run

Fixed Versus Floating: International Monetary Experience

Exchange Rate Crises: How Pegs Work and How They Break

The Euro

Topics in International Macroeconomics

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