Deck 7: Dealing with Foreign Exchange

Question 1

Balance of payments and exchange rate policies usually determine long-run movements of a currency.

Answer 1

True

Question 2

The effect of investors moving in the same direction at the same time leads to a bandwagon effect.

Answer 2

True

Question 3

The theory of purchasing power parity suggests that in the absence of trade barriers,the price for identical products sold in different countries will be different.

Answer 3

False

Question 4

The Bretton Woods system was centered on the British pound as the new common denominator.

Question 5

A country's current account deficit can only be financed using its savings.

Question 6

The Bretton Woods system did not allow the United States to unilaterally change the exchange rate of the dollar.

Question 7

A foreign exchange rate refers to the price of buying and selling commodities for future delivery.

Question 8

Under the gold standard,to be able to redeem its currency in gold at a fixed price,every central bank needed to maintain gold reserves.

Question 9

An appreciation is an increase in the value of the currency whereas a depreciation is a loss in the value of the currency.

Question 10

Forward transactions allow participants to buy and sell currencies now for future delivery.

Question 11

The rise of a country's productivity is usually accompanied by increased demand for its home currency.

Question 12

Governments adopting the floating exchange rate policy tend to set the exchange rate of a currency relative to other currencies.

Question 13

The foreign exchange markets are influenced only by economic factors and free from the effect of social or political pressures.

Question 14

If one country's interest rate is high relative to other countries,the country will attract foreign funds.

Question 15

Basic economic theory suggests that the price of a commodity is most fundamentally determined by its supply and demand.

Question 16

A country highly productive in manufacturing typically generates a merchandise trade deficit.

Question 17

The foreign exchange market has no central physical location and is the largest and most active market in the world.

Question 18

The Bretton Woods system had been built on the condition that the US inflation rate had to be continuously high.

Question 19

Many countries with high inflation have pegged their currencies to the yuan in order to restrain domestic inflation.

Question 20

The International Monetary Fund offers free grants to countries depending on the stability and need of the borrower.

Question 21

In terms of international trade competitiveness,a strong dollar makes it easier for US firms to export and to compete on price when combating imports.

Question 22

A floating exchange rate allows each country to make its own monetary policy.

Question 23

Hedging protects firms from spot market unpredictability.

Question 24

Currency hedging is a popular way to minimize the foreign exchange risk inherent in all nonspot transactions.

Question 25

Majority of the largest US firms practice currency hedging.

Question 26

The primary participants of the foreign exchange market are IMF and World Bank.

Question 27

Forward discount is a condition under which the forward rate of one currency relative to another currency is lower than the spot rate.

Question 28

Which of the following methods is directly derived from the theory of purchasing power parity (PPP)?

A) The floating exchange rate
B) The fixed exchange rate
C) The stock market index
D) The Big Mac index

Question 29

A weak dollar makes it more expensive for US tourists when traveling abroad.

Question 30

Proponents of fixed exchange rates argue that fixed exchange rates impose monetary discipline by preventing governments from engaging in inflationary monetary policies.

Question 31

Strategic hedging means spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions.

Question 32

Which of the following conditions will attract foreign funds into a country?

A) If the country has high trade deficits
B) If the country's interest rate is relatively high compared to other countries
C) If the country's currency is depreciated
D) If the country is experiencing high levels of inflation

Question 33

The _____ suggests the price for identical products in different countries would be the same,if trade barriers are absent.

A) theory of purchasing power parity
B) fixed exchange rate policy
C) Penn effect
D) Bretton Woods system

Question 34

Proponents of fixed exchange rates believe that market forces should take care of supply,demand,and price of any currency.

Question 35

Risk analysis of any country must include its currency risks.

Question 36

Strategic hedging focuses on using forward contracts and swaps to contain currency risks.

Question 37

Floating exchange rates are less volatile than fixed rates.

Question 38

The most extreme fixed rate policy is through a currency board.

Question 39

Which of the following will cause a country's currency to depreciate?

A) High interest rates on the currency
B) High inflation rates
C) High account surplus
D) High in-flow of foreign funds

Question 40

A _____ is the price of one currency,such as the dollar,in terms of another,such as the euro.

A) stock exchange index
B) securities market rate
C) commodities exchange rate
D) foreign exchange rate

Question 41

Which of the following is one of the major reasons the gold standard was abandoned?

A) The increased flow of gold from the U.S. into foreign central banks.
B) The competitive devaluation of currencies during the Great Depression.
C) The strengthening of the U.S. dollar due to the rise in productivity levels in the United States.
D) The United States unilaterally announced that the dollar would not be convertible to gold.

Question 42

Which of the following best describes a rate where selective government intervention works hand-in-hand,allowing markets the freedom to work themselves out?

A) Free float rate
B) Fixed rate
C) Dirty float rate
D) Target exchange rate

Question 43

Between 1870 and 1914,the value of most major currencies was maintained by fixing their prices in terms of _____.

A) dollar
B) yuan
C) gold
D) diamonds

Question 44

In foreign exchange,a(n)_____ is said to have occurred when investors move in the same direction at the same time,like a herd.

A) placebo effect
B) bandwagon effect
C) edge effect
D) positive correlation

Question 45

The fixing of East and West Germany's currencies at a 1:1 ratio to each other during the German unification in 1990 is an example of a _____.

A) managed float rate policy
B) floating rate policy
C) target exchange rate policy
D) fixed exchange rate policy

Question 46

Which of the following characterizes a country's current account?

A) A country's current account deficit has to be financed by both purchases and sales of assets.
B) A country experiencing a current account deficit will see its currency appreciate.
C) A country's current account balance consists of exports plus imports of merchandise and services minus income on the country's assets abroad.
D) A country experiencing a current account surplus will see its currency depreciate.

Question 47

Which of the following resulted in the abandoning of the Bretton Woods system in the 1970s?

A) The inflation rates in the United States and other developed counties were low.
B) The United States was not running a trade deficit.
C) The dollar became inconvertible into gold.
D) Most countries wanted to return to the gold standard system.

Question 48

The weight a member country carries within the IMF,which determines the amount of its financial contribution,its capacity to borrow from the IMF,and its voting power is referred to as a(n)_____.

A) grant
B) accommodation
C) quota
D) balance of payment

Question 49

The post-Bretton Woods system is a system of flexible exchange rate regimes with _____.

A) the Japanese yen as its common denominator
B) the American dollar as its common denominator
C) gold as its common denominator
D) no official common denominator

Question 50

Which of the following was true of the Bretton Woods system?

A) All currencies in the system had floating exchange rates.
B) All currencies were pegged at a fixed rate to the dollar.
C) All currencies were maintained by fixing their prices in terms of gold.
D) All currencies in the system were required to be gold convertible.

Question 51

Which of the following is the funding source for the International Monetary Fund?

A) Member-country quota
B) Foreign direct investment
C) Subsidiary investing
D) Currency trading

Question 52

Which of the following is true of quantitative easing?

A) It depreciates the currency that is being printed.
B) It appreciates the currency that is being printed.
C) It increases the inflation rate in the country.
D) It increases the exchange value of the currency.

Question 53

_____ allow participants to buy and sell currencies now for future delivery.

A) Currency Swaps
B) Direct transactions
C) Spot transactions
D) Forward transactions

Question 54

_____ have specified upper or lower bounds within which the exchange rate is allowed to fluctuate.

A) Fixed exchange rates
B) Target exchange rates
C) Free float exchange rates
D) Dirty float exchange rates

Question 55

A clean floating exchange rate policy is a government policy to _____.

A) set exchange rates purely on the basis of supply and demand
B) allow a currency's value to fluctuate according to the foreign exchange rate
C) allow selective government intervention in determining the exchange rate
D) link the exchange rate of a currency to the gold standard

Question 56

Which of the following types of exchange rate policies is apt for a pure free market economy?

A) Dirty float
B) Flexible float
C) Clean float
D) Target exchange rate

Question 57

_____ is a country's international transaction statement,which includes merchandise trade,service trade,and capital movement.

A) Capital flight
B) Currency hedging
C) Purchasing power parity
D) Balance of payments

Question 58

The bandwagon effect is an example of the way _____ directly affects foreign exchange rates.

A) exchange rate policy
B) investor psychology
C) purchasing power parity
D) balance of payments

Question 59

Which of the following characterizes the peg policy in foreign exchange rates?

A) It links a developed country's currency to the gold standard.
B) It stabilizes the import and export prices for developing countries.
C) It is a type of floating exchange rate policy.
D) It is primarily used by developed countries to control inflation.

Question 60

Capital flight is a phenomenon in which a large number of individuals and companies exchange _____.

A) domestic goods for gold
B) gold for domestic goods
C) foreign currency for a domestic currency
D) domestic currency for a foreign currency

Question 61

Compare and contrast the two primary strategies companies use to cope with the currency risks.

Question 62

A manager arguing against currency hedging would most likely argue that _____.

A) currency hedging eats into company profits
B) currency hedging leaves firms at the mercy of the spot market
C) currency hedging decreases stability of cash flows and earnings
D) currency hedging is mainly a practice of very large MNEs

Question 63

A currency board is a monetary authority that issues notes and coins convertible into a key foreign currency at a _____ exchange rate.

A) clean floating
B) dirty floating
C) fixed
D) target

Question 64

Which of the following is true of the bid rate in foreign exchange markets?

A) It is always higher than the offer rate.
B) It is always lower than the offer rate.
C) It is always equal to the offer rate.
D) It does not affect the spread of the exchange.

Question 65

Which of the following is an advantage of a weak US dollar?

A) US consumers benefit from low prices on imports.
B) US tourists enjoy lower prices abroad.
C) Foreign firms find it harder to acquire US targets.
D) Foreign tourists enjoy lower prices in the US.

Question 66

Briefly explain the cause for the fall of the Bretton Woods System.

Question 67

The ____ is defined as the difference between the offer price and the bid price in a foreign exchange.

A) cost to serve
B) spread
C) forward discount
D) forward premium

Question 68

Explain,with the help of examples,the three primary types of foreign exchange transactions.

Question 69

If the forward rate of the euro per dollar is higher than the spot rate,the euro has a _____.

A) high spread
B) low spread
C) forward discount
D) forward premium

Question 70

_____ is defined as the conversion of one currency into another at Time 1,with an agreement to revert it back to the original currency at a specific Time 2 in the future.

A) Currency swap
B) Currency hedging
C) Spot transaction
D) Forward transaction

Question 71

Identify the difference between fixed and floating exchange rates.Provide an example of a situation where the fixed and floating exchange rates were used.

Question 72

Which of the following foreign exchange transactions provide protection to traders and investors from being exposed to fluctuations of the spot rate?

A) Spot transactions
B) Forward transactions
C) Direct transactions
D) Currency swaps

Question 73

Compare and contrast the advantages and disadvantages of a strong and a weak dollar.

Question 74

Describe what it means for a country to peg its currency to another,and give two benefits to adopting this policy.

Question 75

_____ refers to non-financial companies spreading out its activities in different currency zones in order to offset the currency losses in certain regions through gains in other regions.

A) Currency hedging
B) Currency pegging
C) Strategic hedging
D) Currency swapping

Question 76

What determines the success and failure of currency management around the globe?

Question 77

List the five underlying building blocks that determine the supply and demand of foreign exchange.

Question 78

Which of the following is an advantage of a strong US dollar?

A) US importers will find it easier to compete with low-cost imports.
B) US exporters will find it easier to compete on price abroad.
C) US firms will experience less competitive pressure to keep prices low.
D) US tourists will find it more expensive when traveling abroad.