Deck 11: Foreign Exchange

Question 1

Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice.This finding would likely result in a(n)

A) increase in the demand for Swiss francs.
B) decrease in the demand for Swiss francs.
C) increase in the supply of Swiss francs.
D) decrease in the supply of Swiss francs.

Answer 1

decrease in the demand for Swiss francs.

Question 2

An increase in the dollar price of other currencies tends to cause

A) U.S. goods to be cheaper than foreign goods.
B) U.S. goods to be more expensive than foreign goods.
C) foreign goods to be more expensive to residents of foreign nations.
D) foreign goods to be cheaper to residents of the United States.

Answer 2

U.S. goods to be cheaper than foreign goods.

Question 3

Concerning the foreign exchange market, one can best say that

A) there is a spot market for virtually every currency in the world.
B) the market is highly centralized like the stock exchange.
C) most foreign exchange payments are made with bank notes.
D) the values of the forward and spot rates are always in agreement.

Answer 3

there is a spot market for virtually every currency in the world.

Question 4

When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a(n)

A) increase in the spot price of the yen.
B) increase in the forward price of the dollar.
C) sale of dollars in the forward market.
D) purchase of yen in the spot market.

Question 5

Which of the following tends to cause the U.S.dollar to appreciate in value?

A) an increase in U.S. prices above foreign prices
B) rapid economic growth in foreign countries
C) a fall in U.S. interest rates below foreign levels
D) an increase in the level of U.S. income

Question 6

Over time, a depreciation in the value of a nation's currency in the foreign exchange market will result in

A) exports rising and imports falling.
B) imports rising and exports falling.
C) both imports and exports rising.
D) both imports and exports falling.

Question 7

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S.dollar, they would

A) purchase Canadian dollars.
B) purchase U.S. dollars.
C) purchase Swiss francs.
D) sell Swiss francs.

Question 8

An appreciation in the value of the U.S.dollar against the British pound would tend to

A) discourage the British from buying American goods.
B) discourage Americans from buying British goods.
C) increase the number of dollars that could be bought with a pound.
D) discourage U.S. tourists from traveling to Britain.

Question 9

A major difference between the spot market and the forward market is that the spot market deals with

A) the immediate delivery of currencies.
B) the merchandise trade account.
C) currencies traded for future delivery.
D) hedging of international currency risks.

Question 10

A U.S.export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by

A) buying 1 million pounds in the forward market today for delivery in six months.
B) buying 1 million pounds in the spot market for delivery in six months.
C) selling 1 million pounds in the spot market for delivery in six months.
D) selling 1 million pounds in the forward market today for delivery in six months.

Question 11

Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days.You can remove the risk of loss due to a devaluation of the pound sterling by

A) selling sterling in the forward market for 60-day delivery.
B) buying sterling now and selling it at the end of 60 days.
C) selling the dollar equivalent in the forward market for 60-day delivery.
D) keeping the sterling in Britain after it is delivered to you.

Question 12

Concerning the covering of exchange market risks, assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for

A) exporters to rush to cover their future needs.
B) importers to rush to cover their future needs.
C) both exporters and importers to rush to cover their future needs.
D) neither exporters nor importers to rush to cover their future needs.

Question 13

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and

A) reduce the demand for dollars.
B) increase the demand for dollars.
C) reduce the supply of dollars.
D) increase the supply of dollars.

Question 14

A depreciation of the dollar refers to

A) a fall in the dollar price of foreign currency.
B) an increase in the dollar price of foreign currency.
C) a loss of foreign-exchange reserves for the U.S.
D) an intervention in the international money market.

Question 15

The exchange rate is kept the same in all parts of the market by

A) forward cover.
B) hedging.
C) exchange speculation.
D) exchange arbitrage.

Question 16

Suppose the exchange rate between the Japanese yen and the U.S.dollar is 100 yen per dollar.A Japanese stereo with a price of 60,000 yen will cost

A) $60.
B) $600.
C) $6000.
D) $5000.

Question 17

Suppose that real incomes increase more rapidly in the United States than in Mexico.In the United States, this situation would likely result in a(n)

A) increase in the demand for pesos.
B) decrease in the demand for pesos.
C) increase in the supply of pesos.
D) decrease in the supply of pesos.

Question 18

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by

A) buying dollars in the forward market for delivery in 30 days.
B) selling dollars in the forward market for delivery in 30 days.
C) buying the pounds in the forward market for delivery in 30 days.
D) selling the pounds in the forward market for delivery in 30 days.

Question 19

The supply of foreign currency may be

A) upward-sloping.
B) backward-sloping.
C) vertical.
D) shifting rightward.

Question 20

Which of the following would NOT induce the U.S.demand curve for foreign exchange to shift backward to the left?

A) worsening American tastes for goods produced overseas
B) decreasing interest rates in the U.S. compared to those overseas
C) a fall in the level of U.S. income
D) a depreciation in the U.S. dollar against foreign currencies

Question 21

Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States.The exchange rate between the franc and the dollar is

A) 2 francs per dollar.
B) 1 franc per dollar.
C) $2 per franc.
D) $3 per franc.

Question 22

A corporation dealing in foreign exchange may desire to obtain an exchange quote between the pound and franc, whose values are both expressed relative to the dollar.____ are used to determine such a relationship.

A) Spot exchange rates
B) Forward exchange rates
C) Cross exchange rates
D) Option exchange rates

Question 23

In the early 1980s, the Federal Reserve pursued a tight monetary policy.All else being equal, the impact of that policy was to ____ interest rates in the United States relative to those in Europe and cause the dollar to ____ against European currencies.

A) decrease, depreciate
B) decrease, appreciate
C) increase, depreciate
D) increase, appreciate

Question 24

In the interbank market for foreign exchange, the ____ refers to the difference between the offer rate and the bid rate.

A) cross rate
B) option
C) arbitrage
D) spread

Question 25

In the interbank market for foreign exchange, the ____ refers to the price for which a bank is willing to sell a unit of foreign currency.

A) offer rate
B) option rate
C) futures rate
D) bid rate

Question 26

Under a system of floating exchange rates, the Swiss franc would depreciate in value if which of the following occurs?

A) price inflation in France
B) an increase in U.S. real income
C) a decrease in the Swiss money supply
D) falling interest rates in Switzerland

Question 27

In the interbank market for foreign exchange, the ____ refers to the price that a bank is willing to pay for a unit of foreign currency.

A) offer rate
B) bid rate
C) spread rate
D) transaction rate

Question 28

Suppose there occurs an increase in the Canadian demand for Japanese computers.This results in

A) an increase in the demand for yen.
B) a decrease in the demand for yen.
C) an increase in the supply of yen to Canada.
D) a decrease in the supply of yen to Canada.

Question 29

In a supply-and-demand diagram for Japanese yen, with the exchange rate in dollars per yen on the vertical axis, the demand schedule for yen is drawn sloping

A) upward.
B) vertical.
C) downward.
D) horizontal.

Question 30

During the era of dollar appreciation, in the 1980s, a main reason why the dollar did NOT fall in value was

A) flows of foreign investment into the United States.
B) rising price inflation in the United States.
C) a substantial decrease in U.S. imports.
D) a substantial increase in U.S. exports.

Question 31

Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.


-Refer to Exhibit 11.1.If U.S.investors cover their exchange rate risk, then the extra return for the six months on the U.K.treasury bills is

A) 1.0 percent.
B) 1.5 percent.
C) 2.0 percent.
D) 2.5 percent.

Question 32

Most foreign exchange trading occurs between banks and

A) national governments.
B) other banks.
C) corporations.
D) household investors.

Question 33

Given the foreign currency market for the Swiss franc, the supply of francs slopes upward, because as the dollar price of the franc rises

A) America's demand for Swiss merchandise rises.
B) America's demand for Swiss merchandise falls.
C) Switzerland's demand for American merchandise rises.
D) Switzerland's demand for American merchandise falls.

Question 34

Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.

-Refer to Exhibit 11.1.By investing in U.K.treasury bills rather than U.S.treasury bills, and NOT covering exchange rate risk, U.S.investors earn an extra return of

A) 4 percent per year or 1 percent for the 6 months.
B) 4 percent per year or 2 percent for the 6 months.
C) 2 percent per year or 0.5 percent for the 6 months.
D) 2 percent per year or 1 percent for the 6 months.

Question 35

A depreciation of the dollar will have its most pronounced impact on imports if the demand for imports is

A) constant.
B) inelastic.
C) elastic.
D) unitary elastic.

Question 36

Suppose the exchange value of the British pound is $2 per pound while the exchange value of the Swiss franc is 50 cents per pound.The cross-exchange rate between the pound and the franc is

A) 1 franc per pound.
B) 2 francs per pound.
C) 3 francs per pound.
D) 4 francs per pound.

Question 37

The most important (in terms of dollar value) type of foreign exchange transaction by U.S.banks is the

A) spot transaction.
B) forward transaction.
C) swap transaction.
D) option transaction.

Question 38

Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future?

A) forward transaction
B) futures transaction
C) spot transaction
D) swap transaction

Question 39

Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.


-Refer to Exhibit 11.1.If the price of the six-month forward pound were to ____, then U.S.investors would no longer earn an extra return by shifting funds to the United Kingdom.

A) rise to $1.52
B) rise to $1.53
C) fall to $1.48
D) fall to $1.47

Question 40

Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price within a few days to a couple of years?

A) letter of credit
B) foreign currency option
C) cable transfer
D) bill of exchange

Question 41

Figure 11.3 The Market for the Euro


-Refer to Figure 11.3.If the supply curve is represented by S₀, then the equilibrium exchange rate is

A) $1.20.
B) $1.00.
C) $0.80.
D) $0.60.

Question 42

Figure 11.1. Supply and Demand Schedules of Francs
​
Refer to Figure 11.1.At the equilibrium exchange rate of ____ per franc, ____ francs will be purchased at a total dollar cost of ____.

A) $.50, 5 million, $2.5 million
B) $.50, 5 million, $1.5 million
C) $.70, 3 million, $2.1 million
D) $.70, 7 million, $4.9 million

Question 43

Figure 11.1. Supply and Demand Schedules of Francs
​
Refer to Figure 11.1.Suppose the exchange rate is $.30 per franc.At this exchange rate, there is an ____ of francs, which leads to a ____ in the dollar price of the franc, a(n) ____ in the quantity of francs supplied, and a(n) ____ in the quantity of francs demanded.

A) excess demand, rise, increase, decrease
B) excess demand, rise, decrease, increase
C) excess supply, fall, decrease, increase
D) excess supply, fall, increase, decrease

Question 44

Figure 11.2. Market for Francs
​
Refer to Figure 11.2.A shift in the demand for francs from D₀ to D₂, or a shift in the supply of francs from S₀ to S₁, would result in a(n)

A) depreciation in the dollar against the franc.
B) appreciation in the dollar against the franc.
C) no change in the dollar/franc exchange rate.
D) appreciation in the franc against the dollar.

Question 45

When the dollar gets stronger,

A) U.S. firms become more competitive in the international market.
B) foreign tourists travel in the U.S. at a higher cost.
C) U.S. inflation increases.
D) U.S. consumers face higher prices on foreign goods.

Question 46

The nominal exchange rate is the

A) rate at which stocks and bonds may be exchanged for currency.
B) the rate at which domestic bank deposits and foreign bank deposits are exchanged.
C) the price of one country's currency in terms of another country's currency.
D) rate of return on Treasury bills, notes, and bonds.

Question 47

Figure 11.3 The Market for the Euro


-Refer to Figure 11.3.If the supply curve shifts from S₂ to S₁, then

A) the dollar has depreciated relative to the euro.
B) the dollar has appreciated relative to the euro.
C) the euro has depreciated relative to the dollar.
D) U.S. consumers will be inclined to buy more European goods.

Question 48

Assume that you are the Chase Manhattan Bank of the United States, and you have 1 million Swiss francs in your vault that you will need to use in 30 days.Moreover, you need 500,000 British pounds for the next 30 days.You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today and reverse the transaction at the end of 30 days.You have just arranged a

A) forward contract.
B) futures contract.
C) spot contract.
D) currency swap.

Question 49

Figure 11.1. Supply and Demand Schedules of Francs
​
Refer to Figure 11.1.Suppose the exchange rate is $.30 per franc.Free-market forces would lead to a(n) ____ of the dollar against the franc and a(n) ____ in U.S.international competitiveness.

A) depreciation, improvement
B) depreciation, worsening
C) appreciation, improvement
D) appreciation, worsening

Question 50

Figure 11.1. Supply and Demand Schedules of Francs
​
Refer to Figure 11.1.Suppose the exchange rate is $.70 per franc.At this exchange rate, there is an ____ of francs which leads to a ____ in the dollar price of the franc, a(n) ____ in the quantity of francs supplied, and a(n) ____ in the quantity of francs demanded.

A) excess demand, rise, increase, decrease
B) excess demand, rise, decrease, increase
C) excess supply, fall, decrease, increase
D) excess supply, fall, increase, decrease

Question 51

Concerning the foreign exchange market, which of the following is FALSE?

A) Most foreign exchange transactions involve the transfer of electronic balances between commercial banks or foreign exchange dealers.
B) The worldwide amount of foreign exchange transactions is about $4 trillion a day.
C) Unlike the stock or commodity exchanges, the foreign exchange market is not an organized structure.
D) Virtually all foreign exchange trading occurs among banks located in New York City.

Question 52

Concerning the foreign exchange market, which of the following is FALSE?

A) Virtually all foreign exchange trading takes place in London and Zurich.
B) Foreign exchange trading is dominated by the dollar, euro, yen, and pound.
C) Individual households, businesses, governments, and banks buy and sell foreign currencies and other debt instruments.
D) The foreign exchange market has no centralized meeting place and no formal requirements for participation.

Question 53

When the real exchange rate of the Japanese yen depreciates,

A) the yen's nominal exchange rate must also depreciate.
B) the yen's nominal exchange rate must remain constant.
C) the yen will trade for more units of a foreign currency.
D) the yen will trade for fewer units of a foreign currency.

Question 54

A(n) ____ is an arrangement by which two parties exchange one currency for another and agree that the exchange will be reversed at a stipulated date in the future.

A) arbitrage
B) swap
C) option
D) hedge

Question 55

When the dollar depreciates,

A) U.S. exporters tend to sell more goods in foreign markets.
B) U.S. consumers see a lower price on foreign goods.
C) More foreign tourists can afford to visit the United States.
D) U.S. inflation is low.

Question 56

The offer rate

A) is the price at which the bank is willing to sell a unit of foreign currency.
B) is the price that the bank is willing to pay for a unit of foreign currency.
C) is synonymous with the spread rate.
D) is synonymous with the exchange rate.

Question 57

Figure 11.2. Market for Francs
​
Refer to Figure 11.2.A shift in the demand for francs from D₀ to D₁, or a shift in the supply of francs from S₀ to S₂, would result in a(n)

A) depreciation in the dollar against the franc.
B) appreciation in the dollar against the franc.
C) unchanged dollar/franc exchange rate.
D) depreciation in the franc against the dollar.

Question 58

Figure 11.1. Supply and Demand Schedules of Francs
​
Refer to Figure 11.1.Suppose the exchange rate is $.70 per franc.Free-market forces would lead to a(n) ____ of the dollar against the franc and a(n) ____ in U.S.international competitiveness.

A) depreciation, improvement
B) depreciation, worsening
C) appreciation, improvement
D) appreciation, worsening

Question 59

When the real exchange rate of Japan's yen appreciates,

A) the yen's nominal exchange rate must remain constant.
B) the yen's nominal exchange rate must also appreciate.
C) the yen's nominal exchange rate must depreciate.
D) Japanese goods are less competitive on international markets.

Question 60

The real exchange rate differs from the nominal exchange rate in that the real exchange rate

A) does not account for the purchasing power of the currency.
B) adjusts the nominal exchange rate for interest rate differentials among countries.
C) is fixed, while the nominal exchange rate is flexible.
D) embodies the changes in price levels of countries in its calculation.

Question 61

Throughout the foreign exchange market, trading in currencies

A) occurs at any hour of the day or night.
B) occurs at prices established by the U.S. and British governments.
C) is conducted on centralized trading floors in Paris and Hong Kong.
D) is restricted to the hours between 1 P.M and 3 P.M., Eastern Time Zone.

Question 62

In recent years, the smallest amount of foreign-exchange trading has involved

A) spot transactions.
B) forward transactions.
C) foreign-exchange options.
D) foreign-exchange swaps.

Question 63

Which is NOT a bank that trades in the foreign exchange market?

A) Deutsche Bank
B) Citigroup
C) Barclays
D) Charles Schwab

Question 64

In recent years, the largest amount of foreign-exchange trading has involved

A) foreign-exchange swaps and spot transactions.
B) spot transactions and forward transactions.
C) forward transactions and foreign-exchange swaps.
D) foreign-exchange options and spot transactions.

Question 65

In the table above, if the exchange rate is equal to $1.00 per pound, then there is a ______, and the exchange rate will______.

A) surplus of pounds, decrease
B) surplus of pounds, increase
C) shortage of pounds, decrease
D) shortage of pounds, increase

Question 66

Concerning foreign exchange trading, a "futures contract" is characterized by which of the following?

A) The size of the contract is standardized in round lots.
B) The contract's costs are based on bid/offer spread.
C) Trading happens over the counter by telephone.
D) The date of delivery is negotiable.

Question 67

Concerning foreign exchange trading, which of the following characterizes a forward contract?

A) It is an agreement between a holder and a writer.
B) Its contract size can be tailored to the needs of the exporter, importer, and so on.
C) Its date of delivery is non-negotiable.
D) It does not obligate a person to carry out a transaction if the price has changed.

Question 68

Concerning the spot market for foreign exchange transactions,

A) currencies are bought and sold for delivery at a particular date in the future.
B) currencies are traded for immediate delivery.
C) currency exchange rates are set by government regulatory agencies.
D) currency exchange rates are set by central banks.

Question 69

Concerning foreign exchange trading, bank purchases from and sales to their customers are classified as retail transactions when the amount involved

A) is less than 100,000 units of currency.
B) is less than 500,000 units of currency.
C) is less than 1 million units of currency.
D) is greater than 1 million units of currency.

Question 70

In the table above, if the exchange rate is equal to $2.00 per pound, then there is a ______, and the exchange rate will______.

A) surplus of pounds, decrease
B) surplus of pounds, increase
C) shortage of pounds, decrease
D) shortage of pounds, increase

Question 71

A call option provides an options holder

A) the obligation to buy foreign currency at a specific price.
B) the obligation to sell foreign currency at a specific price.
C) the right to buy foreign currency at a specific price.
D) the right to sell foreign currency at a specific price.

Question 72

The ______ is the price at which a foreign currency option can be exercised-that is, the price at which the foreign currency is bought or sold

A) strike price
B) terms of trade
C) rate of exchange
D) exercise price

Question 73

The supply for foreign exchange results from transactions that appear on the

A) credit side of a country's balance of payments statement.
B) debit side of a country's balance of payments statement.
C) both the credit side and the debit side of a country's balance of payments statement.
D) neither the credit side nor the debit side of a country balance of payments statement.

Question 74

In the table above, the equilibrium exchange rate is shown as

A) $2.50 per pound.
B) $2.00 per pound.
C) $1.50 per pound.
D) $1.00 per pound.

Question 75

All of the following are main centers for foreign exchange trading EXCEPT

A) Tokyo.
B) London.
C) Edmonton.
D) New York.

Question 76

The soaring (appreciating) value of the trade-weighted dollar in the early 1980s

A) was caused by relatively low interest rates in the United States.
B) decreased the international competitiveness of American exporters.
C) resulted in Americans importing fewer goods and services.
D) increased the demand for American exports of goods and services.

Question 77

A put option provides an options holder

A) the obligation to buy foreign currency at a specific price.
B) the obligation to sell foreign currency at a specific price.
C) the right to buy foreign currency at a specific price.
D) the right to sell foreign currency at a specific price.

Question 78

Concerning foreign exchange trading, wholesale transactions involving more than 1 million currency units generally

A) occur between banks or with large corporate customers.
B) occur only in Hong Kong and Frankfurt.
C) are limited to transactions in the spot market.
D) are limited to transactions in the forward market.

Question 79

Concerning foreign exchange trading, a "forward contract"

A) has no defined expiration date at which settlement must occur.
B) has contract costs based on the brokerage fees for sell and buy orders.
C) is issued by a major commercial bank, like Citibank or Barclays.
D) is traded on IMM's market floor.

Question 80

The demand for foreign exchange results from transactions that appear on the

A) credit side of a country's balance of payments statement.
B) debit side of a country's balance of payments statement.
C) both the credit side and the debit side of a country's balance of payments statement.
D) neither the credit side nor the debit side of a country balance of payments statement.