Deck 4: Foreign Exchange and the International Monetary System

Question 1

The foreign exchange market allows participants to invest and borrow across international borders through a variety of financial institutions managed by specialist bank and fund managers.

Answer 1

False

Question 2

Future exchange rate movements influence export and import opportunities, financing decisions, the profitability of investment and the price competitiveness of foreign-traded products.

Answer 2

True

Question 3

A floating exchange rate is a system under which the exchange rate is determined and adjusted by the market forces of supply and demand.

Answer 3

True

Question 4

The extent to which an international business adjusts prices in a foreign market as the result of an exchange rate change is called the exchange rate pass-through.

Question 5

When more and more traders begin to sell a currency and buy another in expectation of a decline in the value of that currency, then that currency will most likely decline in value as a result of the bandwagon effect.

Question 6

One concern with floating exchange rates is flexibility.

Question 7

The US dollar is regarded as a ______________ currency, as it is one of the most traded currencies in the world.

A) desirable
B) vehicle
C) driving
D) speculative

Question 8

When managing foreign exchange risk, firms need to develop strategies for dealing with economic exposure. One such strategy is to:

A) diversify product lines.
B) reduce transaction exposure.
C) produce in multiple country locations.
D) lobby governments.

Question 9

An attempt to delay the collection of foreign currency receivables if that currency is expected to appreciate, and to delay payables if that currency is expected to depreciate, is called a:

A) lag strategy.
B) natural hedge.
C) lead strategy.
D) delay strategy.

Question 10

Which three trading centres are the most important for the foreign exchange market?

A) Zurich, Frankfurt and Hong Kong
B) São Paulo, Russia and Beijing
C) Mexico, Moscow and Singapore
D) London, New York and Tokyo

Question 11

When a country allows the foreign exchange market to be free of any government intervention to determine the relative value of a currency, we say that country is adhering to:

A) an open financial system.
B) a freely floating exchange rate system.
C) floating controls over the cross-border movement of funds.
D) dispersed controls over financial market prices other than the case rate.

Question 12

The foreign exchange market has two main functions:

A) to 'convert' the currency of one country into the currency of another, and to provide some 'hedge' or insurance against foreign exchange risk.
B) to allow a country to purchase any amount of a foreign currency, and to transfer assets between firms.
C) to facilitate short and long positions for developing nations selling commodities.
D) to host the tradeable wealth of nations, and to transfer the benefits from their transactions.

Question 13

A national currency that is widely used in international transactions and is used as an intermediary unit to convert one currency to another is called:

A) adriving currency.
B) an insider currency.
C) a speculative currency.
D) a vehicle currency.

Question 14

Critics of conditionality argue that the International Monetary Fund (IMF), via conditionality, oversteps the mark by attempting to:

A) limit international investment.
B) achieve its objectives by taking a 'one size fits all' approach.
C) micro-manage economies.
D) filter greatest profit from developing and emerging countries.

Question 15

One means of protecting short-term cash flows from adverse changes in exchange rates is through:

A) fixed exchange rate contracts.
B) forward exchange rate contracts.
C) relative exchange rate contracts.
D) market exchange rate contracts.

Question 16

______________ is when an investor places a speculative bet that the value of a currency will change against another by borrowing one to buy the second currency.

A) A hedge fund
B) Foreign direct investment
C) Foreign exchange risk
D) Carry trade

Question 17

With Tokyo and Singapore to the east and New York to the west, it is this central location that has made ______________ the critical link today between the East Asian and New York markets.

A) Moscow
B) Israel
C) Madrid
D) London

Question 18

According to purchasing power parity (PPP) theory, a country in which price inflation is running high should expect its currency to _____________ against that of countries in which inflation rates are lower.

A) depreciate
B) appreciate
C) not change
D) fluctuate positively

Question 19

In essence, PPP theory predicts that the exchange rate will change if relative ______________ change.

A) interest rates
B) banking fees
C) prices
D) tax rates

Question 20

A foreign debt crisis is a situation in which a country cannot _____________, which is commonly caused by_________.

A) repay borrowings; an increase in foreign investment
B) attract investment; an unstable monetary system
C) service foreign debt; high inflation rates
D) deflate inflation; political uncertainty

Question 21

It follows from the Fisher Effect that if the real interest rate is the same worldwide, then any difference in interest rates between countries reflects:

A) differing expectations about inflation rates.
B) variances in supply and demand.
C) the offset of the bandwagon effect.
D) manipulation by government policy.

Question 22

The Impossible Trinity Argument states that it is not possible to have simultaneously a fixed exchange rate, a free flow of capital and _______________.

A) an adjustment mechanism
B) a speculative mechanism
C) an independent monetary system
D) a distensible interest system

Question 23

In a fixed exchange rate system, the exchange rate is _____________ and does not vary with __________________.

A) fixed; economic development
B) floating; purchasing power
C) constant; supply and demand
D) pegged; market forces

Question 24

The new role of the International Monetary Fund (IMF) is performed through the functions of:

A) receipt, a contract and a document of title.
B) a sight draft, a time draft and a banker's acceptance.
C) a cover note, insurance document and security title.
D) surveillance, lending and technical assistance.

Question 25

With dramatic swings in exchange rates, particularly in a freely floating exchange rate regime, setting prices for internationally traded goods is a challenge for international business management. The extent to which an international business adjusts prices in a foreign market as the result of an exchange rate change is called the:

A) exchange rate decision.
B) exchange rate pass-through.
C) bandwagon effect.
D) nominal interest rate differentials effect.