Deck 4: Foreign Exchange and the International Monetary System

Question 1

An attempt to collect foreign currency receivables early when a foreign currency is expected to depreciate and to pay foreign currency payables before they are due when a currency is expected to appreciate is called:

A)a lead strategy.
B)a natural hedge.
C)a lag strategy.
D)an open account.

Answer 1

A

Question 2

The world's four major trading currencies - the British pound,the euro,the Japanese yen and the US dollar - all free float against each other.

Answer 2

True

Question 3

The floating exchange rate regimes of Australia and New Zealand have been supported by all of the following influences except:

A)an open financial system.
B)foreign exchange controls.
C)no controls over the cross-border of funds.
D)no controls over financial market prices other than the case rate.

Answer 3

B

Question 4

When traders follow the actions of others to force down the value of their holdings,this is called the bandwagon effect.

Question 5

The latest trend in the foreign exchange market is to trade the spiralling euro and leverage with contracts for difference (CFD)opportunities.

Question 6

The Fisher Effect states that a country's nominal interest rate (i)is the sum of the required real rate of interest (r)and the expected rate of inflation (I)over the period for which the funds are to be lent.

Question 7

When managing foreign exchange risk many companies seem to focus on reducing their transaction and translation exposure and pay scant (little)attention to______isk.

A)political
B)social
C)economic
D)legal

Question 8

One key assumption concerning the principles of currency convertibility is that:

A)currencies are freely convertible.
B)a country allows anybody to purchase any amount of a foreign currency.
C)it involves large funds over short-term periods.
D)host recipients benefit the most from the transactions.

Question 9

A system under which a country's currency is nominally allowed to float freely against other countries,but in which the government will intervene if it believes the currency has deviated too far from its fair value is called a ____________t system.

A)developed or 'clean'
B)temporal or 'pegged'
C)controlled or 'ordinal'
D)managed or 'dirty'

Question 10

A concern with floating exchange rates is volatility.

Question 11

Nominal interest rates reflect expectations about inflation,deflation and stagflation.

Question 12

The law of one price and purchasing power parity (PPP)theory predict that the exchange rate will change if relative prices change.

Question 13

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

Question 14

With London,New York and Tokyo the most important trading centres for the foreign exchange market,the next most important trading centres are:

A)New Delhi,Paris and Sydney.
B)São Paulo,Russia and Beijing.
C)Mexico,Moscow and Singapore.
D)Zurich,Frankfurt and Hong Kong.

Question 15

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

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

Question 16

The theory that nominal interest rates (i)in each country equal the required rate of interest (r)and expected rate of inflation (I)over the period for which the funds are to be lent is referred to as:

A)the Law of One Price.
B)the Purchasing Power Parity conundrum.
C)the Fisher Effect.
D)the Big Mac index.

Question 17

The purchase of securities in one market for immediate resale in another market to profit from a price discrepancy is known as:

A)barter arrangements
B)negotiation agreements
C)agiotage (speculative dealing)
D)arbitrage

Question 18

Domestic political realities often mean that domestic policy goals will get preference over the goal of international monetary stability.

Question 19

Fluctuating exchange rates expose an international business to three types of foreign exchange risk: transaction,translation and economic.

Question 20

Two main functions of the foreign exchange market are ______and ______ against foreign exchange risk.

A)currency speculation;hedging
B)currency investing;managing
C)currency conversion;insuring
D)currency controls;communicating

Question 21

The term 'mission creep' describes the situation where an organisation:

A)limits its activities overseas.
B)attempts a 'one-size-fits-all' approach to achieving its objectives.
C)expands its activities beyond its original mandate.
D)looks to developing and emerging countries to profit.

Question 22

Rates for currency exchange quoted for 30,90 or 180 days into the future are referred to as ______________.

A)forward exchange rates
B)foreign exchange quotes
C)united trade rates
D)generic exchange quotes

Question 23

If the Australian dollar is in short supply,and the British pound is in plentiful supply,the _________ exchange rate is likely to change.

A)fixed
B)spot
C)relative
D)market

Question 24

Due to its central role in so many foreign exchange deals,the US dollar is regarded as ________ currency.

A)a vehicle
B)a potent
C)an important
D)a widespread

Question 25

____________urs when an investor places a speculative bet that the value of a financial asset will decline and then profits from that decline.

A)A hedge fund
B)Foreign direct investment
C)Foreign exchange risk
D)Short selling

Question 26

____________an investment fund that not only buys financial assets (stocks,bonds,currencies),but also sells them short.

A)A hedge fund
B)A merchant bank
C)An economic fund
D)A reserve bank

Question 27

The process of buying a currency low and selling it high is called:

A)forward exchange.
B)skimming.
C)profiteering.
D)arbitrage.

Question 28

In essence,PPP theory predicts that changes in relative prices will result in a change in:

A)interest rates.
B)banking fees.
C)exchange rates.
D)tax rates.

Question 29

If the demand for dollars outstrips the supply of them,and if the supply of Japanese yen is greater than the demand for them,the dollar will:

A)appreciate against the yen.
B)depreciate against the yen.
C)not change.
D)not be reflected in currency changes.

Question 30

If the law of one price were true for all goods and services,the _________ exchange rate could be found from any individual set of prices.

A)stability power similarity (SPS)
B)purchasing ability adeptness (PAA)
C)buying prowess equality (BPE)
D)purchasing power parity (PPP)

Question 31

The foreign exchange market:

A)is not located in any one place.
B)is located in New York City.
C)has offices in Australia,Japan,France,Germany,the USA and the UK.
D)is located in Rome.

Question 32

A lead strategy is an attempt to collect foreign currency receivables ______hen a foreign currency is expected to depreciate and paying foreign currency payables ______hey are due when a currency is expected to appreciate.

A)early;before
B)late;after
C)prematurely;later than
D)pre-emptively;at the time

Question 33

When the Australian dollar buys more euros on the spot market than the 30-day forward market,we say the dollar is selling at a ______.Conversely,when the dollar buys fewer euros on the spot market than the 30-day forward market,we say the dollar is selling at a ________.

A)premium;discount
B)handicap;bonus
C)discount;premium
D)subsidy;handicap

Question 34

An interesting feature of the foreign exchange market is that:

A)the market never sleeps.
B)the market has not yet created a global link.
C)there are not yet significant differences in the exchange rates.
D)high-speed computer linkages between trading centres have yet to be createD.

Question 35

With Tokyo and Singapore to the east and New York to the west,it is these locations that have made the central position of ________ today the critical link between the East Asian and New York markets.

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

Question 36

The ________ theory tells us that a country with a high inflation rate will see deprecation in its currency exchange rate.

A)law of one price
B)monetary system
C)purchasing power parity
D)price inflation

Question 37

The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates is called a:

A)spot exchange.
B)currency swap.
C)forward exchange.
D)reverse exchange.

Question 38

The most important trading centres for the foreign exchange market are in:

A)London,New York and Tokyo.
B)São Paulo,New York and Paris.
C)San Francisco,Tokyo and Singapore.
D)New York,Hong Kong and Paris.

Question 39

The _________ states that in competitive markets free of transportation costs and barriers to trade,identical products sold in different countries must sell for the same price,when their price is expressed in terms of the same currency.

A)law of one price
B)principle of consistent pricing
C)model of fair pricing
D)principle of equitable pricing

Question 40

Three factors that have the most important impact on future exchange rate movements include the country's price inflation,its market philosophy,and its ______???__________.

A)rate of economic growth
B)unemployment rate
C)interest rate
D)participation in the World Trade Organization

Question 41

The new role of the 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 42

The argument that it is not possible to have simultaneously a fixed exchange rate,a free flow of capital and an independent monetary system is referred to as the ____________.

A)adjustment mechanism
B)special role of the dollar
C)impossible trinity argument
D)distensible monetary system

Question 43

When investors are free to transfer capital between countries,according to the Fisher Effect,real interest rates will:

A)fall in both countries.
B)be highest in the richest country.
C)be the same in every country.
D)depreciate in both countries.

Question 44

Reducing a firm's economic exposure requires longer-term strategic choices about:

A)vested interests and economic conversion rights in the business.
B)the competition and their ability to drive value for customers.
C)non-repudiation of contracts and the law of one price.
D)the sources of supplies and the location of production plants.

Question 45

The ______ states that a country's nominal interest rate is the sum of the required 'real' rate of interest and the expected rate of inflation over the period for which the funds are to be lent.

A)PPP theory
B)efficient market theory
C)Sora Effect
D)Fisher Effect

Question 46

Exchange rate regimes or systems range from a pure 'free float',where the exchange rate is determined by the unfettered market forces of demand and supply,to a 'fixed-peg system'-more generally referred to as a fixed exchange rate system.The almost pure form of a fixed-pegged system was the:

A)purchasing power standard.
B)floating exchange rate.
C)Fisher effect.
D)gold standarD.

Question 47

The ________ is not a good predictor of short-run changes in spot exchange rates.

A)Fisher Effect
B)inflation effect
C)bandwagon effect
D)nominal interest rate differentials effect

Question 48

The agreement reached at Bretton Woods established two multinational institutions:

A)Inter-American Development Bank (IDB)and African Development Bank (AfDB).
B)Asian Development Bank (ADB)and European Bank for Reconstruction and Development (EBRD).
C)Multilateral Investment Guarantee Agency (MIGA)and South East Asia Development Bank (SAsiaDB).
D)International Monetary Fund (IMF)and World Bank (IBRD).

Question 49

Ways of managing transaction and translation exposures include buying forward,using foreign exchange and natural hedges,such as:

A)open-convertibility in currency transactions.
B)leading and lagging payables and receivables.
C)a receipt,a contract and a document of title.
D)restricting residents or non-residents from converting currency into a foreign currency.

Question 50

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:

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