Deck 9: The Foreign Exchange Market

Question 1

If $1 bought more yen with a spot exchange than with a 30-day forward exchange it indicates the dollar is expected to depreciate against the yen in the next 30 days.When this occurs,we say the dollar is selling at a premium on the 30-day forward market.

Answer 1

False

Question 2

The most important trading centers for currencies are in Zurich,Frankfurt,Paris,Hong Kong,and Sydney.

Answer 2

False

Question 3

Currency speculation involves the long-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

Answer 3

False

Question 4

The value of a currency is determined by the interaction between the demand and the supply of that currency relative to the demand and supply of other currencies.

Question 5

When a tourist goes to a bank in a foreign country to convert money into the local currency,the exchange rate used is the spot rate.

Question 6

When a tourist changes one currency into another,the tourist is participating in the foreign exchange market.

Question 7

A currency swap is the rate at which a foreign exchange dealer converts one currency into another on a particular day.

Question 8

Changes in spot exchange rates can be advantageous for an international business.

Question 9

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about future currency movements.

Question 10

When two parties agree to exchange currency and execute the deal at some specific time in the future,a forward exchange occurs.

Question 11

If the spot rate is $1 = *20,and the 30-day forward rate is $1 = *30,the dollar is selling at a discount in the forward market.

Question 12

The foreign exchange market is a market for converting the currency of one country into that of another country.

Question 13

The rate at which one currency is converted into another is known as the fluctuation rate.

Question 14

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa.

Question 15

To minimize the risk of an unanticipated change in exchange rates,a company can protect itself by entering into a forward exchange contract.

Question 16

The foreign exchange market is a global network of banks,brokers,and foreign exchange dealers connected by electronic communications systems.

Question 17

If the spot exchange rate is $\le$ 1 = $1.50 when the market opens,and $\le$ 1 = $1.48 at the end of the day,the pound has appreciated,and the dollar has depreciated.

Question 18

It is possible for a firm to purchase complete insurance against the risks that arise from changes in exchange rates in the foreign exchange market.

Question 19

The risk that arises from volatile changes in exchange rates is known as foreign exchange risk.

Question 20

A spot exchange rate is quoted for 30 days,90 days,and 180 days into the future.

Question 21

According to a less extreme version of the PPP theory,given relatively efficient markets,the price of a "basket of goods" should be roughly equivalent in each country.

Question 22

When the growth in a country's money supply is faster than output increases,inflation is fueled.

Question 23

A lag strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

Question 24

There are no impediments to the free flow of goods and services in an efficient market.

Question 25

Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation,or when a country's economic prospects are shaky in other respects.

Question 26

According to the law of one price,at the most basic level,exchange rates are determined by supply and demand.

Question 27

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

Question 28

An inefficient market is one in which prices do not reflect all available information.

Question 29

The International Fisher Effect states that for any two countries,the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates for the two countries.

Question 30

Arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time.

Question 31

The foreign exchange market is open for only 12 hours in a day.

Question 32

Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

Question 33

If a country has an externally convertible currency,neither residents nor nonresidents are allowed to convert it into a foreign currency.

Question 34

The PPP theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

Question 35

Price inflation occurs when the quantity of money in circulation rises faster than the stock of goods and services.

Question 36

Although a foreign exchange transaction can involve any two currencies,most transactions involve pounds on one side.

Question 37

Technical analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Question 38

The impact of currency exchange rates on the reported financial statements of a company is translation exposure.

Question 39

According to the PPP,a country with a high inflation rate will see depreciation in its currency exchange rate.

Question 40

The International Fisher Effect has proven to have substantial power at predicting short-run changes in spot exchange rates.

Question 41

_____ are exchange rates governing some specific future date foreign exchange transactions.

A)Spot exchange rates
B)Forward exchange rates
C)Future exchange rates
D)Currency swaps

Question 42

A pair of shoes costs $\le$ 30 in Britain.The identical pair costs $45 in the United States.The exchange rate is $\le$ 1 = $1.80.In terms of cost of the shoes:

A)the U.S.offers a better deal.
B)the deal is the same in both countries.
C)Britain offers a better deal.
D)the U.S.deal is comparatively worse.

Question 43

Assuming the 30-day forward exchange rate were $1 = *30 and the spot exchange rate were $1 = *20,the dollar is selling at a _____ on the 30-day forward market.

A)premium
B)margin
C)discount
D)subsidy

Question 44

If lots of people want euros and euros are in short supply,and a few people want Japanese yen and yen are in plentiful supply,the euro is likely to _____ against the yen.

A)depreciate
B)appreciate
C)devalue
D)stabilize

Question 45

Assume that the yen/dollar exchange rate quoted in London at 3:00 p.m.is *120 = $1,and the New York yen/dollar exchange rate at the same time is *125 = $1.A dealer makes a profit by buying a currency low and selling it high.The dealer has engaged in a(n):

A)currency swap.
B)arbitrage.
C)backwardation.
D)straddle.

Question 46

The rate at which one currency is converted into another is the:

A)replacement percentage.
B)resale rate.
C)exchange rate.
D)interchange ratio.

Question 47

If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it,what will happen?

A)The dollar will appreciate against the yen
B)The dollar will depreciate against the yen
C)The exchange rates will remain the same
D)The yen will appreciate against the dollar

Question 48

An exchange rate of €1 = $1.30 indicates that:

A)$1 is worth 1.30 euros.
B)one could sell 1.30 euros for $1.
C)one euro buys $1.30.
D)there are 1.30 euros for every dollar.

Question 49

Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is $3.75 at the prevailing euro/dollar exchange rate,then according to PPP the euro is:

A)undervalued by 25 percent against the dollar.
B)overvalued by 25 percent against the dollar.
C)appreciating relative to the dollar.
D)depreciating relative to the dollar.

Question 50

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

A)fiscal barter.
B)liquid trade.
C)currency exchange.
D)currency swap.

Question 51

One function of the foreign exchange market is to provide some insurance against the risks that arise from changes in exchange rates,commonly referred to as:

A)foreign market hazard.
B)global jeopardy.
C)foreign exchange risk.
D)commerce uncertainty.

Question 52

The _____ helps us to compare the relative prices of goods and services in different countries.

A)interest rate
B)customs rate
C)exchange rate
D)tariff rate

Question 53

The _____ suggests that given relatively efficient markets,the price of a "basket of goods" should be roughly equivalent in each country.

A)theory of efficient markets
B)law of one price
C)theory of price inflation
D)PPP theory

Question 54

When two parties agree to exchange currency and execute the deal immediately,the transaction is a:

A)point-in-time exchange.
B)temporal exchange.
C)spot exchange.
D)forward exchange.

Question 55

International businesses use foreign exchange markets for all of the following reasons except:

A)to receive payments from foreign investments that may be in foreign currencies.
B)to pay a foreign company for its products or services in its country's currency.
C)to invest for short terms in money markets when they have spare cash.
D)to cover themselves from all risks involved in currency speculation.

Question 56

According to the _____,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 57

The foreign exchange market serves two main functions.These are:

A)collect duties on imported products and convert the currency of one country into the currency of another.
B)insure companies against foreign exchange risk and set interest rates charged to foreign investors.
C)collect duties on imported products and set interest rates charged to foreign investors.
D)convert the currency of one country into the currency of another and provide some insurance against foreign exchange risk.

Question 58

According to the law of one price,if the exchange rate between the British pound and the dollar is $\le$ 1 = $1.50,a jacket that retails for $75 in New York should sell for _____ in London.

A) $\le$ 40
B) $\le$ 50
C) $\le$ 60
D) $\le$ 75

Question 59

The risks that arise from volatile changes in exchange rates are commonly referred to as:

A)interest rate risks.
B)basis risks.
C)operational risks.
D)foreign exchange risks.

Question 60

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as:

A)currency arbitrage.
B)currency speculation.
C)currency supposition.
D)short selling.

Question 61

_____ is the impact of currency exchange rates changes on the reported financial statements of a company.

A)Economic exposure
B)Financial exposure
C)Translation exposure
D)Transaction exposure

Question 62

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)inefficient market theory
D)Fisher Effect

Question 63

A currency is said to be externally convertible when:

A)the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.
B)only nonresidents may convert it into a foreign currency without any limitations.
C)neither residents nor nonresidents are allowed to convert it into a foreign currency.
D)only residents may convert it internally into a foreign currency.

Question 64

A range of barter-like agreements by which goods and services can be traded for other goods and services is known as:

A)countertrade.
B)protracted trade.
C)intermediate sales.
D)countersale.

Question 65

The _____ argues that forward exchange rates do the best possible job of forecasting future spot rates and therefore investing in forecasting services would be a waste of money.

A)inefficient market school
B)efficient market school
C)Fisher Effect
D)international Fisher Effect

Question 66

When a currency is nonconvertible:

A)the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.
B)only nonresidents may convert it into a foreign currency without any limitations.
C)neither residents nor nonresidents are allowed to convert it into a foreign currency.
D)only residents may convert it internally into a foreign currency.

Question 67

Countries might be forced to use countertrade when a currency is:

A)freely convertible.
B)externally convertible.
C)internally convertible.
D)nonconvertible.

Question 68

The extent to which a firm's future international earning power is affected by changes in exchange rates is known as:

A)translation exposure.
B)financial exposure.
C)economic exposure.
D)transaction exposure.

Question 69

Identify the incorrect statement about the PPP theory.

A)It predicts that exchange rates are determined by relative prices.
B)It yields accurate predictions in the short run.
C)It best predicts exchange rate changes for countries with high rates of inflation.
D)It assumes away transportation costs and barriers to trade.

Question 70

_____ states that for any two countries,the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

A)The Fisher Effect
B)The International Fisher Effect
C)The efficient market theory
D)The inefficient market theory

Question 71

_____ involves dominant enterprises setting different prices in different markets to reflect varying demand conditions.

A)Conditional pricing
B)Dual pricing
C)Price discrimination
D)Foreign market pricing

Question 72

A currency is said to be freely convertible when:

A)the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.
B)only nonresidents may convert it into a foreign currency without any limitations.
C)neither residents nor nonresidents are allowed to convert it into a foreign currency.
D)only residents may convert it internally into a foreign currency.

Question 73

When traders move as a herd in the same direction at the same time such as what occurred when George Soros betted against the British pound in 1992,a(n)_____ occurs.

A)efficient market
B)inefficient market
C)bandwagon effect
D)Fisher Effect

Question 74

A(n)_____ involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.

A)follower strategy
B)interim strategy
C)lead strategy
D)lag strategy

Question 75

Economic theory suggests that when inflation is expected to be high:

A)interest rates will be low.
B)exchange rates will be high.
C)the International Fisher Effect does not hold.
D)interest rates will be high.

Question 76

_____ draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

A)Efficient market theory
B)Inefficient market theory
C)Fundamental analysis
D)Technical analysis

Question 77

_____ is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects.

A)The bandwagon effect
B)The Fisher Effect
C)The International Fisher Effect
D)Capital flight

Question 78

The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as:

A)economic exposure.
B)financial exposure.
C)translation exposure.
D)transaction exposure.

Question 79

_____ uses price and volume data to determine past trends,which are expected to continue into the future.

A)Technical analysis
B)Fundamental analysis
C)The Fisher Effect
D)The International Fisher Effect

Question 80

A(n)_____ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

A)follower strategy
B)interim strategy
C)lead strategy
D)lag strategy