Deck 6: Currency and Foreign Exchange

Question 1

FreeMart is an online fashion store that readily accepts payments in the form of cryptocurrencies. These digital currencies can be sent directly by a consumer to the store's wallet. This enables faster processing of a consumer's order. In this scenario, these currencies:

A) refer to currencies that are present in a physical form.
B) are backed by all national governments.
C) refer to electronic currencies.
D) are designated to be controlled by intermediaries.

Answer 1

C

Question 2

Gradium Technosoft, one of the leading laptop manufacturers in the country of Bhodonia, wants to open its stores in the country of Cregonasa. To finance the stores' rent, Gradium Technosoft sells Bhodos, currency of Bhodonia, and it acquires Crego dollars, currency of Cregonasa. In the context of exchange rates, identify the most likely outcome if the demand for Crego dollars is higher than that of Bhodos.

A) Bhodos will need to undergo a process of demonetization.
B) More Bhodos will be required to buy Crego dollars.
C) The value of Bhodos will be considered to have depreciated relative to the Crego dollars.
D) Currencies belonging to Crego dollars and Bhodos will solely be eligible for FX swaps.

Answer 2

B

Question 3

The country of Jolania faced a major political instability when the nation's government implemented new trade laws that hurt investment opportunities for several industries. Companies doing business in Jolania feared an economic disaster, and moved their money to safer countries. Many sold their Jolanian currency to purchase other stable currencies. This resulted in the _____ of the Jolanian currency.

A) demonetization
B) depreciation
C) equitization
D) inflation

Answer 3

B

Question 4

Which of the following is a difference between fiat currencies and cryptocurrencies?

A) Unlike fiat currencies, cryptocurrencies have a physical form.
B) Unlike fiat currencies, cryptocurrencies are not backed by any government.
C) Unlike fiat currencies, cryptocurrencies are not backed by any physical commodity.
D) Unlike fiat currencies, cryptocurrencies represent the value of a government's store of gold or silver.

Question 5

The nation of Gregoran wants to purchase liquefied petroleum gas and diesel fuel from oil refineries based in the nation of Frodaria. Since Gregoran's currency is overvalued, Gregoran swaps its currency with the currency of Frodaria. In this scenario, the nation of Gregoran engages in:

A) currency domination.
B) currency extraction.
C) currency blocking.
D) currency exchange.

Question 6

Mantonian franc is the currency of Mantonia, a country with a floating exchange rate system. The government of Mantonia does not directly intervene in the currency exchange. Hence, it has no direct influence on the price of the nation's currency. However, it is involved in other indirect actions such as buying currencies of other countries. Which of the following statements supports the fact that the act of buying currencies of other countries can affect the floating exchange rate?

A) The demand for the domestic currency of Mantonia decreases.
B) Mantonian franc is guaranteed to appreciate beyond a threshold amount.
C) The nation's government embraces dollarization.
D) The nation's government is obligated to print more money.

Question 7

ABC Corp., a U.S.-based company, is signing a business deal with Syphed Inc., a company based in the country of Yanghor. The base currency for the deal is the U.S. dollar. The counter currency for the transactions between the two companies is Yang, the official currency of Yanghor. To be able to conduct business in Yanghor, ABC Corp. should identify how much of U.S. dollars will be required to buy an equivalent amount of purchasing power in Yang. In short, ABC Corp. needs to identify the _____ of the currency of Yanghor.

A) equity value
B) capital share
C) exchange rate
D) dividend

Question 8

The country of Ethandan witnesses a major economic growth in its current financial year as a result of a major breakthrough by the nation's scientists in the field of nanotechnology. The economic growth leads to an increase in the value of the nation's currency relative to that of other nations'. In the context of the foreign exchange market, the increase in the value of Ethandan's currency is referred to as _____.

A) appreciation
B) dollarization
C) spot exchange
D) overvaluation

Question 9

The country of Cloden witnesses a major economic downfall in its current financial year because of monetary losses in the nation's major business sectors. This economic decline, in turn, causes a decrease in the value of the nation's currency relative to that of other nations'. In the context of the foreign exchange market, the decrease in Cloden's currency value is referred to as _____.

A) depreciation
B) risk aversion
C) spot diversification
D) overvaluation

Question 10

_____ are electronic currencies that are monitored by distributed peer networks that simultaneously keep track of currency ownership and trades.

A) Cost-push currencies
B) Private currencies
C) Microcurrencies
D) Cryptocurrencies

Question 11

In the context of money, identify a true statement about fiat currencies.

A) The value of fiat currencies remains constant.
B) Bitcoin is an example of a fiat currency.
C) They are digital currencies that are monitored by distributed peer networks.
D) A country can undermine the value of its fiat currency, rendering it valueless.

Question 12

Jim, an independent trader, conducts his business transactions using digital forms of money that are not regulated by any national government. Jim uses this digital means of exchange with his trading partners as well. In this scenario, Jim uses currencies known as _____.

A) cost-push currencies
B) cryptocurrencies
C) microcurrencies
D) complementary currencies

Question 13

The ratio that tells how much of one currency is needed in order to buy an equivalent amount of purchasing power in a different currency is known as the currency's _____.

A) equity value
B) exchange rate
C) dividend
D) capital share

Question 14

In contrast to currencies that have been declared to be a legal tender by a nation's government, in case of cryptocurrencies, _____.

A) no one institution controls the currency
B) currency prices remain constant as supply and demand fluctuate
C) no value is stored in the currency
D) currency ownership is backed by the government

Question 15

In contrast to digital forms of money, a fiat currency:

A) is backed by a physical commodity.
B) is declared to be legal tender by a nation's government.
C) represents the value of a government's store of gold.
D) can be traded for a precious metal.

Question 16

Unlike electronic currencies, fiat currencies:

A) are backed by a physical commodity.
B) are not backed by any government.
C) represent the value of a government's store of gold.
D) cannot be traded for a precious metal.

Question 17

During the 1950s, Ghajna, a developing nation, used currency whose value was determined based on the value of gold. People in Ghajna could present currency worth of 10 Gaj, Gaj being the currency of Ghajna, to a government-approved bank and receive 10 Gaj worth of gold in return. The nation used gold as the base to value its currency. In this scenario, we can say that the nation of Ghajna had the _____ in place during the 1950s.

A) gold variant
B) gold standard
C) gold stock
D) gold bond

Question 18

In the context of the foreign exchange market, _____ is defined as a decrease in the value of one currency relative to another currency.

A) depreciation
B) decompensation
C) spot exchange
D) undervaluation

Question 19

Identify a difference between fiat currencies and cryptocurrencies.

A) Unlike cryptocurrencies, fiat currencies are electronic currencies monitored by distributed peer networks.
B) Unlike cryptocurrencies, fiat currencies are not controlled by intermediaries.
C) Unlike cryptocurrencies, fiat currencies have no physical form.
D) Unlike cryptocurrencies, fiat currencies are declared to be legal tender by the government.

Question 20

In the context of money, unlike fiat currencies, cryptocurrencies:

A) do not store value.
B) do not facilitate trade.
C) are not controlled by intermediaries.
D) are not monitored by distributed peer networks.

Question 21

When the nation of Varnia faced rampant economic inflation, it became evident that the inflation would reduce Varnia's domestic currency's buying power. As a result, the Varnian government decided to officially use the currency of Rhotabha as legal tender for conducting transactions. In this scenario, the Varnian government's action of abandoning its own domestic currency and using Rhotabha's currency instead is called _____.

A) dollarization
B) equitization
C) amortization
D) delinquency

Question 22

In the context of foreign exchange rates, which of the following statements best describes the process of dollarization?

A) It is the process of a country abandoning its currency and using another currency instead.
B) It is the process of a country fixing its currency to a foreign currency that is usually stronger or more stable.
C) It is the process of eliminating currencies that are backed by a physical commodity.
D) It is the process wherein a dollar has intrinsic value such that it can be traded for a specified amount of gold.

Question 23

Ramanond Technologies is an independent business that facilitates foreign exchange trades. In the context of institutions that make foreign exchange happen, Ramanond Technologies is categorized under:

A) nonfinancial customers.
B) fiscal investors.
C) reporting dealers.
D) hedge funders.

Question 24

SafestMoney is a commercial bank that is involved in foreign exchange trade. In addition to conducting trade on behalf of its customers and itself, it provides trading channels for other participants. SafestMoney makes money by charging a _____ on the exchange, which is the difference between the buy and sell price for a currency.

A) spot rate
B) dividend
C) valence
D) spread

Question 25

Imagine that the exchange rate for trading Shealton Sheas for Rosmanian Ros is 0.75 Ros to 1 Sheas. Given that Sheas is the domestic currency, estimate the exchange rate for trading Sheas to Ros.

A) 0.75 Ros
B) 0.75 Sheas
C) 1 Ros
D) 1 Sheas

Question 26

Although Sinthland is a manufacturing-dependent nation, it prefers to have an overvalued currency. Which of the following is most likely a reason why Sinthland would want an overvalued domestic currency?

A) To make domestic production more appealing for foreign trade
B) To boost domestic manufacturing sectors
C) To increase the buying costs of foreign goods
D) To make imports cheaper

Question 27

In contrast to undervalued currencies, overvalued currencies:

A) make it easier for a country to pay down foreign debts.
B) boost domestic manufacturing sectors.
C) make foreign trading unfavorable for domestic industries.
D) make imports expensive.

Question 28

Linda wants to sell U.S. dollars and buy Noan currencies, currency of the country of Noansia. The spot exchange rate is 1,170 Noan to the dollar; hence, Linda is unlikely to sell her U.S. dollars at this rate. The bank offers Linda 1,150 Noan for each dollar she sells. However, if Linda plans to sell Noan currencies to buy U.S. dollars, the bank will charge her 1,190 Noan for each dollar she purchases. In this scenario, the 20 Noan difference between the spot exchange rate and the rate that the bank offers Linda is referred to as the _____.

A) equity
B) dividend
C) valence
D) spread

Question 29

The government of Ambria generally does not interfere in the value of the nation's currency. However, recently when the nation faced a severe financial crisis leading to its currency being depreciated to a great extent, the government decided to explicitly intervene by increasing the supply of money. In this scenario, the Ambrian government can be said to be engaging in a _____.

A) managed float
B) clean float
C) fixed float
D) spreader float

Question 30

The country of Ghathan has been in serious foreign debt for quite some time. It has large amounts of debt denominated in dollars, euros, and pounds. In the given scenario, the government of Ghathan is most likely to:

A) consider overvaluing the national currency.
B) make its exports cheaper.
C) reduce purchase of foreign goods.
D) stop employment drives in the manufacturing sector.

Question 31

Leather sold in the country of Zanasia costs the same as leather sold in the countries of Meramba, Chidean, and Pareuim. In the context of currency values, this exemplifies:

A) the law of averages.
B) the law of reinforcement.
C) the law of price depreciation.
D) the law of one price.

Question 32

In the context of foreign exchange rates, when the country of Zansia fixes its currency Zan to the U.S dollar at 5.5 Zan per dollar, it can be said that:

A) Zansia spreads its currency, Zan, to the U.S dollar at 5.5 Zan per dollar.
B) Zansia pegs its currency, Zan, to the U.S dollar at 5.5 Zan per dollar.
C) Zansia forecasts its currency, Zan, to the U.S dollar at 5.5 Zan per dollar.
D) Zansia exchanges its currency, Zan, with the U.S dollar at 5.5 Zan per dollar.

Question 33

In contrast to overvalued currencies, undervalued currencies:

A) make foreign debts easier to pay off.
B) boost domestic manufacturing sectors.
C) encourage citizens to buy foreign-produced products.
D) make domestic production less appealing for foreign trade.

Question 34

Dansaz is one of the largest textile-producing nations. However, little demand exists within the country for its own goods because incomes are traditionally low and most of the produced textiles are too expensive for the average Dansazian. In spite of this, the Dansazian government chooses to keep its currency valuation low. This is likely to:

A) lead to a dip in the demand for Dansazian goods.
B) result in a significant hike in the prices of Dansaz's goods.
C) help in the development of the Dansazian industry.
D) restrict employment opportunities in Dansaz.

Question 35

In the context of foreign exchange, the difference between the buy and sell price for a currency is referred to as a _____.

A) spot rate
B) dividend
C) valence
D) spread

Question 36

A Big Mac costs 4 Jon in the country of Jonanda, where Jon is the national currency, whereas in the country of Forunisa, where Fortan is the national currency, it costs 2.5 Fortan. If Fortan is the domestic currency, then the exchange rate is 1.60. Hence, if the exchange rate of Jon to Fortan is any greater, the Big Mac Index would state that:

A) the currency exchange rate is likely to decrease.
B) the Jon is overvalued.
C) the Fortan is overvalued.
D) the spot exchange rate is likely to decrease.

Question 37

In the country of Losan, majority of the population is employed in the manufacturing sector. However, as the nation's overall income is low, little demand exists within Losan for the manufactured products. Yet, the government of Losan keeps its currency valuation quite low to ensure that:

A) Losanian goods are comparatively cheaper in the world market.
B) the currency can be abandoned easily for a higher value currency.
C) Losanian goods create more competition in the world market with their high prices.
D) limited number of manufacturing jobs are created in Losan.

Question 38

Taverna is a manufacturing-dependent nation. The Taverna government plans to increase the supply of the national currency by a major proportion in an effort to devalue the currency in international markets. In this scenario, the Tavernan government prefers to have its currency undervalued in an effort to:

A) pay off foreign debts easily.
B) help drive exports.
C) make goods more expensive in world markets.
D) encourage citizens to buy foreign-produced products.

Question 39

In the context of foreign exchange rates, which of the following scenarios exemplifies dollarization?

A) The country of Zansas pegs its currency, the Zan, to the U.S. dollar at 5.75 Zan per dollar.
B) Melton, a country facing serious crisis, uses the currency of Alarodo as legal tender for conducting transactions.
C) Pereraus, a developing country, mandates the use of electronic currencies that can be monitored by distributed peer networks for all trading purposes.
D) The country of Denbarrow bases its currency on the gold standard such that the value of the currency can be determined by the ability to trade it for a specified amount of gold.

Question 40

In the context of institutions that make foreign exchange happen, nonfinancial customers include:

A) governments and businesses.
B) large banks such as JP Morgan Chase.
C) small commercial banks.
D) hedge funds.

Question 41

Assess the causes and consequences of the Chinese government's attempt to maintain a low currency valuation.

Question 42

The National Bank of Fragana implements monetary policies that help to control currency supply and maintain price stability. When there is a demand, the bank prints more money. This increases currency supply and stimulates borrowing and growth within Fragana. Predict the most likely outcome when this increase causes a decline in the purchasing value of money in Fragana.

A) Inflation decreases.
B) Fragana's currency depreciates.
C) Exporting nations that have strong competition with Fragana deliberately strengthen their currency to make their exports cheaper.
D) Importing nations that have strong competition with Fragana try to weaken their currencies to increase their purchasing power.

Question 43

In the context of managing exchange rate risks, when companies take advantage of spot exchange rates, they:

A) buy foreign currency at present-day rates in anticipation of future transactions.
B) make an agreement with a bank to exchange currency at some future date.
C) simultaneously purchase and sell a given amount of currency at two different rates.
D) abandon their own country's currency to adopt the most stable currency in the international market.

Question 44

Briefly explain the reasons behind some countries preferring to have an overvalued currency.

Question 45

Bank of Linsdon lends $1,000,000 to SBC Techno Inc. with an understanding that the company will need to repay the loan in monthly installments of $25,000. SBC Techno Inc. successfully makes the monthly payments for two consecutive years. However, due to a financial crisis, it faces cash flow problems and eventually stops paying the installments. In this scenario, Bank of Linsdon is said to have a(n) _____.

A) user-disposal loan
B) non-performing loan
C) unverified loan
D) payday loan

Question 46

RedFliers orders 50,000 pieces of steel rods from its supplier in Xonamba, priced at 1 Xon each, when the exchange rate is 0.60 Xon per dollar. Instead of paying the supplier immediately, RedFliers sells its dollars at the current rate and agrees to buy Xonamba's currency in 30 days at a fixed forward price. In this way, the company manages to lock in the price of the exchange, eliminating the risk from currency fluctuations in the future. This scenario exemplifies that RedFliers is involved in _____.

A) dollarization
B) random exchanges
C) FX swaps
D) loan-to-value trades

Question 47

North Korea is considered a poor candidate for a strong and widely traded currency. This is because of:

A) the presence of authoritarian leadership.
B) the country's open economy.
C) the country's high political stability.
D) the country's abundant wealth.

Question 48

The nation of Dholabha is experiencing a widespread drop in its spending. Hence, it has been declared as a nation going through a phase of recession. The people of Dholabha are dealing with reduced levels of employment, which is adversely affecting the economic growth of the nation. In this scenario, when Dholabha begins to thrive again and the gross domestic product (GDP) of the nation increases, _____.

A) the nation will experience a withdrawal of foreign capital
B) the citizens will begin demanding more imports
C) the nation will develop a positive trade balance
D) the value of the nation's currency will depreciate

Question 49

NBC Uro Corp. is a large U.S. company that earns almost 70 percent of its revenue from foreign markets. When forecasting operations for the next few years, the company factors in a slow decline of the U.S. dollar in comparison to other leading global currencies. However, if instead of declining, the U.S dollar appreciates in the years ahead, this would mean that NBC Uro Corp faces a(n) _____.

A) situational exposure
B) compounded exposure
C) economic exposure
D) assessed exposure

Question 50

In the context of managing exchange rate risks, which of the following best exemplifies a company that is engaged in forward exchange rate transactions?

A) ABC Inc. purchases foreign currency at present-day rates in anticipation of future transactions.
B) XYZ Corp. reaches an agreement with Iond bank to trade currency at a future date at the rate agreed to and specified at the time of the deal.
C) RTN Inc. simultaneously purchases and sells the currency of Zanvia at two different rates.
D) OPY Corp. diversifies its production of textiles to the global markets in which it operates.

Question 51

While the price of a currency is a function of economic and political trends, it can also be directly affected by government intervention. Discuss the impact of the four main types of government policy that affect currency valuations and foreign exchange rates.

Question 52

In the context of managing exchange rate risks, which of the following statements is true of an option?

A) An option is similar to a forward contract that does not allow for purchase of currency from a bank.
B) A trader uses an option to buy and sell currencies at different exchange rates on the same day.
C) A trader planning to purchase an option is compulsorily required to couple a spot transaction with a forward transaction.
D) Even after purchasing an option, it is not an obligation to buy a certain amount of currency at a given exchange rate.

Question 53

In the context of managing exchange rate risks, which of the following statements is true of forward exchange rate transactions?

A) It involves the purchase of foreign currency at present-day rates in anticipation of future transactions.
B) It involves the simultaneous purchase and sale of a given amount of currency at two different forward rates.
C) The forward rate at which a company and a bank agree to exchange currency is same as the spot rate.
D) The forward rate is a prediction of future spot rates that allows a company to bypass uncertainty in the currency market.

Question 54

The Central Bank of Curisia is responsible for performing functions such as printing money, increasing currency supply, raising interest rates, etc. The bank, therefore, uses monetary policies to control the supply of its currency with the goal of:

A) making imports cheaper.
B) maintaining price stability.
C) decreasing the country's purchasing power.
D) increasing the costs of exports.

Question 55

In the context of currency exchange rate changes, with examples based on instances that have happened around the world, assess how international companies have faced the risk of economic exposure.

Question 56

The fluctuation of exchange rates is a significant risk factor for Sedantha Inc., a company based in Velezland that imports miniature grape vines from the country of Highlands. The company usually purchases these vines during early fall and decides to pay for them after a few months. This could be termed as a risky exchange because the true cost of the vines can swing dramatically with currency shifts. In this scenario, Sedantha Inc. can eliminate currency risk by using _____ to lock in an exchange rate.

A) forward contracts
B) volatility analysis
C) environmental scanning
D) needs assessment

Question 57

In the context of managing exchange rate risks, which of the following is true of a future?

A) Currencies are traded on an exchange.
B) A future is completely different from a forward contract.
C) A trader is committed to couple a spot transaction with a forward transaction.
D) Currencies are purchased from a bank.

Question 58

To keep its currency cheap, China had pegged the renminbi to the U.S. dollar. Evaluate the consequences of the renminbi being more than 40 percent undervalued.

Question 59

In the context of managing exchange rate risks, which of the following statements is true of FX swaps?

A) The simultaneous purchase and sale of a given amount of currency is prohibited.
B) An option is provided to a buyer to purchase the right to buy a certain amount of currency at a given exchange rate.
C) A spot transaction is coupled with a forward transaction where both are completed at the same time.
D) The spot rate is a prediction of future forward rates so that a company can bypass uncertainty in the currency market.

Question 60

Anghona recently faced a severe economic crisis. This resulted in most companies going bankrupt with reduced employment rates all over the nation. In essence, Anghona experienced a negative gross domestic product (GDP). Which of the following statements was likely to be true of the nation of Anghona in this scenario?

A) Citizens began demanding more imports.
B) Citizens had rising levels of disposable income.
C) The country developed a positive trade balance.
D) The country had a depreciated currency.