Question 1

Differentiate between spot exchange rates and forward exchange rates.

Accepted Answer

When two parties agree to exchange curre...

Question 2

In terms of foreign exchange,which of the following is true of leading and lagging strategies?

Accepted Answer

A)   They primarily protect long-term cash flows from adverse changes in exchange rates.
B)   They are used to minimize economic exposure of companies.
C)   They can help firms minimize their transaction and translation exposure.
D)   The involve accelerating payments from strong-currency to weak-currency countries.
E)   They are limited by governments because they create pressure on strong currencies.F) A) and E)
G) B) and E)

Question 3

Which of the following is a key feature of the foreign exchange market?

Accepted Answer

A)   The foreign exchange market never sleeps.
B)   The foreign exchange market is located in London.
C)   The foreign exchange market is characterized by high transaction costs.
D)   The foreign exchange market is shut for two hours every day.
E)   The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities.F) A) and B)
G) C) and E)

Question 4

Which of the following transactions is used to move out of one currency into another for a limited period without incurring foreign exchange risk?

Accepted Answer

A)   Currency swap
B)   Currency speculation
C)   Carry trade
D)   Spot exchange
E)   ArbitrageF) A) and B)
G) A) and C)

Question 5

_____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Accepted Answer

A)   Carry trade
B)   Forward exchange
C)   Spot exchange
D)   Currency swap
E)   ArbitrageF) A) and B)
G) D) and E)

Question 6

Which of the following is true when a government is strongly committed to controlling the rate of growth in money?

Accepted Answer

A)   The country's future inflation rate may be low.
B)   The country's currency will steadily depreciate significantly and instantly in the foreign exchange market.
C)   The country's economy will be marked by an abundance of liquidity.
D)   The country will see a good number of populist measures not funded by taxation.
E)   The country will struggle to match money supply with adequate supply of goods and services.F) B) and C)
G) B) and D)

Question 7

In terms of foreign exchange,which of the following observations is true of leading and lagging strategies?

Accepted Answer

A)   They are easy to implement.
B)   They primarily protect long-term cash flows from adverse changes in exchange rates.
C)   Firms need minimal bargaining power to implement them.
D)   They can put pressure on a weak currency.
E)   They accelerate payments from strong-currency to weak-currency countries.F) A) and C)
G) C) and D)

Question 8

In countries where inflation is expected to be high,interest rates also will be high.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following results from the output of goods and services not matching the increase in money supply?

Accepted Answer

A)   Inflation
B)   Deflation
C)   Arbitrage
D)   Bandwagon effect
E)   Carry tradeF) B) and C)
G) A) and E)

Question 10

How are spot exchange rates determined?

Accepted Answer

A)   By using historical average prices of different currencies
B)   By the interaction between demand and supply of a currency relative to other currencies
C)   By taking the average of a basket of currencies
D)   By government decree
E)   By predicting future currency movementsF) A) and E)
G) B) and C)

Question 11

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

Accepted Answer

A)   The impact of investor psychology on short-run exchange rate movements
B)   The strong relationship between inflation rates and interest rates
C)   The impact of interest rates and short-term exchange rate movements
D)   The strong relationship between interest rate differentials and subsequent changes in spot exchange rates
E)   Government intervention in cross-border trade that violates the assumption of efficient marketsF) C) and E)
G) C) and D)

Question 12

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately?

Accepted Answer

A)   It assumes away transportation costs and trade barriers.
B)   It does not take into account the law of one price.
C)   It does not take into account the practice of arbitrage.
D)   It assumes that the markets are not efficient.
E)   It does not consider government influence on a nation's money supply.F) A) and B)
G) B) and D)

Question 13

How do the purchasing power parity theory and the law of one price relate the prices of commodities to exchange rate movements?

Accepted Answer

Purchasing power parity (PPP)theory and ...

Question 14

For price discrimination to work,arbitrage opportunities must be unlimited.

Accepted Answer

A) True 
 B)False

Question 15

Carry trade,a kind of speculation,takes advantage of the:

Accepted Answer

A)   temporary undervaluation of one currency vis-à-vis another.
B)   disparity between spot exchange rates and forward exchange rates.
C)   the collapse of the gold standard.
D)   differences in interest rates between countries.
E)   the rise of the fixed exchange rate system.F) A) and B)
G) C) and D)

Question 16

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan.Applying the international Fisher effect,the Brazilian real should:

Accepted Answer

A)   appreciate by 3 percent against the Japanese yen.
B)   depreciate by 3 percent against the Japanese yen.
C)   appreciate by 1.5 percent against the Japanese yen.
D)   depreciate by 1.5 percent against the Japanese yen.
E)   appreciate by 15 percent against the Japanese yen.F) A) and C)
G) B) and E)

Question 17

The phenomenon of _____ occurs when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency.

Accepted Answer

A)   deflation
B)   arbitrage
C)   liquidity rush
D)   capital flight
E)   currency swapF) None of the above
G) C) and D)

Question 18

Which of the following refers to currency speculation?

Accepted Answer

A)   The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
B)   The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day
C)   Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
D)   The purchase of securities in one market for immediate resale in another to profit from a price discrepancy
E)   The growth in a country's money supply exceeding the growth in its output, leading to price inflationF) B) and C)
G) A) and E)

Question 19

The euro/dollar exchange rate is €1 = $1.20.According to the law of one price,a camera that retails for $300 in New York should sell for _____ in Germany.

Accepted Answer

A)   €320
B)   €300
C)   €250
D)   €360
E)   €150F) A) and E)
G) All of the above

Question 20

Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Accepted Answer

A firm needs to develop a mechanism for ...

Exam 10: The Foreign Exchange Market

Which of the following refers to currency speculation?

Correct AnswerverifiedShow Answer

How do the purchasing power parity theory and the law of one price relate the prices of commodities to exchange rate movements?

Correct AnswerverifiedPurchasing power parity (PPP)theory and ...View AnswerShow Answer

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan.Applying the international Fisher effect,the Brazilian real should:

Correct AnswerverifiedShow Answer

Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Correct AnswerverifiedA firm needs to develop a mechanism for ...View AnswerShow Answer

Differentiate between spot exchange rates and forward exchange rates.

Correct AnswerverifiedWhen two parties agree to exchange curre...View AnswerShow Answer

Which of the following results from the output of goods and services not matching the increase in money supply?

Correct AnswerverifiedShow Answer

Which of the following transactions is used to move out of one currency into another for a limited period without incurring foreign exchange risk?

Correct AnswerverifiedShow Answer

The phenomenon of _____ occurs when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency.

Correct AnswerverifiedShow Answer

The euro/dollar exchange rate is €1 = $1.20.According to the law of one price,a camera that retails for $300 in New York should sell for _____ in Germany.

Correct AnswerverifiedShow Answer

In terms of foreign exchange,which of the following observations is true of leading and lagging strategies?

Correct AnswerverifiedShow Answer

Carry trade,a kind of speculation,takes advantage of the:

Correct AnswerverifiedShow Answer

In countries where inflation is expected to be high,interest rates also will be high.

Correct AnswerverifiedShow Answer

Which of the following is true when a government is strongly committed to controlling the rate of growth in money?

Correct AnswerverifiedShow Answer

_____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Correct AnswerverifiedShow Answer

How are spot exchange rates determined?

Correct AnswerverifiedShow Answer

In terms of foreign exchange,which of the following is true of leading and lagging strategies?

Correct AnswerverifiedShow Answer

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

Correct AnswerverifiedShow Answer

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately?

Correct AnswerverifiedShow Answer

Which of the following is a key feature of the foreign exchange market?

Correct AnswerverifiedShow Answer

For price discrimination to work,arbitrage opportunities must be unlimited.

Correct AnswerverifiedShow Answer

Correct Answer
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Purchasing power parity (PPP)theory and ...
View Answer

Correct Answer
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A firm needs to develop a mechanism for ...
View Answer

Correct Answer
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When two parties agree to exchange curre...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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