Question 1

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 4 percent. Carlos, an active currency trader, borrows in Indian rupees, converts the money into U.S. dollars and deposits it in a U.S. bank. What is the speculative element of this carry trade?

Accepted Answer

A)   There will be no adverse movement in exchange rates or interest rates.
B)   Liquidity is the key factor in determining interest rates.
C)   Increasing money supply will not drive inflation.
D)   Spot exchange rates are more favorable than forward exchange rates.
E)   Hedging insures a company against foreign exchange risks.F) C) and E)
G) All of the above

Question 2

An efficient market exists when countries enact tariff barriers to minimize imports.

Accepted Answer

A) True 
 B)False

Question 3

London is able to dominate in the foreign exchange market because of its

Accepted Answer

A)   conversion to the euro.
B)   government.
C)   location.
D)   class system.
E)   free trade policy.F) A) and B)
G) C) and D)

Question 4

In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 5

Economic exposure is concerned with long-run effects on future prices, sales, and costs caused by changes in exchange rates.

Accepted Answer

A) True 
 B)False

Question 6

In theory, if inflation is at an all-time high in the United States, then its currency will

Accepted Answer

A)   increase in value when trading with countries in a political union.
B)   appreciate against that of other countries where inflation is lower.
C)   not be affected.
D)   depreciate against that of other countries where inflation is lower.
E)   increase faster than the money supply.F) D) and E)
G) A) and E)

Question 7

Currency speculation takes place when

Accepted Answer

A)   there is 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 differs on a particular day.
C)   there is a simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
D)   the purchase of securities in one market are immediately resold in another to profit from a price discrepancy.
E)   the growth in a country's money supply exceeds the growth in its output, leading to price inflation.F) B) and C)
G) B) and E)

Question 8

What is one way an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Accepted Answer

A)   price its products identically despite huge differences in demand across different markets
B)   differentiate otherwise identical products among nations along some line, such as design or packaging
C)   adopt a pricing strategy that matches what competitors charge in each of the different national markets
D)   limit sales of its products to only a few nations
E)   sell its products at higher prices than normal to break even by selling fewer unitsF) A) and B)
G) A) and C)

Question 9

Describe the difference between fundamental analysis and technical analysis in forecasting exchange rate movements.

Accepted Answer

Assuming the inefficient market school i...

Question 10

A(n)  ________ is used to move out of one currency and 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) D) and E)
G) All of the above

Question 11

Shantal saw a Hermes scarf at the Amsterdam airport when she was catching a flight back home to New York. She noticed that the scarf sold for 100 euros. Assume that the euro/dollar exchange rate is €1 = $1.20. According to the law of one price, at what price would it make sense to buy the scarf in New York?

Accepted Answer

A)   $150
B)   $140
C)   $120
D)   $105
E)   $100F) D) and E)
G) A) and C)

Question 12

________ draw(s)  on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Accepted Answer

A)   Technical analysis
B)   Purchasing power parity
C)   The Sullivan principles
D)   Fundamental analysis
E)   The Treaty of LisbonF) C) and E)
G) A) and E)

Question 13

Describe spot exchange rates and how they affect consumers.

Accepted Answer

When two parties agree to exchange curre...

Question 14

When Lila was planning her visit to Japan, she learned that the 30-day forward exchange rate was $1 = ¥130, which meant that $1 would buy more yen with a forward exchange than a spot exchange. In other words, the dollar was selling at a ________ on the 30-day forward market.

Accepted Answer

A)   discount
B)   constant
C)   command
D)   premium
E)   deficitF) B) and D)
G) C) and D)

Question 15

A country's currency is referred to as ________ when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

Accepted Answer

A)   externally convertible
B)   nonconvertible
C)   leading
D)   freely convertible
E)   laggingF) A) and E)
G) A) and D)

Question 16

Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Accepted Answer

A) True 
 B)False

Question 17

The foreign exchange market is the primary vehicle used to minimize monopolies within a marketplace.

Accepted Answer

A) True 
 B)False

Question 18

When companies wish to convert currencies, they typically do so through a bank.

Accepted Answer

A) True 
 B)False

Question 19

The Brazilian government decided to analyze price and volume data to determine past trends in exchange rate movements for the country. What approach does this represent?

Accepted Answer

A)   technical analysis
B)   PPP index
C)   efficient market
D)   fundamental analysis
E)   inefficient marketF) A) and B)
G) A) and C)

Question 20

The ________ 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.

Accepted Answer

A)   bandwagon effect
B)   law of one price
C)   international Fisher effect
D)   Helms-Burton Act
E)   purchasing power parity (PPP)  theoryF) A) and E)
G) B) and D)

Exam 10: The Foreign Exchange Market

An efficient market exists when countries enact tariff barriers to minimize imports.

Correct Answer
verified

Economic exposure is concerned with long-run effects on future prices, sales, and costs caused by changes in exchange rates.

Correct Answer
verified

Correct Answer
verified

In theory, if inflation is at an all-time high in the United States, then its currency will

Correct Answer
verified

When Lila was planning her visit to Japan, she learned that the 30-day forward exchange rate was $1 = ¥130, which meant that $1 would buy more yen with a forward exchange than a spot exchange. In other words, the dollar was selling at a ________ on the 30-day forward market.

Correct Answer
verified

Currency speculation takes place when

Correct Answer
verified

The ________ 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.

Correct Answer
verified

In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Correct Answer
verified

When companies wish to convert currencies, they typically do so through a bank.

Correct Answer
verified

Describe spot exchange rates and how they affect consumers.

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

What is one way an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Correct Answer
verified

The Brazilian government decided to analyze price and volume data to determine past trends in exchange rate movements for the country. What approach does this represent?

Correct Answer
verified

London is able to dominate in the foreign exchange market because of its

Correct Answer
verified

A(n) ________ is used to move out of one currency and into another for a limited period without incurring foreign exchange risk.

Correct Answer
verified

A country's currency is referred to as ________ when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

Correct Answer
verified

Describe the difference between fundamental analysis and technical analysis in forecasting exchange rate movements.

Correct Answer
verified
Assuming the inefficient market school i...
View Answer

________ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Correct Answer
verified

The foreign exchange market is the primary vehicle used to minimize monopolies within a marketplace.

Correct Answer
verified

Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Correct Answer
verified

Correct Answer
verified

Exam 10: The Foreign Exchange Market

An efficient market exists when countries enact tariff barriers to minimize imports.

Correct AnswerverifiedShow Answer

Economic exposure is concerned with long-run effects on future prices, sales, and costs caused by changes in exchange rates.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In theory, if inflation is at an all-time high in the United States, then its currency will

Correct AnswerverifiedShow Answer

When Lila was planning her visit to Japan, she learned that the 30-day forward exchange rate was $1 = ¥130, which meant that $1 would buy more yen with a forward exchange than a spot exchange. In other words, the dollar was selling at a ________ on the 30-day forward market.

Correct AnswerverifiedShow Answer

Currency speculation takes place when

Correct AnswerverifiedShow Answer

The ________ 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.

Correct AnswerverifiedShow Answer

In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Correct AnswerverifiedShow Answer

When companies wish to convert currencies, they typically do so through a bank.

Correct AnswerverifiedShow Answer

Describe spot exchange rates and how they affect consumers.

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

What is one way an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Correct AnswerverifiedShow Answer

The Brazilian government decided to analyze price and volume data to determine past trends in exchange rate movements for the country. What approach does this represent?

Correct AnswerverifiedShow Answer

London is able to dominate in the foreign exchange market because of its

Correct AnswerverifiedShow Answer

A(n) ________ is used to move out of one currency and into another for a limited period without incurring foreign exchange risk.

Correct AnswerverifiedShow Answer

A country's currency is referred to as ________ when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

Correct AnswerverifiedShow Answer

Describe the difference between fundamental analysis and technical analysis in forecasting exchange rate movements.

Correct AnswerverifiedAssuming the inefficient market school i...View AnswerShow Answer

________ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Correct AnswerverifiedShow Answer

The foreign exchange market is the primary vehicle used to minimize monopolies within a marketplace.

Correct AnswerverifiedShow Answer

Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
verified
Assuming the inefficient market school i...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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