Question 1

The euro/dollar exchange rate is €1 = $1.20. If it costs $36 to buy a European product, the stated price of the product would be €36.

Accepted Answer

A) True 
 B)False

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)  They involve accelerating payments from strong-currency to weak-currency countries.
E)  They are limited by governments because they create pressure on strong currencies.

Question 3

The Fisher effect states that:

Accepted Answer

A)  a country's "nominal" interest rate (i)  is the sum of the required "real" rate of interest (r)  and the expected rate of inflation over the period for which the funds are to be lent (I) .
B)  by comparing the prices of identical products in different currencies, it is possible to determine the "real" or purchasing power parity exchange rate that would exist if markets were efficient.
C)  a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower.
D)  when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled.
E)  in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price.

Question 4

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Accepted Answer

A) True 
 B)False

Question 5

How is a country's currency referred to 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)  Lagging

Question 6

Which of the following is a function of the foreign exchange market?

Accepted Answer

A)  To provide some insurance against foreign exchange risk
B)  To protect short-term cash flow from adverse changes in exchange rates
C)  To eliminate volatile changes in exchange rates
D)  To reduce the economic exposure of a firm
E)  To enable companies to engage in capital flight when countertrade is not possible

Question 7

In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate. The average price of a Big Mac in the United States is $3.58. This suggests that the Korean won is overvalued against the U.S. dollar.

Accepted Answer

A) True 
 B)False

Question 8

A common kind of currency swap is spot against forward.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is true of a country that is running a deficit on a balance-of-payments current account?

Accepted Answer

A)  It is importing fewer goods and services than it is exporting.
B)  It may result in depreciation of the country's currency on the foreign exchange market.
C)  It will lead to very low interest rates in the country.
D)  It will lead to a shortage of the country's currency in the foreign exchange market.
E)  It is engaging in neo-mercantilism.

Question 10

Differentiate between spot exchange rates and forward exchange rates.

Accepted Answer

When two parties agree to exchange curre...

Question 11

Which of the following is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months?

Accepted Answer

A)  Purchasing power parity
B)  Transaction exposure
C)  Economic exposure
D)  Translation exposure
E)  Currency speculation

Question 12

Which of the following refers to the bandwagon effect?

Accepted Answer

A)  Securities are purchased in one market for immediate resale in another.
B)  Dominant enterprises exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions.
C)  Traders move like a herd, all in the same direction and at the same time, in response to each other's perceived actions.
D)  Governments routinely intervene in international trade, creating tariff and nontariff barriers to cross-border trade.
E)  The output of goods and services grows at a lesser rate than that of the money supply.

Question 13

What is the Fisher effect?

Accepted Answer

Economic theory tells us that interest r...

Question 14

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

Accepted Answer

A)  The dollar will depreciate against the euro.
B)  The market is undecided about the direction of currency movement.
C)  The dollar will appreciate against the euro.
D)  The dollar/euro exchange rate will be steady.
E)  The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.

Question 15

Which of the following observations is true of technical analysis, an approach to exchange rate forecasting?

Accepted Answer

A)  It draws on economic theory to construct models for predicting exchange rate movements.
B)  The variables contained in this model typically include relative money supply growth rates, inflation rates, and interest rates.
C)  There is a sound theoretical rationale for the assumption of predictability underlying this approach.
D)  Owing to its drawbacks, this approach has declined in importance over the last few years, giving way to fundamental analysis.
E)  It does not rely on a consideration of economic fundamentals.

Question 16

Which of the following 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 swap

Question 17

Explain the concepts of transaction exposure and translation exposure.

Accepted Answer

Foreign exchange risk is usually divided...

Question 18

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 19

Explain the concept of economic exposure. How is it different from transaction exposure?

Accepted Answer

Foreign exchange risk is usually divided...

Question 20

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.

Exam 10: The Foreign Exchange Market

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Correct AnswerverifiedShow Answer

Explain the concepts of transaction exposure and translation exposure.

Correct AnswerverifiedForeign exchange risk is usually divided...View AnswerShow Answer

Which of the following is true of a country that is running a deficit on a balance-of-payments current account?

Correct AnswerverifiedShow Answer

Which of the following is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months?

Correct AnswerverifiedShow Answer

A common kind of currency swap is spot against forward.

Correct AnswerverifiedShow Answer

What is the Fisher effect?

Correct AnswerverifiedEconomic theory tells us that interest r...View AnswerShow Answer

In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate. The average price of a Big Mac in the United States is $3.58. This suggests that the Korean won is overvalued against the U.S. dollar.

Correct AnswerverifiedShow Answer

Which of the following refers to the bandwagon effect?

Correct AnswerverifiedShow Answer

Which of the following observations is true of technical analysis, an approach to exchange rate forecasting?

Correct AnswerverifiedShow Answer

Which of the following occurs when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency?

Correct AnswerverifiedShow Answer

Which of the following is a function of the foreign exchange market?

Correct AnswerverifiedShow Answer

Explain the concept of economic exposure. How is it different from transaction exposure?

Correct AnswerverifiedForeign exchange risk is usually divided...View AnswerShow 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

Differentiate between spot exchange rates and forward exchange rates.

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

The Fisher effect states that:

Correct AnswerverifiedShow Answer

How is a country's currency referred to when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it?

Correct AnswerverifiedShow Answer

The euro/dollar exchange rate is €1 = $1.20. If it costs $36 to buy a European product, the stated price of the product would be €36.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Foreign exchange risk is usually divided...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Economic theory tells us that interest r...
View Answer

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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Foreign exchange risk is usually divided...
View Answer

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

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

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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