Question 1

Which of the following is a reason why governments limit convertibility of their currency?

Accepted Answer

A)  to encourage foreign investments
B)  to control currency appreciation
C)  to encourage capital flight
D)  to preserve their foreign exchange reserves
E)  to promote neo-mercantilismF) C) and E)
G) B) and E)

Question 2

Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market?

Accepted Answer

A)  The spot exchange rate is currently $1 = ×120 and changes to $1 = ×130 after 30 days.
B)  The spot exchange rate is currently $1 = ×120 and changes to $1 = ×110 after 30 days.
C)  The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×110 after 30 days.
D)  The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×130 after 30 days.
E)  The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×120.F) A) and E)
G) B) and C)

Question 3

Technical analysis,an approach to foreign exchange forecasting,does not rely on a consideration of economic fundamentals.

Accepted Answer

A) True 
 B)False

Question 4

If a basket of goods costs $100 in the United States and €120 in Europe,what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be?

Accepted Answer

A)  $1 = €1.20
B)  $1 = €1
C)  $1 = €0.80
D)  $1 = €0.90
E)  $1 = €1.10F) A) and D)
G) A) and E)

Question 5

In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $3.98 at the prevailing won/dollar exchange rate.The average price of a Big Mac in the United States is $4.93.This suggests that the Korean won is overvalued against the U.S.dollar.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is a step taken to manage foreign exchange risk?

Accepted Answer

A)  Firms should focus solely on managing transaction and translation exposures.
B)  Forecasting future exchange rate movements should be avoided as it is speculative.
C)  Firms need to develop strategies for dealing with economic exposure.
D)  Firms should avoid central control of exposure.
E)  Firms should not distinguish between transaction and translation exposure and economic exposure.F) C) and D)
G) B) and C)

Question 7

What can happen if a country's government does not control the rate of growth in money supply?

Accepted Answer

A)  Its future inflation rate will be low.
B)  Its taxes will decrease in the future.
C)  It will see reduced spending on public infrastructure projects.
D)  Its currency could depreciate in the future.
E)  Its output of goods and services will exceed money supply,thereby fueling deflation.F) A) and D)
G) A) and E)

Question 8

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.F) None of the above
G) B) and D)

Question 9

When a firm enters into a spot exchange contract,it is taking out insurance against adverse future exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 10

Omega,Inc.,a U.S.-based firm entered into an agreement with another party to exchange currency and execute the deal at a specific date in the future.What is Omega,Inc.engaging in when it insures itself against foreign exchange risk?

Accepted Answer

A)  currency speculation
B)  carry trade
C)  hedging
D)  currency swap
E)  arbitrageF) A) and E)
G) C) and E)

Question 11

Which of the following foreign exchange trading centers has the highest percentage of activity?

Accepted Answer

A)  Frankfurt
B)  London
C)  Paris
D)  Hong Kong
E)  SydneyF) A) and D)
G) A) and C)

Question 12

Which of the following enables organizations to conduct international trade without having to resort to barter?

Accepted Answer

A)  foreign exchange market
B)  Caribbean Single Market and Economy
C)  auction market
D)  countertrade
E)  balance-of-trade equilibriumF) B) and C)
G) A) and E)

Question 13

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.F) A) and D)
G) A) and C)

Question 14

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) B) and C)
G) C) and D)

Question 15

Companies can deal with the problem of nonconvertibility of currency by engaging in

Accepted Answer

A)  price discrimination.
B)  countertrade.
C)  arbitrage.
D)  price skimming.
E)  currency speculation.F) C) and D)
G) B) and E)

Question 16

The currency of the country of Venadia falls sharply in value against the currency of Lutetia,a neighboring country.Which of the following is a consequence of this exchange rate movement?

Accepted Answer

A)  Lutetia's products will achieve a competitive pricing in Venadia.
B)  Venadia's exports to Lutetia will increase,because Venadian goods will become cheaper in Lutetia.
C)  Venadia's products will cost more in Lutetia.
D)  There will be no difference in the volume or direction of trade.
E)  Lutetia's exports to Venadia will increase,because Lutetian goods will become cheaper in Venadia.F) B) and E)
G) A) and E)

Question 17

Describe the factors that explain the failure of the purchasing power parity theory to predict exchange rates accurately.

Accepted Answer

Several factors explain the failure of P...

Question 18

Assume that the exchange rate between the British pound and the U.S.dollar is 1 pound = 2 dollars.An Armani jacket sells for $80 in New York and 40 pounds in London.This is an example of

Accepted Answer

A)  hedging
B)  arbitrage.
C)  currency swap.
D)  exchange rate risk.
E)  the law of one price.F) None of the above
G) A) and D)

Question 19

_____ is concerned with the present measurement of past events.

Accepted Answer

A)  Economic exposure
B)  Transaction exposure
C)  Arbitrage
D)  Translation exposure
E)  Currency speculationF) A) and E)
G) B) and E)

Question 20

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

Accepted Answer

A)  externally convertible
B)  nonconvertible
C)  leading
D)  freely convertible
E)  laggingF) All of the above
G) B) and C)

Exam 10: The Foreign Exchange Market

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

Correct AnswerverifiedShow Answer

Omega,Inc.,a U.S.-based firm entered into an agreement with another party to exchange currency and execute the deal at a specific date in the future.What is Omega,Inc.engaging in when it insures itself against foreign exchange risk?

Correct AnswerverifiedShow Answer

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

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

_____ is concerned with the present measurement of past events.

Correct AnswerverifiedShow Answer

What can happen if a country's government does not control the rate of growth in money supply?

Correct AnswerverifiedShow Answer

The currency of the country of Venadia falls sharply in value against the currency of Lutetia,a neighboring country.Which of the following is a consequence of this exchange rate movement?

Correct AnswerverifiedShow Answer

Which of the following foreign exchange trading centers has the highest percentage of activity?

Correct AnswerverifiedShow Answer

Which of the following is a reason why governments limit convertibility of their currency?

Correct AnswerverifiedShow Answer

Describe the factors that explain the failure of the purchasing power parity theory to predict exchange rates accurately.

Correct AnswerverifiedSeveral factors explain the failure of P...View AnswerShow Answer

When a firm enters into a spot exchange contract,it is taking out insurance against adverse future exchange rate movements.

Correct AnswerverifiedShow Answer

Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market?

Correct AnswerverifiedShow Answer

In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $3.98 at the prevailing won/dollar exchange rate.The average price of a Big Mac in the United States is $4.93.This suggests that the Korean won is overvalued against the U.S.dollar.

Correct AnswerverifiedShow Answer

Companies can deal with the problem of nonconvertibility of currency by engaging in

Correct AnswerverifiedShow Answer

Which of the following enables organizations to conduct international trade without having to resort to barter?

Correct AnswerverifiedShow Answer

Which of the following is a step taken to manage foreign exchange risk?

Correct AnswerverifiedShow Answer

Technical analysis,an approach to foreign exchange forecasting,does not rely on a consideration of economic fundamentals.

Correct AnswerverifiedShow Answer

The Fisher effect states that

Correct AnswerverifiedShow Answer

If a basket of goods costs $100 in the United States and €120 in Europe,what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be?

Correct AnswerverifiedShow Answer

Assume that the exchange rate between the British pound and the U.S.dollar is 1 pound = 2 dollars.An Armani jacket sells for $80 in New York and 40 pounds in London.This is an example of

Correct AnswerverifiedShow Answer

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Several factors explain the failure of P...
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