Question 1

Last week, Saturn Tide a U.S.-based energy firm, entered into an agreement with another party to exchange currency and execute the deal in eighteen months. What is Saturn Tide using to insure itself against foreign exchange risk?

Accepted Answer

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

Question 2

In economic terms, interest rate levels reflect future inflation rates.

Accepted Answer

A) True 
 B)False

Question 3

A(n)  ________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Accepted Answer

A)   forward exchange
B)   spot exchange
C)   carry trade
D)   currency swap
E)   arbitrageF) A) and E)
G) All of the above

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The law of one price states that

Accepted Answer

A)   by comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient.
B)   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) .
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 when their price is expressed in terms of the same currency.F) A) and D)
G) A) and C)

Question 6

Define the foreign exchange market and provide an example of when a consumer would use the exchange rate to make a purchase.

Accepted Answer

Student examples will vary. When a touri...

Question 7

According to purchasing power parity (PPP)  theory, the price of a "basket of goods" should be

Accepted Answer

A)   the sum of the required "real" rate of interest.
B)   unchangeable based on the forward exchange rate.
C)   roughly equivalent in each country in relatively efficient markets.
D)   discounted to reflect trade barriers.
E)   focused strictly on consumer and not industrial goods.F) A) and B)
G) A) and E)

Question 8

What is meant by a currency swap?

Accepted Answer

A currency swap is the simultaneous purc...

Question 9

Assume that the interest rate on borrowings in Japan is 3 percent while the interest rate on bank deposits in a U.S. bank is 5 percent. Laura, an active currency trader, borrows in Japanese yen, converts the money into U.S. dollars and deposits it in a U.S. bank. Laura is engaging in

Accepted Answer

A)   countertrading.
B)   hedging.
C)   currency swap.
D)   arbitrage.
E)   carry trade.F) B) and E)
G) A) and C)

Question 10

Residents of a South American country are not allowed to convert their currency into other currencies. However, all foreign businesses with deposits in banks there may, at any time, convert all their currency into foreign currency and take it out of the country. The currency in this country is

Accepted Answer

A)   leading.
B)   nonconvertible.
C)   externally convertible.
D)   freely convertible.
E)   lagging.F) B) and C)
G) A) and E)

Question 11

World Auto Group, based in California, buys component parts from Indonesia. The Indonesian company must be paid in rupiah. World Auto Group will rely on ________ to convert dollars to rupiah.

Accepted Answer

A)   local content regulations
B)   the foreign exchange market
C)   a greenfield investment
D)   an acquisition agreement
E)   arbitrationF) B) and C)
G) None of the above

Question 12

Gold Brands is the industry leader in golf equipment and not only has a degree of pricing power amongst its competition but also sets different prices in different markets based on demand conditions. Gold Brands is practicing

Accepted Answer

A)   price discrimination.
B)   premium pricing.
C)   psychological pricing.
D)   price skimming.
E)   price leadership.F) A) and E)
G) B) and E)

Question 13

The ________ is a variable used in exchange rate forecasting models based on fundamental analysis.

Accepted Answer

A)   PPP index
B)   moving average
C)   inflation rate
D)   business cycle
E)   regression rateF) C) and E)
G) A) and E)

Question 14

One function of the foreign exchange market is to

Accepted Answer

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

Question 15

What happens to the value of money when hyperinflation exists?

Accepted Answer

A)   Money loses value very rapidly.
B)   Foreign currency is valued against the U.S. dollar.
C)   The value of all currency increases faster than gross national income.
D)   There are more goods to purchase and it costs less to buy them.
E)   All currency continues to be valued at the same amount across trade channels.F) A) and E)
G) A) and D)

Question 16

Countertrade is defined as

Accepted Answer

A)   a 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)   a range of barter-like agreements by which goods and services can be exchanged for other goods and services.F) D) and E)
G) C) and D)

Question 17

A lag strategy involves

Accepted Answer

A)   delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.
B)   delaying the collection of foreign currency receivables when a foreign currency is expected to depreciate.
C)   attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate.
D)   paying foreign currency payables (to suppliers)  before they are due when a currency is expected to appreciate.
E)   paying foreign currency payables (to suppliers)  before they are due when a currency is expected to depreciate.F) A) and B)
G) C) and D)

Question 18

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 19

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. What 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.F) A) and E)
G) A) and C)

Question 20

When discussing exchange rate forecasting, the inefficient market school of thought would agree that

Accepted Answer

A)   forward exchange rates are the best possible predictors of future spot exchange rates.
B)   forward exchange rates represent market participants' collective predictions of likely spot exchange rates.
C)   companies cannot beat the markets because forward rates reflect all available information about likely future changes in exchange rates.
D)   investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates.
E)   the foreign exchange market is efficient at setting forward rates, which are unbiased predictors of future spot rates.F) A) and E)
G) B) and D)

Exam 10: The Foreign Exchange Market

Residents of a South American country are not allowed to convert their currency into other currencies. However, all foreign businesses with deposits in banks there may, at any time, convert all their currency into foreign currency and take it out of the country. The currency in this country is

Correct AnswerverifiedShow Answer

World Auto Group, based in California, buys component parts from Indonesia. The Indonesian company must be paid in rupiah. World Auto Group will rely on ________ to convert dollars to rupiah.

Correct AnswerverifiedShow Answer

One function of the foreign exchange market is to

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What is meant by a currency swap?

Correct AnswerverifiedA currency swap is the simultaneous purc...View AnswerShow Answer

The law of one price states that

Correct AnswerverifiedShow Answer

Last week, Saturn Tide a U.S.-based energy firm, entered into an agreement with another party to exchange currency and execute the deal in eighteen months. What is Saturn Tide using to insure itself against foreign exchange risk?

Correct AnswerverifiedShow Answer

What happens to the value of money when hyperinflation exists?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A(n) ________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Correct AnswerverifiedShow Answer

Assume that the interest rate on borrowings in Japan is 3 percent while the interest rate on bank deposits in a U.S. bank is 5 percent. Laura, an active currency trader, borrows in Japanese yen, converts the money into U.S. dollars and deposits it in a U.S. bank. Laura is engaging in

Correct AnswerverifiedShow Answer

According to purchasing power parity (PPP) theory, the price of a "basket of goods" should be

Correct AnswerverifiedShow Answer

Gold Brands is the industry leader in golf equipment and not only has a degree of pricing power amongst its competition but also sets different prices in different markets based on demand conditions. Gold Brands is practicing

Correct AnswerverifiedShow Answer

The ________ is a variable used in exchange rate forecasting models based on fundamental analysis.

Correct AnswerverifiedShow Answer

Define the foreign exchange market and provide an example of when a consumer would use the exchange rate to make a purchase.

Correct AnswerverifiedStudent examples will vary. When a touri...View AnswerShow Answer

In economic terms, interest rate levels reflect future inflation rates.

Correct AnswerverifiedShow Answer

A lag strategy involves

Correct AnswerverifiedShow Answer

When discussing exchange rate forecasting, the inefficient market school of thought would agree that

Correct AnswerverifiedShow Answer

Countertrade is defined as

Correct AnswerverifiedShow Answer

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A currency swap is the simultaneous purc...
View Answer

Correct Answer
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Student examples will vary. When a touri...
View Answer

Correct Answer
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Correct Answer
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