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Exam 10: The Foreign Exchange Market

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Question 61

Multiple Choice

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A(n) ________ has no impediments to the free flow of goods and services, such as trade barriers.

A) economic union
B) currency board
C) efficient market
D) carry trade
E) European Monetary System

F) A) and E)
G) A) and D)

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Question 62

Multiple Choice

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The purchasing power parity puzzle represents the failure to find a strong link between relative inflation rates and

A) trade agreements.
B) entrepreneurial activity.
C) exchange rate movements.
D) the bandwagon effect.
E) monopolistic competition.

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

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Question 63

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Assume that 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.

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

Kristin was shopping in New York last week and saw a Coach purse for $210. When she returned to London, she saw that same purse for £105. She knew that the exchange rate was one pound for every two dollars. Her shopping experience demonstrates

Steven converted $1,000 to ¥105,000 for a trip to Japan. However, he spent only ¥50,000. During this period, the value of the dollar weakened against the yen. Using a current exchange rate of $1 = ¥100, how many dollars does Steven have left?

Explain the concepts of transaction exposure and translation exposure.

What is meant by economic exposure?

Although a foreign exchange transaction can involve any two currencies, most transactions involve U.S. dollars on one side.

One reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately is because it

Rhonda tells Kevin that he will receive 0.86 euro for every U.S. dollar he wants to convert. Rhonda is referring to

FutureForm, a U.S. company, imports microprocessors from Japan. The company must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the company must pay the Japanese supplier ¥150,000 for each microprocessor at the current dollar/yen spot exchange rate of $1 = ¥110. FutureForm intends to resell the microprocessors the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until these have been sold. What will happen if the exchange rate after 30 days is $1 = ¥90?

The currency in a small Asian nation is depreciating rapidly in value. As a result, residents of the country and foreign businesses with an interest in the country are converting their currency into U.S. dollars. This is an example of

Briefly explain the difference between freely convertible, externally convertible, and nonconvertible currency.

Jasper Corp. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. What is the outcome of this transaction?