Question 1

The _____ school of thought argues that forward exchange rates do the best possible job of forecasting future spot exchange rates,and,therefore,investing in forecasting services would be a waste of money.

Accepted Answer

A)  efficient market
B)  inefficient market
C)  quantitative
D)  qualitativeE) All of the above
F) A) and B)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Theoretically,a country in which price inflation is very high should expect to see its currency depreciate against that of countries in which inflation rates are lower.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is concerned with the long-run effect of changes in exchange rates on future prices,sales,and costs?

Accepted Answer

A)  Income exposure
B)  Transaction exposure
C)  Economic exposure
D)  Translation exposureE) All of the above
F) A) and D)

Question 5

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 6

Which of the following uses price and volume data to determine past trends,which are expected to continue into the future?

Accepted Answer

A)  Technical analysis
B)  SWOT analysis
C)  Variable analysis
D)  Fundamental analysisE) All of the above
F) B) and C)

Question 7

Although the foreign exchange market offers some insurance against foreign exchange risk,it cannot provide complete insurance.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following observations is true of leading and lagging strategies?

Accepted Answer

A)  They involve delaying inflows from weak-currency to strong-currency countries.
B)  They are used to maximize foreign exchange exposure of companies.
C)  They can help firms minimize their transaction and translation exposure.
D)  The involve accelerating payments from strong-currency to weak-currency countries.E) A) and B)
F) B) and D)

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

In countries where inflation is expected to be high,interest rates also will be high,because investors want compensation for the decline in the value of their money.This relationship is referred to as the:

Accepted Answer

A)  interest rate paradox.
B)  Tobin effect.
C)  Fisher effect.
D)  Domino effect.E) All of the above
F) C) and D)

Question 11

If the foreign exchange market is efficient,forward exchange rates should be unbiased predictors of future spot rates.This means that;

Accepted Answer

A)  the predictions will be accurate in any specific situation.
B)  inaccuracies will not be consistently above or below future spot rates;they will be random.
C)  more accurate predictions of future spot rates can be calculated from publicly available information.
D)  market participants' collective predictions about future spot rates cannot be incorrect.E) All of the above
F) C) and D)

Question 12

A dealer wishes to sell Thai baht for Brazilian real.Which "third" currency is most likely to appear in this transaction?

Accepted Answer

A)  Euro
B)  Japanese yen
C)  British pound
D)  U.S.dollarE) None of the above
F) All of the above

Question 13

Assume that the currency of Country A falls sharply in value against the currency of Country B. This exchange rate movement will boost Country B's exports to Country A.

Accepted Answer

A) True 
 B)False

Question 14

If a basket of goods costs $100 in the United States and €120 in Europe,PPP theory predicts that the dollar/euro exchange rate should be:

Accepted Answer

A)  $1 = €1.20.
B)  $1 = €1.
C)  $1 = €0.87.
D)  $1 = €0.83.E) None of the above
F) A) and B)

Question 15

When a German tourist in Seoul goes to a bank to convert her euros into Korean wons,the exchange rate used is the spot exchange rate for that day.

Accepted Answer

A) True 
 B)False

Question 16

A _____ 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)  contrarian tradeE) B) and C)
F) A) and B)

Question 17

Spot exchange rates and the 30-day forward rates are usually the same.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following will organizations have to resort to in order to conduct international trade in the absence of the foreign exchange market?

Accepted Answer

A)  Barter system
B)  Spot market
C)  Silver standard
D)  Stock marketE) All of the above
F) A) and D)

Question 19

Explain the concepts of (1) transaction exposure and (2) translation exposure.

Accepted Answer

Transaction exposure is the extent to wh...

Question 20

Let P$ be the U.S.dollar price of a basket of particular goods and P ×	imes×  be the price of the same basket of goods in Japanese yen.The PPP theory predicts that the dollar/yen exchange rate,E$/ ×	imes× ,should be equivalent to:

Accepted Answer

A)  (1+P ×	imes× ) /P$.
B)  (1 + P$) /P ×	imes× .
C)  P ×	imes× /P$.
D)  P$/P ×	imes× . E) None of the above
F) A) and C)

Exam 9: The Foreign Exchange Market

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

Correct AnswerverifiedShow Answer

The _____ school of thought argues that forward exchange rates do the best possible job of forecasting future spot exchange rates,and,therefore,investing in forecasting services would be a waste of money.

Correct AnswerverifiedShow Answer

Which of the following will organizations have to resort to in order to conduct international trade in the absence of the foreign exchange market?

Correct AnswerverifiedShow Answer

Which of the following is concerned with the long-run effect of changes in exchange rates on future prices,sales,and costs?

Correct AnswerverifiedShow Answer

In countries where inflation is expected to be high,interest rates also will be high,because investors want compensation for the decline in the value of their money.This relationship is referred to as the:

Correct AnswerverifiedShow Answer

A dealer wishes to sell Thai baht for Brazilian real.Which "third" currency is most likely to appear in this transaction?

Correct AnswerverifiedShow Answer

Theoretically,a country in which price inflation is very high should expect to see its currency depreciate against that of countries in which inflation rates are lower.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following uses price and volume data to determine past trends,which are expected to continue into the future?

Correct AnswerverifiedShow Answer

Assume that the currency of Country A falls sharply in value against the currency of Country B. This exchange rate movement will boost Country B's exports to Country A.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If a basket of goods costs $100 in the United States and €120 in Europe,PPP theory predicts that the dollar/euro exchange rate should be:

Correct AnswerverifiedShow Answer

Explain the concepts of (1) transaction exposure and (2) translation exposure.

Correct AnswerverifiedTransaction exposure is the extent to wh...View AnswerShow Answer

If the foreign exchange market is efficient,forward exchange rates should be unbiased predictors of future spot rates.This means that;

Correct AnswerverifiedShow Answer

Let P$ be the U.S.dollar price of a basket of particular goods and P ×\times× be the price of the same basket of goods in Japanese yen.The PPP theory predicts that the dollar/yen exchange rate,E$/ ×\times× ,should be equivalent to:

Correct AnswerverifiedShow Answer

Spot exchange rates and the 30-day forward rates are usually the same.

Correct AnswerverifiedShow Answer

When a German tourist in Seoul goes to a bank to convert her euros into Korean wons,the exchange rate used is the spot exchange rate for that day.

Correct AnswerverifiedShow Answer

Which of the following observations is true of leading and lagging strategies?

Correct AnswerverifiedShow Answer

Although the foreign exchange market offers some insurance against foreign exchange risk,it cannot provide complete insurance.

Correct AnswerverifiedShow Answer

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

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Transaction exposure is the extent to wh...
View Answer

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Let P$ be the U.S.dollar price of a basket of particular goods and P $\times$ be the price of the same basket of goods in Japanese yen.The PPP theory predicts that the dollar/yen exchange rate,E_{$/ $\times$},should be equivalent to:

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