Chapter 9 - BUS5 187

What happens when restrictions on external convertibility are imposed?

Domestic companies' ability to invest abroad will be limited.

________blank arises from volatile changes in exchange rates.

Foreign exchange risk

________blank is one in which prices do not reflect all available information

Inefficient market

Identify the correct statement about the PPP theory.

It predicts that exchange rates are determined by relative prices.

________blank uses price and volume data to determine past trends, which are expected to continue into the future.

Technical analysis

The foreign exchange market is

characterized as the market that never sleeps.

A key feature of a(n) ________blank is that it allows the entity conducting the transaction to do so without incurring foreign exchange risk.

currency swap

The ________blank helps consumers compare the relative prices of goods and services in different countries.

exchange rate

Carry trade is non speculative in nature

fa;se

The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

false

There are many impediments to the free flow of goods and services in an efficient market.

false

The ________blank is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.

foreign exchange market

The ________blank states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

law of one price

An exchange rate of €1 = $1.30 indicates that

one euro buys 1.30 dollars.

The ________blank suggests that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country.

purchasing power parity theory

Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be

roughly equivalent in each country.

Milo is traveling to Ireland on vacation. When he arrives, he goes to a bank to convert his U.S. dollars into the local currency—the euro. What exchange rate will be used to handle this transaction?

spot exchange rate

The purchasing power parity puzzle is best described as

the failure to find a strong link between relative inflation rates and exchange rate movements.

Why do governments limit currency convertibility?

to preserve foreign exchange reserves

A currency swap deal enables companies to insure themselves against foreign exchange risk.

true

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable, and vice versa, due to currency volatility and fluctuations

true

The International Fisher Effect states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

true

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

true

_______blank is used by international businesses and their banks to move out of one currency and into another for a limited period without incurring foreign exchange risk.

A currency swap

Assume that the current exchange rate is €1 = $1.50. If you exchange 1,000 euros for dollars, you will receive

$1,500.