FIN 3604 Exam 1 Review

Which of the following statement is INCORRECT? a) If the United States imports more than it exports, then this means that the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. b) When a country's currency depreciates against the currencies of major trading partners, the country's exports tend to rise and imports fall. c) In the long run, both exports and imports tend to be unresponsive to changes in exchange rates. d) The "J-curve effect" shows the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.

c) In the long run, both exports and imports tend to be unresponsive to changes in exchange rates

Which of the following statement is FALSE? a) Bimetallism is a monetary standard or system based upon the use of two metals—traditionally gold and silver—rather than one (monometallism). b) Japan has a large official reserve account because it belongs to a floating exchange rate regime. c) The "J-curve effect" shows the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation. The "J-curve effect" shows the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation. d) When a country's currency depreciates against the currencies of major trading partners the country's exports tend to rise and imports fall. e) A country with increasing political uncertainty tends to have a weakening currency.

c) The "J-curve effect" shows the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation.

With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best characterized as _____________ .

independent floating (market determined)

If the U.S. imports more goods and services than it exports to the U.K., then U.S. manufactures are (more/less)________ competitive than the U.K. manufactures

less

Which of the following markets has the largest trading volume?

the FOREX market

Under the Bretton Woods system, ______________________.

the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold

Which of the following economies has the highest consumer spending? What does it mean for trade negotiation?

the United States

One potential drawback of the gold standard is ________________ .

the world economy can be subject to deflationary pressure due to the limited supply of monetary gold

Invisible trade refers to ________________. a) tourist expenditures, only b) legal, consulting, and engineering services c) the underground economy d) services that avoid tax payments e) imports and exports of tangible goods

b) legal, consulting, and engineering services

Assume that the balance-of-payments accounts for a country are recorded correctly. Balance on the current account = BCA = $130 billion Balance on the capital account = BKA = -$86 billion then the balance on the reserves account (BRA), under the fixed exchange regime is ________.

-$44 billion

When you hear on the news that Euro-Pound is going down, ___________ is getting weaker.

Euro

On August 31, 2020, it became known to the world Warren Buffett's Berkshire Hathaway built a slightly more than 5% stakes in each of ____________________ five biggest trading companies that engage in a vast range of international business activities, including mining, energy, food, aerospace, retail, real estate, finance, consulting, and logistics.

Japan's

The foreign exchange market closes ________

Never

The most heavily traded instrument in the FX market is ___________.

Swaps

Direct ask is the reciprocal of indirect bid.

True

Direct bid is the reciprocal of indirect ask.

True

In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves.

True

The majority of countries got off the gold standard in 1914 when ______________ .

WWI started

Which of the following may be a consequence of a STRONG currency? a) A strong home currency increases the purchasing power of domestic consumers and firms (i.e., ability to buy goods from other countries). b) A strong home currency may boost domestic employment. c) A strong home currency may lead to higher inflation. d) A strong home currency stimulates foreign demand for domestic products.

a) A strong home currency increases the purchasing power of domestic consumers and firms (i.e., ability to buy goods from other countries).

Which of the following conditions give rise to capital flight (i.e., capital outflow) from a country? a) A sudden and dramatic change in foreign investors' appetite for investing in the country. b) The country enjoys rapid economic growth and social and political stability. c) Investors can accurately assess the financial conditions of the country. d) Most of the country's capital account is in the form of direct investment, while only a small fraction is in portfolio investment.

a) A sudden and dramatic change in foreign investors' appetite for investing in the country.

Which of the following intervention efforts represents direct intervention by the U.S. government? a) To boost the value of the Canadian dollar, the Federal Reserve exchanges U.S. dollars for Canadian dollars. b) The Federal Reserve announces that it is strongly considering intervening in the foreign exchange markets. c) The U.S. government imposes restrictions on exchanging Canadian dollars for U.S. dollars. d) The Federal Reserve decreases U.S. short-term interest rates. e) The Federal Reserve increases the target for the inflation rate by two percentage points.

a) To boost the value of the Canadian dollar, the Federal Reserve exchanges U.S. dollars for Canadian dollars.

Which of the following statement is FALSE? a) To stimulate the economy, one common monetary tool is to raise interest rate. b) The dual mandate of the U.S. Federal Reserve, which sets U.S. monetary policy, is price stability and maximum sustainable employment. c) Fed fund rate is the interest rate that banks charge each other for usually overnight, large, uncollateralized loans. d) Other countries are more likely to peg its currency to a country with a much stronger, rather than weaker, economy. e) Gold and silver are frequently viewed by investors as a hedge against inflation and central bank accommodation.

a) To stimulate the economy, one common monetary tool is to raise interest rate. Incorrect. To stimulate the economy, one popular monetary tool is to cut interest rates.

Production of goods and services has become globalized to a large extent as a result of ____________. a) multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher b) natural resources being depleted in one country after another c) increasing populism around the globe d) increasing protectionism around the globe

a) multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher

The advent of the euro marks the first time that sovereign countries have voluntarily given up their ____________ . a) national debt to foster economic integration b) fiscal policy independence to foster economic integration c) monetary independence to foster economic integration

c) monetary independence to foster economic integration

Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means that ________________. a) your firm will be able to charge more in dollar terms b) your domestic competitors will enjoy a period of facing little price competition from Mexican imports c) your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall

c) your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall

Exports of goods and services are entered into balance of payments as ____________, while imports of goods and services are entered into balance of payments as ___________.

credits; debits

Hong Kong has pegged its currency—Hong Kong dollar (HKD)—to the U.S. dollar since 1983. Which of the following highlights the downside of this FX arrangement? a) The peg resulted in the replacement of the local currency with the U.S. dollar. b) The peg has helped Hong Kong attract foreign investment because the exchange rate is stable. c) The peg has allowed Hong Kong firms to engage in direct foreign investment without currency risks. d) Due to the peg, Hong Kong has imported low interest rates that the U.S. Federal Reserve has implemented since the Great Recession (2008-2009), which has led to inflated prices in the real estate market. e) Because of the peg, Hong Kong can insulate itself and its companies from risk of currency volatilities.

d) Due to the peg, Hong Kong has imported low interest rates that the U.S. Federal Reserve has implemented since the Great Recession (2008-2009), which has led to inflated prices in the real estate market.

Which of the following facilitates a country to maintain a pegged FX arrangement? a) Government's commitment to maintain the peg b) Favorable economic and political conditions c) A large FX reserve d) Consistent current account surpluses e) All of the statements are correct

e) All of these statements are correct

Which of the following represents indirect intervention? a) intervention by other public institutions b) exercise of moral suasion that constrains foreign exchange activity c) aggressive use of interest rate policy d) imposition of foreign exchange regulations e) all of the above

e) all of the above

The FX spot market _____________________________ .

involves the almost-immediate purchase or sale of foreign exchange

During the period of the classical gold standard, there were ___________________ exchange rates.

stable exchange rates

Under a purely flexible exchange rate system, _______________________________________ .

supply and demand set the exchange rates

When a currency trades at a premium in the forward market _________

the forward rate is more than the spot rate

Generally speaking, any transaction that results in a receipt from foreigners _________.

will be recorded as a credit, with a positive sign, in the U.S. balance of payments

Suppose that the current exchange rate is €0.80 = $1.00. The direct quote, from the U.S. perspective is ____________

€1.00 = $1.25

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i) - Bimetallism (ii) - Bretton Woods system (iii) - Classical gold standard (iv) - Flexible exchange rate regime (v) - Interwar period

(i), (iii), (v), (ii), and (iv)

Assume that the balance-of-payments accounts for a country are recorded correctly. Balance on the current account = BCA = $130 billionBalance on the capital account = BKA = -$86 billionthen the balance on the reserves account (BRA), under the fixed exchange regime is ________.

-$44 billion

In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves. Under this regime ____________.

-BCA=BKA

For a USD/CHF FX spot rate of 1.2389 - 1.2391, _________ is the BIG figure.

1.23

Approximately _______ percentage of products and services produced or sold by S&P 500 companies outside the U.S.

40-50%

Consider a GBP-USD bid-ask quote of $1.9072-$1.9077. The currency dealer would likely quote that as ____________.

72-77

For a USD/CHF FX spot rate of 1.2389 - 1.2391, _________ is the SMALL figure

89 and 91

Based on the following information, what is the BID price for AUD-Yen (i.e., AUD is the base currency, and Yen is the quote currency)? Yen (JPY) BID: 0.0085 Ask: 0.0088 Australian Dollar (AUD) Bid: 0.7940 Ask: 0.7945

AUD$1.00 = ¥90.2273 BID price for AUD-Yen = (Direct bid AUD-USD) *(Indirect bid USD-Yen) = (0.794)*(1/0.0088)=90.2273 Indirect bid is the reciprocal of direct ask: Indirect bid USD-Yen = 1/ direct ask Yen-USD = 1/0.0088

Based on the following information, what is the ASK price for AUD-Yen (i.e., AUD is the base currency, and Yen is the quote currency)? Yen (JPY) Bid: 0.0085 Ask: 0.0088 Australian Dollar (AUD) Bid: 0.7940 Ask: 0.7945

AUD$1.00 = ¥93.4706 ASK price for AUD-Yen = (Direct ask AUD-USD) * (Indirect ask USD-Yen) = (0.7945(*(1/0.0085)=93.4706 Indirect ask is the reciprocal of direct bid: Indirect ask USD-Yen = 1/ direct bid Yen-USD = 1/0.0085

The most important international reserve asset, comprising over 80 percent of the total reserve assets held by IMF member countries is _____________.

U.S. dollars

Which of the following statements is FALSE? a) Dealers make money by earning the bid-ask spread b) Most foreign exchange transactions take place amongst retail traders. c) The United Kingdom has the largest share of global foreign exchange trades. d) When you hear on the news that Euro-Pound is going down, Euro is getting weaker. e) The foreign exchange market is a global decentralized market.

b) Most foreign exchange transactions take place amongst retail traders. Most foreign exchange transactions are for interbank trades between international banks or nonbank dealers.

The current account includes __________________ . a) Direct investments, including buying and selling businesses, in foreign markets b) The export and import of goods and services c) All purchases and sales of assets such as stocks, bonds, bank accounts, trade credit, and real estate d) All purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs)

b) the export and import of goods and services

Which of the following foreign exchange arrangements value currencies in terms of gold? a) Smithsonian Agreement b) Jamaica Agreement c) Louvre Agreement d) Bretton Woods Agreement

d) Bretton Woods Agreement

Balance of payments _____________. a) can be used to evaluate the performance of a country in international economic competition b) is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping c) provides detailed information concerning the demand and supply of a country's currency d) all of the above

d) all of the above

Special Drawing Rights (SDR) are _________________________ . a) An artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF b) A "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of c) Used in addition to gold and foreign exchanges, to make international payments d) all of the above

d) all of the above

Which of the following is a benefit of the eurozone? a) Investors who reside in the eurozone can invest in stock in member countries without worrying about exchange rate risk. b) All consumers and businesses both inside and outside the eurozone enjoy price transparency and increased price-based competition. c) It encourages more long-term international trade arrangements between firms within the eurozone because they no longer have to worry about exposure to future foreign exchange movements. d) Firms can engage in international trade within the eurozone without incurring foreign exchange transaction costs. e) All of the statements are correct

e) All of the statements are correct

Which of the following correctly explains the potential disadvantage of a freely floating exchange rate regime? a) A freely floating exchange rate may compound a country's inflationary problem. It is because if a country experiences high levels of inflation, its currency may weaken. Higher foreign prices may force domestic consumers to buy domestic products. Recognizing that their foreign competition has been reduced by the weak home currency, domestic producers may raise prices without fearing losing customers to foreign competition, compounding the country's inflationary problem. b) A freely floating exchange rate may compound a country's inflationary problem. It is because if a country experiences high levels of inflation, its currency may weaken. A weaker currency can cause import prices to rise, which can increase the prices of materials and supplies and subsequently the price of the finished goods, compounding the country's inflationary problem. c) A freely floating exchange rate regime may adversely affect a country that has high unemployment. It is because if the unemployment rate is high, the demand for import will decrease, putting appreciation pressure on the home currency. A stronger home currency will cause domestic consumers to purchase foreign, rather than domestic products, because the foreign products are now cheaper. This reaction of domestic consumers can be detrimental to a country during periods of high unemployment d) all of the above

d) all of the above

When the U.S. exports more than it imports from the rest of the world, the ____________ for US dollar increases, leading to U.S. dollar ______________________.

demand; appreciation

Which of the following statement is FALSE? a) The potential effectiveness of a central bank's direct intervention is influenced by the amount of reserves it can use. The larger the FX reserves, the more effective the intervention is likely to be. b) Direct intervention is more likely to be effective when it is coordinated by several central banks. c) When central banks intervene in the foreign exchange market without adjusting for the change in the money supply, it is engaging in a nonsterilized intervention. d) Direct government intervention typically does not have a permanent effect on exchange rate movements. e) Direct intervention by central banks to smooth exchange rate movements are always successful

e) Direct intervention by central banks to smooth exchange rate movements are always successful

Which of the following will NOT help stabilize a country's currency exchange rate? a) Low inflation rate b) Transparent rules and laws c) Steady GDP growth rate d) Stable interest rate e) Persistent current account deficit

e) Persistent current account deficit

Which of the following will NOT contribute to the appreciation of a currency? a) Social unrest b) Persistent trade deficit c) Low interest rates d) High inflation e) Rampant corruption

e) Rampant corruption

What major dimension sets apart international finance from domestic finance? a) Expanded opportunity set b) Market imperfections c) Political risks d) Foreign exchange risks e) All of the above

e) all of the above

If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and ask prices are ________.

€0.6623 and €0.6667 the bid price of an indirect quote is the inverse of the ask price of a direct quote €/$: 1/1.51 = 0.6623. Conversely, the ask price of an indirect quote is the inverse of the bid price of a direct quote €/$: 1/1.50 = 0.6667

Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the euro-pound (i.e., euro priced in pounds) exchange rate.

€1.00 = £0.625

The euro-dollar exchange rate is $1.25 = €1.00 and the dollar-yen exchange rate is ¥100 = $1.00. What is the euro-yen cross rate?

€1.00 = ¥125 ¥/€=(¥/$)*($/€) =(¥100/$1)*( $1.25/€1)= ¥125/€1