IBUS 330: Chapter 10 Quiz

_______ draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements

Fundamental analysis

A pen costs £50 in Britain. An identical pen costs $70 in the United States when the exchange rate is £1 = $1.50. Which of the following is correct?

The U.S. offers a better deal.

If the spot rate is $1 = 120, and the 30-day forward rate is $1 = 130, the dollar is selling at a premium in the forward market.

True

Most foreign exchange transactions involve U.S. dollars on one side.

True

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

True

The rate at which one currency is converted into another is known as the exchange rate.

True

What is the most important vehicle currency by trade volume?

U.S. dollar

When is a currency said to be externally convertible?

When only nonresidents can convert it into a foreign currency without any limitations.

The short-term movement of funds from one currency to another as an attempt to profit from shifts in exchange rates is called

currency speculation.

If many people want euros and euros are in short supply, and a few people want Japanese yen and yen are in plentiful supply, the yen is likely to ________ against the euro.

depreciate

Assuming the 60-day forward exchange rate was $1 = 110 and the spot exchange rate was $1 = *120, the dollar is selling at a(n) _____ on the 60 day forward market.

discount

The extent to which a firm's future international earning power is affected by changes in exchange rates in the long run is known as ______ exposure.

economic

Anderson, Smith, and Bayles-an investment firm-is interested in investing in a production facility in Mexico. However, the firm is worried about unpredictable fluctuations in future exchange rates which would have adverse consequences for the firm. One way to ensure against this exchange risk is by

engaging in hedging

The first thing Analise does when she arrives in Italy is to convert her U.S. dollars to euros. She will do this through the

foreign exchange market.

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

purchasing power parity theory

A Japanese tourist in New York goes to a bank to convert his yens into dollars. The exchange rate that will be used for conversion will be the

spot exchange rate

According to the law of one price, identical products sold in different countries must sell for the same price when

their price is expressed in terms of the same currency.

A lead strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.

False

An efficient market has many impediments to the free flow of goods and services.

False

The concept of carry trade involves borrowing money in one currency where interest rates are high and then using the proceeds to invest in other currency where interest rates are low.

False