International Management Final Exam Review Ch 10
A(n) _____ is quoted for 30 days, 90 days, and 180 days into the future. A. forward exchange rate B. currency swap C. spot exchange rate D. Arbitrage
a
Assuming the 30-day forward exchange rate was $1 = ×130 and the spot exchange rate was $1 = ×120, the dollar is selling at a _____ on the 30-day forward market. A. premium B. margin C. discount D. subsidy
a
The _____ is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day. A. spot exchange rate B. forward exchange rate C. futures exchange rate D. spread
a
The foreign exchange market is a market for converting the currency of one country into that of another country. a.TRUE b.FALSE
a
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 for the two countries. a.TRUE b.FALSE
a
The rate at which one currency is converted into another is known as the _____. A. exchange rate B. currency swap rate C. fluctuation rate D. carry over rate
a
There are no impediments to the free flow of goods and services in an efficient market. a.TRUE b.FALSE
a
To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract. a.TRUE b.FALSE
a
A lag strategy involves: A. attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate. B. delaying collection of foreign currency receivables if that currency is expected to appreciate. C. paying foreign currency payables before they are due when a currency is expected to appreciate. D. delaying collection of foreign currency receivables if that currency is expected to depreciate.
b
Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60 in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming away transportation costs and trade barriers, this creates a profit-making opportunity called ____. A. currency swap B. arbitrage C. carry trade D. straddle
b
If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated. a.TRUE b.FALSE
b
If the spot rate is $1 = ×120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a discount in the forward market. a.TRUE b.FALSE
b
Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is equivalent to $3.75 at the prevailing euro/dollar exchange rate. Using the concept of purchasing power parity, the euro is: A. undervalued by 25 percent against the dollar. B. overvalued by 25 percent against the dollar. C. appreciating relative to the dollar. D. depreciating relative to the dollar.
b
The _____ school of thought argues that forward exchange rates do the best possible job of forecasting future spot rates and therefore investing in forecasting services would be a waste of money. A. inefficient market B. efficient market C. random walk D. Speculative
b
The impact of currency exchange rates on the reported financial statements of a company is called economic exposure. a.TRUE b.FALSE
b
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. a.TRUE b.FALSE
b
The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will: A. export more goods to other countries. B. see depreciation in its currency exchange rate. C. import more goods from other countries. D. see an appreciation in its currency exchange rate.
b
The risk that arises from volatile changes in exchange rates is known as _____. A. translational exposure B. foreign exchange risk C. economic exposure D. transactional exposure
b
The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as: A. currency arbitrage. B. currency speculation. C. currency hedging. D. currency risk mitigation.
b
What is the concept that is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs? A. Translation exposure B. Economic exposure C. Transaction exposure D. Risk exposure
b
When two parties agree to exchange currency and execute the deal at some specific time in the future, a _____ occurs. A. currency swap B. forward exchange C. hedging D. spot exchange
b
Which of the following occurs when traders start moving as a herd in the same direction at the same time? A. Fisher effect B. Bandwagon effect C. Arbitrage D. Decoupling of markets
b
Although a foreign exchange transaction can involve any two currencies, most transactions involve _____ on one side. A. pounds B. yen C. dollars D. Euros
c
The _____ helps us to compare the relative prices of goods and services in different countries. A. interest rate B. GDP growth rate C. exchange rate D. tariff rate
c
The _____ 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. A. purchasing power parity theory B. efficient market theory C. international Fisher effect D. law of one price
c
When two parties agree to exchange currency and execute the deal immediately, the transaction is a _____. A. futures exchange B. carry trade C. spot exchange D. forward exchange
c
Which term refers to the rate at which one currency is converted into another? A. Basis point B. Spread C. Exchange rate D. Interchange rate
c
_____ is the impact of short-run currency exchange rates changes on the reported financial statements of a company. A. Economic exposure B. Financial exposure C. Translation exposure D. Transaction exposure
c
According to the law of one price, if the exchange rate between the British pound and the dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for _____ in London. A. £180 B. £50 C. £60 D. £80
d
Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be: A. much less in industrialized countries. B. much less in third world countries. C. variable depending upon the current rate of exchange between the producer and consumer of the products in the "basket." D. roughly equivalent in each country
d
The _____ states that a country's "nominal" interest rate is the sum of the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent. A. PPP theory B. efficient market theory C. law of one price D. Fisher effect
d
The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as _____. A. economic exposure B. financial exposure C. translation exposure D. transaction exposure
d
The purchasing power parity (PPP) theory argues that the exchange rate will: A. increase if a country is experiencing inflation. B. change even if relative prices remain unchanged. C. increase if a country is experiencing deflation. D. change if relative prices change.
d
What are the two main functions of the foreign exchange market? A. Trading of equities of foreign companies and currency conversion B. Reducing currency volatility and setting interest rates C. Insuring companies against interest rate risk and enabling imports and exports D. Currency conversion and providing some insurance against foreign exchange risk
d
When a tourist goes to a bank in a foreign country to convert money into the local currency, the exchange rate used is the _____. A. currency swap rate B. forward rate C. carry trade D. spot rate
d
_____ is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects. A. The random walk effect B. The Fisher effect C. The international Fisher effect D. Capital flight
d
