16.1 How the Foreign Exchange Market Works

An international investor begins with 20,000 British pound and converts it to $32,000 in U.S. currency because the exchange rate is $1.60. In one month, the exchange rate for the British pound decreases to $1.50, and the investor is able to convert the $32,000 back to 21,333 pounds, earning a profit of 1,333 British pounds. If the exchange rate had decreased to $1.25, what would the conversion had been in British pounds?

25600 British pounds

An international investor takes $45,000 in U.S. currency and converts it to 30,000British pounds (the current exchange rate is $1.50). If the exchange rate increases to $1.75, what will the investor's British pounds convert to in U.S. currency?

52500

What is the best definition for foreign direct investment?

A foreign direct investment is the purchase of more than ten percent of a firm or the creation of a new enterprise in another country.

Which of the following is the best definition of the term "foreign exchange market"?

A foreign exchange market is the market in which people use one currency to buy another currency.

What is the best definition for portfolio investment?

A portfolio investment is an investment in another country that is purely financial and does not involve any management responsibility.

currency appreciation

Currency appreciation is the gain in value of a country's currency in relation to that of another country's. The opposite, depreciation, is the loss in value relative to another country's currency.

A stronger U.S dollar________

DECREASES EXPORTS FROM US. INCREASES IMPORTS TO US.

Which of the following terms means using the US dollar as the currency of a country outside the US.

Dollarizing

Dollarizing

Dollarizing means using the U.S. dollar as the currency of a country outside the United States.

The Chinese yuan is one of the most frequently traded currencies?

FALSE

Of the following, which count as a source of demand for the U.S. dollar?

Foreign investors who make direct investments in the U.S. economy.

All of the following are sources of supply for the U.S. dollar except __________.

Foreign investors who wish to make portfolio investments in the US economy.

Hedging

Hedging is defined as using a financial transaction as protection against risk

A country whose currency is strong against the U.S. dollar is likely to suffer from increased unemployment.

TRUE

If the U.S. dollar exchanged at a certain point in time for 1.2 euros, and several months later the U.S. dollar exchanged for 0.91 euros, then the dollar has appreciated.

TRUE

Which of these currencies constitutes less than 20% of the daily foreign exchange market share?

The Canadian Dollar

n 2016, Britain left the European Union and the British pound subsequently depreciated in value. Who did not benefit from the weaker British pound following Britan's exit?

U.K. central bankers who may have to deal with the long-term inflation that results from a weaker pound

Supply for the US dollar comes from.

US investors who want to make portfolio investments in other countries.

If the U.S. dollar is strong, then American exporters benefit.

false

All of the following are sources of demand for the U.S. dollar except __________.

foreign firms that have sold imported goods in the U.S., earned U.S. dollars, and are trying to pay expenses incurred in their home countries

Who is harmed by a weaker currency?

foreign investors in the home country

To __________ means using a financial transaction as protection against risk.

hedge

A stronger euro will benefit a Dutch tourist visiting Chile by ___________.

increasing the amount of Chilean goods the Dutch tourist can purchase

An international investor takes $30,000 in U.S. currency and converts it to 20,000 British pounds (the current exchange rate is $1.50). In one month, the exchange rate increases to $1.60 and the investor can convert the 20,000 British pounds to $32,000, earning a profit of $2,000. What is this a scenario of? If an investor expects exchange rates to increase from 1British Pound=$1.50 to 1British Pound=$1.60, then the investor can earn a profit by ____________.

increasing their portfolio investment of British denominated assets

Foreign direct investment (FDI) refers to purchasing a firm (at least ten percent) in another country or starting up a new enterprise in a foreign country. To be considered foreign direct invest, a firm must __________.

purchase at least ten percent of a firm located in another country start a new enterprise in a foreign country

If a currency appreciates or 'strengthens' then, ...................

there is an increase in the quantity of other currencies received for a given amount of currency sold

Business people often link portfolio investment to exchange rate expectations. (true/false)

true

When a foreign currency is strong against the dollar, fewer units of the foreign currency are required to purchase one U.S. dollar.

true