3660 Ch.10

Inflation occurs when A) the quantity of money in circulation rises faster than the stock of goods and services. B) the stock of goods and services increases and the quantity of money in circulation decreases. C) output increases faster than the money supply.D) the money supply decreases and the output increases.

A) the quantity of money in circulation rises faster than the stock of goods and services.

Capital flight is most likely to occur when A) the value of the domestic currency is depreciating rapidly because of hyperinflation. B) a country's economic prospects are solid and promising. C) the value of the domestic currency is appreciating rapidly. D) the value of the foreign currency is depreciating rapidly.

A) the value of the domestic currency is depreciating rapidly because of hyperinflation.

Why do governments limit currency convertibility? A) to preserve foreign exchange reserves B) to spend foreign exchange reserves C) to keep domestic companies from investing abroad D) to allow nonresidents to convert money to foreign currencies

A) to preserve foreign exchange reserves

_____ are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk. A) Carry trades B) Currency swaps C) Arbitrages D) Currency pairing

B) Currency swaps

________ arises from volatile changes in exchange rates. A) Translational exposure B) Foreign exchange risk C) Economic exposure D) Transactional exposure

B) Foreign exchange risk

_____ are exchange rates governing some specific future date foreign exchange transactions. A) Spot exchange rates B) Forward exchange rates C) Future exchange rates D) Currency swaps

B) Forward exchange rates

_____ draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements. A) Lead strategy B) Fundamental analysis C) Lag strategy D) Technical analysis

B) Fundamental analysis

Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m. is ¥120 = $1, and the yen/dollar exchange rate quoted in New York at the same time is ¥123 = $1. A dealer in New York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo, thereby making a profit. The dealer has engaged in A) a currency swap. B) an arbitrage. C) atrade. D) a straddle.

B) an arbitrage.

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) currency trade. D) straddle.

B) arbitrage.

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) bandwagon effect

Assume that the interest rate on borrowing in Japan is 1 percent, while the interest rate on deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. Which type of trade is this an example of? A) swing trade B) carry trade C) channel trade D) price action trade

B) carry trade

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) currency speculation.

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) efficient market

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) forward exchange

It follows from the Fisher Effect that if the real interest rate is the same worldwide, any difference in interest rates between countries reflects differing expectations about A) foreign exchange rates. B) inflation rates. C) unemployment rates. D) GDP growth rates.

B) inflation rates.

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) overvalued by 25 percent against the dollar.

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) see depreciation in its currency exchange rate.

The foreign exchange market is A) open for only 12 hours in a day. B) the market never sleeps. C) open for most of the day, but closes for three hours each day—between 2:00 a.m. and 5:00 a.m. Greenwich Mean Time.D) open during normal business hours (9:00 a.m. to 5:00 p.m., local time) in each of the primary locations from which it operates: Tokyo, London, and New York.

B) the market never sleeps.

Assume that the current exchange rate is €1 = $1.50. If you exchange 1,000 euros for dollars, you will receive A) $1,000. B) $750. C) $1,500. D) $667.

C) $1,500.

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) International Fisher Effect

Which of the following is one of the most important trading centers in the foreign exchange market? A) Beijing B) Sau Paulo C) London D) Seoul

C) London

The Fisher Effect states that A) a country's "real" rate of interest is the sum of the "nominal" interest rate and the expected rate of inflation over the period for which the funds are to be lent. B) there is a weak relationship between inflation rates and interest rates. C) 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. D) when investors are free to transfer capital between countries, "nominal" interest rates will be the same in every country.

C) 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.

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) dollars

The _____ helps consumers 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) exchange rate

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) exchange rate

An exchange rate of €1 = $1.30 indicates that A) $1 is worth 1.30 euros. B) one could get 1.30 euros for $1. C) one euro buys 1.30 dollars. D) one euro buys 0.77 dollars.

C) one euro buys 1.30 dollars.

If a country has an externally convertible currency A) neither residents nor nonresidents are allowed to convert it into a foreign currency. B) both residents and nonresidents can purchase unlimited amounts of a foreign currency with it. C) only nonresidents may convert it into a foreign currency without any limitations. D) the government limits convertibility to preserve foreign exchange reserves.

C) only nonresidents may convert it into a foreign currency without any limitations.

Currency _____ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. A) hedging B) risk mitigation C) speculation D) arbitrage

C) speculation

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) spot exchange.

_____ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. A) An arbitrage B) A carry trade C) A spot exchange D) A currency swap

D) A currency swap

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) Fisher Effect

An American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment? A) The Hungarian forint rises in value against the dollar. B) Interest rates in the United States move down. C) Short-term interest rates in Hungarian money markets shoot up. D) The dollar appreciates against the Hungarian forint.

D) The dollar appreciates against the Hungarian forint.

A currency is said to be freely convertible when A) its exchange rate with respect to other currencies is decided by the central bank of the country. B) residents alone are allowed to convert it into a foreign currency without any limitations. C) neither residents nor nonresidents are allowed to convert it into a foreign currency. D) both residents and nonresidents are allowed to purchase unlimited amounts of a foreign currency with it.

D) both residents and nonresidents are allowed to purchase unlimited amounts of a foreign currency with it.

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) change if relative prices change.

What are the two main functions of the foreign exchange market? A) trading foreign company equities and converting currency B) reducing currency volatility and setting interest rates C) insuring companies against interest rate risk and enabling imports and exports D) converting currency and providing some insurance against foreign exchange risk

D) converting currency and providing some insurance against foreign exchange risk

Which of the following refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates? A) currency pairing B) carry trade C) currency exchange D) currency swap

D) currency swap

Restrictions on external convertibility can A) hamper foreign companies wishing to do business in that country. B) allow domestic companies to freely invest abroad. C) limit the amount of product a foreign company can produce in that country. D) limit domestic companies' ability to invest abroad.

D) limit domestic companies' ability to invest abroad.

The International Fisher Effect has A) proven to have substantial power at predicting long-run changes in forward exchange rates. B) proven to have substantial power at predicting short-run changes in spot exchange rates. C) not proven to be a good predictor of long-run changes in forward exchange rates. D) not proven to be a good predictor of short-run changes in spot exchange rates.

D) not proven to be a good predictor of short-run changes in spot exchange rates.

The _____ suggests that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country. A) random walk theory B) theory of competitive advantage C) theory of price inflation D) purchasing power parity theory

D) purchasing power parity theory

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) roughly equivalent in each country.

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) spot rate.

Which of the following is referred to as the purchasing power parity puzzle? A) reduced levels of inflation in countries where the growth in the money supply is faster than the growth in its output B) the reason countries with high inflation rates see depreciation in their currency exchange rates C) identical products being sold in different countries for the same price when their price is expressed in terms of the same currency D) the failure to find a strong link between relative inflation rates and exchange rate movements

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

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) £80

Carry trade is nonspeculative in nature. ⊚ true ⊚ false

false

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. ⊚ true ⊚ false

false

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. ⊚ true ⊚ false

false

The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney. ⊚ true ⊚ false

false

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. ⊚ true ⊚ false

false

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

false

There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates. ⊚ true ⊚ false

false

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

true

Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly. ⊚ true ⊚ false

true

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

true

If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a discount on the 30-day forward market. ⊚ true ⊚ false

true

If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices. ⊚ true ⊚ false

true

Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the hope that she would make money based on the exchange rates. This demonstrates a carry trade. ⊚ true ⊚ false

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 ⊚ false

true

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

true

The foreign exchange market converts the currency of one country into that of another country. ⊚ true ⊚ false

true

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. ⊚ true ⊚ false

true

To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract. ⊚ true ⊚ false

true

Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies. ⊚ true ⊚ false

true

When Krista traveled from the United States to England, she had to change her money from dollars into pounds. Krista was participating in the currency exchange market. ⊚ true ⊚ false

true

_____ is quoted for 30 days, 90 days, and 180 days into the future. A) A forward exchange rate B) A currency swap C) A spot exchange rate D) An arbitrage

A) A forward exchange rate

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) spot exchange rate

With which of the following would a follower of the inefficient market school of thought agree? A) Companies would be better off investing in foreign exchange forecasting services. B) Forward exchange rates do the best possible job of forecasting future spot exchange rates. C) Companies can optimize their foreign exchange transactions by using forward markets. D) Forward rates reflect all available information about likely future changes in exchange rates.

A) Companies would be better off investing in foreign exchange forecasting services.

_____ is one in which prices do not reflect all available information. A) Inefficient market B) Speculative market C) Efficient market D) Externally convertible market

A) Inefficient market

Identify the correct statement about the PPP theory. A) It predicts that exchange rates are determined by relative prices. B) It yields accurate predictions of short-run movements in exchange rates. C) It best predicts exchange rate changes for countries with low rates of inflation. D) It includes transportation costs and trade tariffs.

A) It predicts that exchange rates are determined by relative prices.

Which of the following is the most important foreign exchange trading center? A) London B) New York C) Tokyo D) Singapore

A) London

_____ are reported on a real-time basis on many financial websites and are continually changing—their value being determined by supply and demand for that currency relative to others. A) Spot exchange rates B) Currency swaps C) Forward exchange rates D) Future exchange rates

A) Spot exchange rates

_____ uses price and volume data to determine past trends, which are expected to continue into the future. A) Technical analysis B) Fundamental analysis C) Efficient market theory D) Value investing

A) Technical analysis

A pair of shoes costs £40 in Britain. An identical pair costs $50 in the United States when the exchange rate is £1 = $1.50. Which of the following is correct? A) The United States offers a better deal. B) The deal is the same in both countries. C) Britain offers a better deal. D) A trader can make money by buying the shoes in Britain and selling in the United States at $50.

A) The United States offers a better deal.

If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it, what will happen? A) The dollar will appreciate against the yen. B) The dollar will depreciate against the yen. C) The exchange rates will remain the same. D) The yen will appreciate against the dollar.

A) The dollar will appreciate against the yen.

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about A) anticipated currency swap rates. B) stability in the global marketplace. C) future currency movements. D) the carry trades that will occur.

A) anticipated currency swap rates.

Which of the following involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high? A) carry trade B) swing trade C) channel trade D) price action trade

A) carry trade

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) exchange rate.

The _____ is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. A) foreign exchange market B) united global database C) global marketplace D) foreign market database

A) foreign exchange market

Which of the following occurs when the quantity of money in circulation in a country rises faster than the country's stock of goods and services? A) inflation B) credit squeeze C) deflation D) production surplus

A) inflation

The _____ 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. A) law of one price B) principle of consistent pricing C) model of fair pricing D) rational price theory

A) law of one price

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) premium