Chapter 11

An American tourist in Japan is interested in buying a souvenir that costs 1800 yen. How much is this in dollars if the exchange rate is $1 to Y400?

$4.50

A lead strategy occurs when a firm attempts to collect foreign currency receivables early when a currency is expected to ______ and pay foreign currency payables before they are due when a currency is expected to ______.

depreciate; appreciate

A key to reducing economic exposure involves _____ so the firm is not severely affected by adverse changes in exchange rates.

distributing a firm's productive assets to various locations

A fundamental analysis approach to forecasting relies on _____ theory.

economic

market in which prices reflect all available public information is considered to be

efficient

Transaction _____ refers to the extent that income from individual transactions is affected by changes in foreign exchange values.

exposure

The efficient market school believes that the foreign exchange market is efficient at setting ______ exchange rates.

forward

The efficient market school suggests that ______ exchange rates are optimal at forecasting future ______ exchange rates.

forward ; spot

The inefficient market school believes that....

forward exchange rates are NOT the best predictors of future spot exchange rates.

Marcy is happy to live in a country where she is allowed to purchase unlimited amounts of foreign currency. Her country demonstrates a currency that is _____ convertible.

freely

A(n) ______ market is one in which prices do not reflect all available information, and forward exchange rates will not be the best predictors of future spot exchange rates.

inefficient

According to the ____ market school of thought, companies can improve the foreign exchange market's estimate of future exchange rates by investing in forecasting services.

inefficient

The_______market school believes that forward exchange rates are NOT the best predictors of future spot exchange rates.

inefficient

Interest rates reflect expectations about future ____ rates, which has been shown to lead to a depreciation in exchange rates.

inflation

Increases in interest rates reflect likely increases in ______, which is connected to depreciating ______ rates.

inflation; exchange

One main reason why the International Fisher Effect is NOT good at explaining short-term exchange rate movements is the impact of ______ on those movements.

investor psychology

______ strategy is when a firm attempts to collect foreign currency receivables early when a currency is expected to depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate.

lead

Identical products sold in different countries must sell for the same price in competitive markets when their price is expressed in terms of the same currency. This is called the law of

one price

Jen knows that it is not possible to accurately predict how exchange rates might fluctuate and result in a loss of finances for her company. In other words, Jen understands the reality of foreign exchange ____.

risk

The adverse consequences of unpredictable changes in exchange rates is called foreign exchange ______.

risk

The impact of psychological factors and investor expectations make it difficult for exchange rate theories to predict ______ changes in exchange rates.

short-term

Suppose a US company agrees to buy products worth 1 million euros. At the time of the agreement, the dollar/euro exchange rate was $1 = €1.10, but at the time of payment, the exchange rate is $1 = €0.80. The additional money owed by the US company due to the adverse movement in exchange rates between the time of the deal and the time when payment is due is called ______ exposure.

transaction

Brittany is traveling in Germany and went to a bank to convert $200 into euros. She was concerned when she received fewer euros than she had last week when she converted the same amount of money. The teller explained that the money had been converted based on the rate that was available today for currency exchange and this rate fluctuates. What type of rate is being used in this transaction?

spot exchange

Empirical evidence suggests that the....

International Fisher effect does not explain short-term exchange rate movements well.

The most important foreign exchange trading center (with more than 37% of the market) is ______.

London

The five most important foreign exchange trading centers are

London, New York, Zurich, Tokyo and Singapore.

What are the three fundamental determinants of exchange rates?

Monetary growth, interest rates and inflation rates

Kenneth wants to buy a new winter coat for his trip to London. He found the coat for $80 at Nordstrom in New York but he thinks he would prefer to buy it at Harrod's when he gets to London. He knows that based on the law of one price, the coat should cost _____ in London.

the same

appreciate

to increase in value

If the demand for dollars is greater than the supply of them and the supply of Indian rupee is greater than the demand for them, then the dollar will _____ against the rupee.

appreciate

What determines the value of a spot exchange rate?

demand and supply

Exchange rates are based on the

demand and supply of one currency against another

If the exchange rate is 1 British pound to $1.35, an American in London will need $______ (rounded to closest whole number) to purchase a purse priced at 20 pounds.

27

Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?

Centralized

Converting the currency of one country into the currency of another country is done through the _____.

Foreign Exchange Market