IBUS Ch 10 SB
The approach to forecasting that draws on economic theory to develop models that predict exchange rate movements is the ______ approach.
fundamental
The market school believes that forward exchange rates are NOT the best predictors of future spot
inefficient
The Fisher effect equates the nominal interest rate as ______.
the required real interest rate + expected rate of inflation
If a basket of goods costs $200 in the US and 20,000 yen in Japan, PPP theory predicts that the dollar/yen exchange rate should be ______.
$.01 per Japanese yen
If a basket of goods costs $400 in the US and 40,000 yen in Japan, PPP theory predicts that the dollar/yen exchange rate should be ______.
$.01 per Japanese yen
Most economic theories of exchange rate movements agree that three factors have an impact on future exchange rate movements in a country's currency -- what are those three factors?
-The country's interest rate -The country's price inflation -Market psychology
Identify two ways international businesses use the foreign exchange market.
-When income from foreign investments is received in a foreign currency -When a business must pay a foreign company in its country's currency
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
For most major currencies, forward exchange rates are commonly quoted for which three periods of time?
30 days 90 days 180 days
Rita knows that every euro she plans to purchase for her trip is worth 1.30 US dollars. What aspect of currency conversion is Rita considering?
Exchange rate
True or false: The foreign exchange market is essentially open 24 hours per day.
True
When interest rates for deposits were up to 12% in the United States, Carter's company decided to borrow money in Japanese yen with a loan rate of just 2% and deposit that money in a US bank. What type of speculation was Carter's company participating in?
carry trade
The rate at which the market converts one currency into another is known as the ______ rate.
exchange
One major advantage of a currency swap is that it does not incur ______.
foreign exchange risk
Increases in interest rates reflect likely increases in ______, which is connected to depreciating ______ rates.
inflation; exchange
A forward exchange contract is comparable to a(n) ______.
insurance policy
The ______ rate is the exchange rate of currency at a particular time on a particular day.
spot exchange
The Economist magazine version of the PPP uses ______ as a proxy for a "basket of goods."
the Big Mac
True or false: The foreign exchange market provides 100% insurance against foreign exchange risk.
False
Exchange rates are based on the ______.
demand and supply of one currency against another
The efficient market school believes that the foreign exchange market is efficient at setting ______ exchange rates.
forward
The international Fisher effect states that for any two countries, the spot exchange rate should change in an equal amount, in the (opposite, same) direction to the difference in nominal interest rates between the two countries.
opposite
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 volatile 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
Kyle's company has decided to exchange 35% of its investable US dollars into Japanese yen as a shift in exchange rates should help the company establish a profit once it converts this money back into US dollars in a few months. This demonstrates the idea of currency ______.
speculation
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
It would be possible to determine the PPP exchange rate that would exist if markets were efficient by comparing ______.
the prices of identical products in different currencies
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
An efficient market lacks ______.
trade barriers
Several Latin American countries experienced an inflation rate of 1 million percent in 2018. What caused this excessive inflation?
uncontrolled growth in the money supply
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
The PPP, according to research, seems to predict exchange rate movements best for countries exhibiting which two characteristics?
-Countries with underdeveloped capital markets -Countries with high inflation rates
What is hyperinflation?
An explosive and seemingly uncontrollable price inflation in which money loses value very rapidly
Consider a situation in which Country A, Country B, Country C, and Country D lose more than half of their value one after another. Which psychological term has been applied to this situation?
Bandwagon effect
______ agreements are barter-like agreements used by countries whose currency is NOT convertible
Countertrade
True or false: Short-term exchange rate movements are simple to predict.
False
Fit-Right Shoe Company is a shoe distribution center. The company agrees to buy 1,000 pairs of shoes from a factory in China. Fit-Right enters into a 30-day forward exchange transaction with the factory. What is the result of this type of agreement?
Fit-Right will be guaranteed that they will have to pay no more than the 30-day forward exchange rate, insuring a profit.
What is the contract that acts as insurance against unfavorable exchange rate movements?
Forward exchange contract
The failure to find a link between which two conditions has been referred to as the purchasing power parity puzzle?
Inflation rates Exchange rates
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
The most important foreign exchange trading center (with 43% of the market) is ______.
London
The six most important foreign exchange trading centers are ______.
London, New York, Zurich, Tokyo, Hong Kong, and Singapore.
Why does The Economist magazine use McDonald's Big Mac as a proxy for a "basket of goods?"
The Big Mac is produced according to more or less the same recipe in about 120 countries.
What are the two most prominent features of the foreign exchange market?
The trading centers are integrated. The market never sleeps.
True or False: If many national markets are controlled by a few multinational enterprises with the power to influence prices and distribution channels, PPP theory may not hold.
True
True or False: If we understand how exchange rates are determined, we may be able to forecast exchange rate movements.
True
True or false: Empirical evidence suggests that the International Fisher effect does NOT explain short-term exchange rate movements well.
True
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
It would be difficult to profit through arbitrage because the demand for a currency would increase when dealers try to profit from exchange rate discrepancies leading to ______ of that currency and the price differential would disappear.
appreciation
Foreign exchange dealers can make a profit by buying a currency low and selling it high, a process called ______.
arbitrage
If companies didn't have the foreign exchange market, trade and investment between countries would not have a basis to work from and companies would have to rely on ______.
bartering
According to the Fisher effect, if the real interest rate in country #1 is 8% and it is 5% in country #2, an investor should ______.
borrow from #2 and invest in #1
When the citizens of the small country realized that the value of their currency was decreasing because of recent government sanctions, they all rushed to exchange their money for a foreign currency. This demonstrates the idea of ______.
capital flight
It would be ______ for an international business to use the services of the foreign exchange market.
common
The foreign exchange market is used to ______.
convert currency
When General Electric won a contract for a $150 million generator project in Romania, it agreed to take payment in the form of Romanian goods that could be sold for $150 million on international markets. This is an example of ______.
countertrade
In a(n) ______ swap, businesses, banks and/or the government choose to move out of one currency into another for a limited period without incurring foreign exchange risk.
currency
An investment made in order to profit from future currency movements is called ______.
currency speculation
A country in which inflation is on the rise will have a currency that ______ compared to a country in which inflation is low.
depreciates
When a dominant enterprise is able to set different prices in different markets to reflect varying demand conditions, it is practicing price ______.
discrimination
Most foreign exchange transactions would include the ______ on one side of the transaction.
dollar
Match the currency with its level of importance as a vehicle currency.
dollar - 1st euro - 2nd yen - 3rd pound - 4th
A fundamental analysis approach to forecasting relies on ______ theory.
economic
A market in which prices reflect all available public information is considered to be (efficient or inefficient?).
efficient
When using technical analysis for exchange rate forecasting, a company would ______ to predict future trends.
examine past trends
Kevin works for a company in Japan. His company sells many products in the European market and his company converts the euros from these sales into yen. His company relies on the ______ rate to know the value of this transaction.
exchange
Nora is traveling to the Cayman Islands where the Cayman Islands dollar is equal to 1.22 US dollars. The value of the money is an example of a(n) ______.
exchange rate
PPP theory shows a direct relationship between a change in relative prices and a change in ______.
exchange rates
A policy of ______ convertibility is in place in some countries that place restrictions on residents' ability to convert domestic currency into a foreign currency.
external
Hillary's country only lets nonresidents convert money into a foreign currency without any restrictions. This country has a(n) ______ convertible currency.
externally
When only nonresidents can convert a currency into a foreign currency with no limitations, the currency is identified as ______.
externally convertible
The link between interest and exchange rates is called the International effect.
fisher
Converting the currency of one country into the currency of another country is done through the ______.
foreign exchange market
The ______ facilitates international trade and investment by allowing the conversion of currencies.
foreign exchange market
An exchange rate that is used to take care of business in the future is called a exchange rate.
forward
Scott's company is planning a major purchase from a Japanese company and doesn't want to take the risk that the dollar will depreciate in value against the yen. He sets up an agreement with the Japanese company to exchange currency now and execute the sale in six months. This is an example of ______.
forward exchange
The efficient market school suggests that ______ exchange rates are optimal at forecasting future ______ exchange rates.
forward; spot
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
When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is ______.
freely convertible
The link between price changes and changes in exchange rates is further weakened by ______ intervention in foreign exchange markets in their attempt to affect the value of their currencies.
government
When a company takes steps to insure itself against foreign exchange risk, it is practicing ______.
hedging
The bandwagon effect takes place when currency traders move as a group in (identical or different?) directions.
identical
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
If the citizens of a country all had enough money to purchase anything they wanted, the demand for products across the country would increase. In response, the companies that supply products would raise the price. This demonstrates the idea of (inflation or deflation?) in an economy.
inflation
Interest rates reflect expectations about future ______ rates, which has been shown to lead to a depreciation in exchange rates.
inflation
The Fisher effect predicts that there is a strong relationship between ______ rates and interest rates.
inflation
The Fisher effect would say that different interest rates between countries reflects differing expectations about ______ rates between those countries.
inflation
When a country's money supply grows faster than goods and services can be produced, it results in ______.
inflation
A firm is engaging in hedging when it ______.
insures itself against foreign exchange risk
According to research, the PPP is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.
long-run; short-run
When a country experiences hyperinflation, money value very rapidly. (Choose gains or loses.)
loses
If a government appears committed to controlling the rate of growth in money supply, it is probably safe to predict that the country's future inflation rate may be ______.
low
Carry trade is borrowing in a currency where interest rates are (high or low?) and then investing in a currency where interest rates are (high or low?).
low high
A(n) ______ currency is when neither residents nor nonresidents are allowed to exchange money into a foreign currency.
nonconvertible
No one in Trevor's country is allowed to convert currency into any foreign currency. This is an example of ______ currency.
nonconvertible
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
What type of forecasting relies on past pricing trends to predict the future?
Technical analysis
