LS7

The foreign exchange market is the largest of all financial markets, with daily turnover exceeding ______ per day in 2019.

$8.3 trillion

The selling of risky securities by investors and their replacement with safe U.S. treasury securities has been referred to as a

flight to quality.

A financial institution may enter into a forward contract to ______ its future foreign currency earnings or ______ its future foreign currency payments at today's known forward rate.

sell; buy

In 2012 China allowed the yuan to fluctuate much more broadly by _________ against the dollar.

widening the yuan's trading band

The depletion of the United Kingdom's gold reserves during the Second World War rendered the gold standard impractical. This led to the creation of the ___________ in 1944.

Bretton Woods Agreement

The largest foreign exchange trading center is ________ followed by ________.

London; New York

The agreement that led to the creation of the euro and the European Central Bank was the

Maastricht Treaty.

A cross currency exchange rate is an exchange rate between two currencies that does not involve the

U.S. dollar.

Before the advent of cross currency exchange rates, most cross currency trades had to go through the

U.S. dollar.

The international Fisher effect assumes that the appreciation or depreciation of a foreign currency relative to the U.S. dollar is proportional to the difference between ______ and ______.

U.S. nominal interest rates; foreign nominal interest rates

The gold standard was dominant in the late 19th and early 20th centuries because the _________, which was the dominant international trading country, had a long-standing commitment to the gold standard.

United Kingdom

During the start of the financial crisis, the dollar sharply _______ against most other currencies as global investors sought a safe haven investment in ________.

appreciated; U.S. Treasury securities

When a foreign currency increases in value relative to the U.S. dollar (requires more dollars to buy one unit), we say the currency has ________ or ________ relative to the dollar.

appreciated; risen

Financial institutions can implement an on-balance-sheet hedge by matching a foreign-currency denominated _______ with a ________ denominated in that same currency, and having the same ________.

asset; liability; maturity

The Smithsonian Agreement of 1971 allowed the dollar to _______ and the boundaries within which the fixed rates could move were _______.

be devalued; widened

The Bretton Woods Agreement called for currencies to _______ relative to one another within narrow boundaries with the help of government intervention.

be fixed

Prior to 1995, most foreign exchange trading was executed ______, while after that most trading was executed ______.

by direct dealing; by electronic brokerage

The risk involved with a spot foreign exchange transaction is that the value of the foreign currency may _______ over the holding period.

change relative to the dollar

The major players in foreign currency trading and dealing are the large ______ and ______ banks.

commercial; money center

A forward contract is a

contingent off-balance-sheet claim.

A country that undertakes fiscal or monetary policies whose effects are to weaken its currency relative to the currencies of its trading partners so that the country has a competitive advantage in trade will be accused of

currency manipulation.

During the period 2003 - 2007, the U.S. dollar _______ against the euro and most other major currencies as well.

depreciated

Immediately following the Brexit vote, the euro _____ against the U.S. dollar.

depreciated

When a foreign currency decreases in value relative to the U.S. dollar (requires fewer dollars to buy one unit), we say the currency has ________ or ________ relative to the dollar.

depreciated; fallen

The day after the U.K. voted in favor of the Brexit, the pound _______ against the dollar to its ________ level in 30 years

depreciated; lowest

The day after the U.K. voted in favor of the Brexit, the pound _______ against the dollar to its ________ level in 30 years.

depreciated; lowest

A firm that is net short in a currency will profit if that currency _______ against the dollar, and will lose if that currency _______ against the dollar.

depreciates; appreciates

If a foreign currency _______ between the time an investor buys it and the time the investor sells it, the investor _______.

depreciates; loses appreciates; gains

The ________ of a country's currency means that the country's goods are less expensive for foreign buyers, though foreign goods are more expensive for domestic buyers.

depreciation devaluation

For a currency governed by a fixed exchange rate system, the official reduction in value of that currency by the government's monetary authority is called a

devaluation.

The purchasing power parity theorem states that the change in the spot exchange rate between two countries' currencies is proportional to the

difference in the inflation rates in the two countries.

The use of a foreign currency in parallel to or instead of the local currency is referred to as

dollarization.

In 1973, under the Smithsonian Agreement II, the exchange rate boundaries were _______ and the exchange rates of the major currencies were allowed to ________.

eliminated; float freely

Adding foreign exchange denominated assets and liabilities to a firm's balance sheet introduces _________ into the firm.

exchange rate risk

If two countries both fixed the value of a unit of their currency to a quantity of gold, then the exchange rate between those two currencies was

fixed.

A firm can reduce its net exposure in a currency to zero by offsetting an imbalance in its ______ with an opposing imbalance in its _______.

foreign asset-liability portfolio; FX trading book

Cash flows from the sale of products, services or assets denominated in a foreign currency are transacted in

foreign exchange markets.

The need to periodically exchange cash flows in one currency to another currency exposes the global firm to

foreign exchange risk.

To reduce the risk that the foreign currency will change relative to the dollar over the holding period, the firm can use a ________ to lock-in the exchange rate at the end of the period.

forward contract

A ________ is the exchange of currencies at a specified exchange rate at some specified date in the future.

forward foreign exchange transaction

The exchange rate that is written into a forward contract is called the

forward rate.

Hedging of currency risk reduces both possible ______ and possible ______ from currency movements.

gains; losses

A ________ is a system in which a government that issues a currency guarantees to redeem each unit of currency upon demand for a fixed amount of gold.

gold standard

The major advantages of dollarization are the promotion of fiscal discipline leading to ________ and ________.

greater financial stability; lower inflation

Managers use ______ to manage their exposure to currency risk, not to eliminate it.

hedges

As firms and investors increase their volume of transactions in foreign currencies, ________ foreign exchange rate risk has become a more important activity.

hedging

The weakening of the U.S. dollar against the euro and the pound during the 2003-2007 period was due to ______ interest rates in Europe and the U.K. while the Federal Reserve was ______ interest rates.

high; decreasing

Financial institutions engage in two types of foreign exchange transactions in which they act as an agent for one of their customers for a fee, but take on no risk themselves. They are FX transactions

in support of international commercial trade transactions. in support of customers' positions in foreign real and financial investments.

An exchange rate quote that gives the cost of one U.S. dollar in foreign currency is called a(n)

indirect quote.

A consequence of the assumption that real risk-free interest rates are the same between two countries is that the interest rate differential between the two countries is equal to the

inflation rate differential between the two countries.

The theory that asserts that the return an investor would earn on an investment in their home country is the same as the return they would earn on a hedged foreign investment is the

interest rate parity theorem.

A direct quote for a particular exchange rate is the _______ of the indirect quote for that exchange rate, and vice-versa.

inverse

According to interest rate parity, if the interest rate in the US is ______ than the interest rate in a foreign country, the forward rate between the two currencies will be ______ the spot rate, by an approximately equal amount.

less than; less than greater than; greater than

The theory that describes how the exchange rate between two countries will adjust due to differences in inflation between the two countries is called

purchasing power parity.

The ________ of a country's currency means that the country's goods are more expensive for foreign buyers, though foreign goods are cheaper for domestic buyers.

revaluation appreciation

For a currency governed by a fixed exchange rate system, the official increase in value of that currency by the government's monetary authority is called a

revaluation.

The current exchange rate that is used for the immediate exchange of currencies is the

spot rate.

The daily volume of foreign exchange transactions can be measured in

trillions of dollars.

In 2019, there were over _______ as many forward transactions as spot transactions in foreign exchange markets.

twice

In 2009, China began a program of internationalizing its currency by allowing the yuan to be traded by banks in

Hong Kong.

The euro officially started trading in January of the year

1999.

The fact that the major money centers are globally distributed makes it possible to trade foreign exchange

24 hours a day.

Financial institutions could use an on balance sheet hedging strategy to lock-in the larger spread between _______ and ________ that may be obtainable in foreign markets.

deposit rates; loan rates

A prediction of the International Fisher Effect is that the currency of a country with higher interest rates will ________ relative to the currency of a country with lower interest rates.

depreciate

According to purchasing power parity, if country A has higher inflation than country B, then country A's currency will ______ relative to the currency of country B.

depreciate

Foreign exchange markets are the markets in which traders of foreign currencies transact _______ and _______.

most efficiently; at lowest cost

A firm could avoid exposure to exchange rate risk in a currency by reducing its _______ in that currency to zero.

net exposure

A firm's overall exposure to foreign exchange risk in any currency can be measured by its Blank______ in that currency.

net exposure

A firm's net exposure to a foreign currency is the sum of its _______ and its _______ in that currency.

net foreign assets; net FX bought

A positive net exposure to a foreign currency implies that a firm is overall ______ in that currency.

net long

A foreign currency forward contract is a(n) _______ hedge.

off-balance-sheet

Financial institutions are market makers in the foreign exchange market and sometimes take _____ positions in foreign currencies as part of their trading activities with other banks, which they may choose to ______ to reduce risk.

open; hedge

Prior to July 2005, the Chinese yuan was ______ to the U.S. dollar, meaning that the yuan-to-dollar exchange rate was ______.

pegged; fixed

Electronic trading platforms automatically provide traders with _________ gathered from _______.

the best prices available; multiple dealers

A consequence of interest rate parity is that the gains to a U.S. investor from investing in a foreign currency with higher interest rates and covering that position with a forward contract will be offset by difference between the forward and spot rates, so the investor will realize

the same returns from investing in the U.S. or the foreign country.