Chapter 10
If the exchange rate is 1 British pound to $1.35, an American in London will need ______ to purchase a purse priced at 20 pounds.
$27
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
An economist who believes that the foreign exchange market is effective at setting forward rates is a part of the _____ market school.
An economist who believes that the foreign exchange market is effective at setting forward rates is a part of the _____ market school.
Jameson Electric Corp. would use the foreign exchange market when it needs to
convert currency
What are the two main functions of the foreign exchange market?
currency conversion provide insurance against foreign exchange risk
The value of a currency is determined by the ______ of that currency relative to other currencies.
demand and supply
Some country's governments do not put any limits on the purchase of foreign currency for residents and nonresidents. These country's have a _____ currency.
freely convertible
When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is
freely convertible.
Which approach to forecasting draws on economic theory to develop models that predict exchange rate movements?
fundamental
The ______ market school believes that forward exchange rates are NOT the best predictors of future spot exchange rates.
inefficient
A(n) ______ is based on the theory that prices don't reveal all available information and more is needed to predict future spot exchange rates.
inefficient market
What are the two schools of thought regarding the prediction of future exchange rates?
inefficient market school efficient market school
The Fisher effect predicts that there is a strong relationship between ______ and interest rates.
inflation rates
One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of ______ in determining the expectations of market traders.
investor psychology
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
The law of ______ is the economic theory that the price of a given security, asset or commodity must have the same price when exchange rates are taken into consideration.
one price
A(n) ______ exchange rate is the price to exchange one currency for another for immediate delivery.
spot
At the simplest of levels, exchange rates are determined by _____
the supply and demand of currencies
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 foreign exchange market is where one country's ______ is converted into that of another country. exposure
currency
If the demand for the yen outstrips its availability and if the supply of the dollar outweighs the demand, the yen will (appreciate or depreciate?) against the dollar.
depreciate
In an efficient market, prices are said to
fully reflect all available information.
The method of forecasting that draws on economic theory to construct sophisticated models is called the ______ approach.
fundamental
Which school of thought on exchange rate forecasting does NOT believe that forward exchange rates are the best predictors of future spot exchange rates?
inefficient
which school of thought on exchange rate forecasting does NOT believe that forward exchange rates are the best predictors of future spot exchange rates?
inefficient
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
The Fisher effect equates the nominal interest rate as
the required real interest rate + expected rate of inflation.
At the simplest of levels, exchange rates are determined by _____.
the supply and demand of currencies
The most important foreign exchange trading center is ______ with 37% of the activity.
London
The five most important foreign exchange trading centers in terms of level of activity are
London, New York, Zurich, Tokyo and Singapore.
What are three moderately decent predictors of long-term changes in exchange rates? (Check all that apply.)
Relative inflation rates Relative monetary growth Nominal interest rate differentials
True or false: Empirical evidence suggest that the International Fisher effect does NOT explain short-term exchange rate movements well.
True
