MGT 302: Chapter 11
Hillary's country only lets nonresident convert money into a foreign currency without any restrictions. This country has a(n) _____ convertible currency.
externally
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 Fisher effect predicts that there is a strong relationship between ________ rates and interest rates.
inflation
Carry trade is borrowing in a currency where interest rates are _____ (high to low?) and then investing in a currency where interest rates are _____ (high or low?).
low; high
No one in Trevor's country is allowed to convert currency into any foreign currency. This is an example of _____ currency.
nonconvertible
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
The PPP, according to research, seems to predict exchange rate movements best for countries exhibiting two characteristics?
Countries with high inflation rates and countries with underdeveloped capital markets
The link between interest and exchange rates is called the international _____ effect.
Fisher
The five most important foreign exchange trading centers are
London, New York, Zurich, Tokyo and Singapore.
When a country trades goods and services for other goods and services it is called _____.
countertrade
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 failure to find a link between which two of the following conditions has been referred to as the purchasing power parity puzzle?
Exchange rates and inflation rates
The most important foreign exchange trading center (with more than 37% of the market) is _____.
London
What are the three fundamental determinants of exchange rates?
Monetary growth, interest rates and inflation rates
What type of forecasting relies on past pricing trends to predict the future?
Technical analysis
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, market psychology and the country's price inflation
Most economic theorists 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, market psychology and the country's price inflation
What are the two most prominent features of the foreign exchange markets?
The trading centers are integrated and the market never sleeps
The foreign exchange market is used to _____.
convert currency
Identify two ways international businesses use the foreign exchange market.
When a business must pay a foreign company in its country's currency and when income from foreign investments is received in a foreign currency
What determined the value of a spot exchange rate?
demand and supply
A country in which inflation is on the rise will have a currency that _____ compared to a country in which inflation is low.
depreciates
Capital flight is a possibility when the value of a country's currency is experiencing rapid _____.
depreciation
The long-term effect of exchange rate change is an important consideration in _____ (translation or economic?) exposure.
economic
The long-term effect of exchange rate change is an important consideration in _______ (translation or economic?) exposure.
economic
A market in which prices reflect all available public information is considered to be _____ (one word).
efficient
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
Tonya was surprised to learn that her country limited the amount of currency she could take out of the country when she went to America to visit her cousin. The limit is an example of a policy of
external convertibility.
The _____ facilitates international trade and investment by allowing the conversion of currencies.
foreign exchange market
One major advantage of a currency swap is that it does not incur _____.
foreign exchange risk
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 bandwagon effect takes place when currency traders move as a group in _____ (identical or different?) directions.
identical
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
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 demonstrate the idea of _____ (inflation or deflation?) in an economy.
inflation
Increases in interest rates reflect likely increases in _____, which is connected to depreciating _____ rates.
inflation; exchange
One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of _____ on those movements.
investor psychology
A(n) _____ strategy is when a firm attempts to delay the collection of foreign currency receivables when a currency is expected to appreciate and delay foreign currency payables when a currency is expected to depreciate.
lag
A(n) _____ 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
Two strategies that can be used to reduce translation and transaction exposure are _____.
lead strategy and lag strategy
When a country experiences hyperinflation, money _____ value very rapidly. (Choose gains or loses.)
loses
If an American firm has a subsidiary in the EU and the value of the euro depreciates rapidly against the value of the dollar over a year, you would see a reduction in the dollar value of the euro profit made by the European subsidiary. This would result in _____ translation exposure. (Choose positive or negative.)
negative
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 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
The adverse consequences of unpredictable changes in exchange rates in called foreign exchange _____.
risk
An efficient market lacks _____.
trade barriers
Suppose a US company agrees to buy products worth 1 millions euros. At the time of the agreement, the $/€ 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 the adverse movement in exchange rates between the time of the deal and the time when payment is due is called _________ exposure.
transaction
Match the currency with its level of importance as a vehicle currency.
Dollar--First Euro--Second Yen--Third Pound--Fourth
What determines the value of a spot exchange rate?`
Demand and supply
For most major currencies, forward exchange rates are commonly quoted for which three periods of time?
180 days, 30 days and 90 days
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 in high, a process called _____.
arbitrage
According to the Fisher effect, if the real investment rate in country #1 is 8% and it is 5% in country #2, an investor should
borrow from #2 and invest in #1.
