ch 10

________ is quoted for 30 days, 90 days, and 180 days into the future. A) A forward exchange rate B) A currency swap C) A spot exchange rate D) An arbitrage

A) A forward exchange rate

With which of the following would a follower of the inefficient market school of thought agree A) Companies would be better off investing in foreign exchange forecasting services. B) Forward exchange rates do the best possible job of forecasting future spot exchange rates. C) Companies can optimize their foreign exchange transactions by using forward markets. D) Forward rates reflect all available information about likely future changes in exchange rates.

A) Companies would be better off investing in foreign exchange forecasting services.

Identify the correct statement about the PPP theory. A) It predicts that exchange rates are determined by relative prices. B) It yields accurate predictions of short-run movements in exchange rates. C) It best predicts exchange rate changes for countries with low rates of inflation. D) It includes transportation costs and trade tariffs.

A) It predicts that exchange rates are determined by relative prices.

Which of the following is the most important foreign exchange trading center? A) London B) New York C) Tokyo D) Singapore

A) London

The ________ is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. A) foreign exchange market B) united global database C) global marketplace D) foreign market database

A) foreign exchange market

Inflation occurs when A) the quantity of money in circulation rises faster than the stock of goods and services. B) the stock of goods and services increases and the quantity of money in circulation decreases. C) output increases faster than the money supply. D) the money supply decreases and the output increases.

A) the quantity of money in circulation rises faster than the stock of goods and services.

Capital flight is most likely to occur when A) the value of the domestic currency is depreciating rapidly because of hyperinflation. B) a country's economic prospects are solid and promising. C) the value of the domestic currency is appreciating rapidly. D) the value of the foreign currency is depreciating rapidly

A) the value of the domestic currency is depreciating rapidly because of hyperinflation.

Why do governments limit currency convertibility? A) to preserve foreign exchange reserves B) to spend foreign exchange reserves C) to keep domestic companies from investing abroad D) to allow nonresidents to convert money to foreign currencies

A) to preserve foreign exchange reserves

________ are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk. A) Carry trades B) Currency swaps C) Arbitrages D) Currency pairing

B) Currency swaps

________ includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies. A) Economic exposure B) Transaction exposure C) Corporate financial exposure D) Translation exposure

B) Transaction exposure

Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60 in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming away transportation costs and trade barriers, this creates a profit-making opportunity called A) currency swap. B) arbitrage. C) carry trade. D) straddle.

B) arbitrage.

What concept is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs? A) translation exposure B) economic exposure C) transaction exposure D) risk exposure

B) economic exposure

The ________ school of thought argues that forward exchange rates do the best possible job of forecasting future spot rates and therefore investing in forecasting services would be a waste of money. A) inefficient market B) efficient market C) random walk D) speculative

B) efficient market

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will A) export more goods to other countries. B) see depreciation in its currency exchange rate. C) import more goods from other countries. D) see an appreciation in its currency exchange rate.

B) see depreciation in its currency exchange rate.

The foreign exchange market is A) open for only 12 hours in a day. B) the market never sleeps. C) open for most of the day, but closes for three hours each day—between 2:00 a.m. and 5:00 a.m. Greenwich Mean Time. D) open during normal business hours (9:00 a.m. to 5:00 p.m., local time) in each of the primary locations from which it operates: Tokyo, London, and New York.

B) the market never sleeps.

________ is the impact of currency exchange rate changes on the reported financial statements of a company. A) Economic exposure B) Financial exposure C) Translation exposure D) Transaction exposure

C) Translation exposure

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about A) anticipated currency swap rates. B) stability in the global marketplace. C) future currency movements. D) the carry trades that will occur.

C) future currency movements.

International businesses use foreign exchange markets for many reasons. Which of the following is one of these reasons? A) to receive payments from domestic investors that are in local currencies B) to pay a foreign company for its products or services in its native country's currency C) to invest for short terms in money markets when they have spare cash D) to cover themselves from all risks involved in currency speculation

C) to invest for short terms in money markets when they have spare cash

________ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. A) An arbitrage B) A carry trade C) A spot exchange D) A currency swap

D) A currency swap

An American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment? A) The Hungarian forint rises in value against the dollar. B) Interest rates in the United States move down. C) Short-term interest rates in Hungarian money markets shoot up. D) The dollar appreciates against the Hungarian forint.

D) The dollar appreciates against the Hungarian forint.

The purchasing power parity (PPP) theory argues that the exchange rate will A) increase if a country is experiencing inflation. B) change even if relative prices remain unchanged. C) increase if a country is experiencing deflation. D) change if relative prices change.

D) change if relative prices change.

Which of the following refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates? A) currency pairing B) carry trade C) currency exchange D) currency swap

D) currency swap

Restrictions on external convertibility can A) hamper foreign companies wishing to do business in that country. B) allow domestic companies to freely invest abroad. C) limit the amount of product a foreign company can produce in that country. D) limit domestic companies' ability to invest abroad.

D) limit domestic companies' ability to invest abroad.

Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be A) much less in industrialized countries. B) much less in third world countries. C) variable depending upon the current rate of exchange between the producer and consumer of the products in the "basket." D) roughly equivalent in each country.

D) roughly equivalent in each country.

Which of the following is referred to as the purchasing power parity puzzle? A) reduced levels of inflation in countries where the growth in the money supply is faster than the growth in its output B) the reason countries with high inflation rates see depreciation in their currency exchange rates C) identical products being sold in different countries for the same price when their price is expressed in terms of the same currency D) the failure to find a strong link between relative inflation rates and exchange rate movements

D) the failure to find a strong link between relative inflation rates and exchange rate movements

The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as ________ exposure. A) economic B) financial C) translation D) transaction

D) transaction