chap 10
The yen/dollar exchange rate is ¥120 = $1 in London and ¥123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ¥1,23,000,000 in New York and engages in arbitrage by selling it in London?
$25,000
Steven converted $1,000 to ¥105,000 for a trip to Japan. However, he spent only ¥50,000. During this period, the value of the dollar weakened against the yen. Considering a current exchange rate of $1=¥100, how many dollars did Steven spend on the trip?
$450
The euro/dollar exchange rate is €1 = $1.20. If a trader buys a camera that retails for $300 in New York and sells it for €200 in Berlin (ignoring transaction costs, transportation costs, or trade barriers), this represents a potential profit (arbitrage) of _____.
$60
According to the Fischer effect, if the "real" rate of interest in a country is 4 percent and expected annual inflation is 9 percent, the "nominal" interest rate will be _____.
13 percent
Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?
A loss of $62,500
_____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.
Currency swap
Which of the following has no impediments to the free flow of goods and services, such as trade barriers?
Efficient market
_____ refers to the adverse consequences of unpredictable changes in exchange rates.
Foreign exchange risk
A lag strategy involves:
delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate
The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see:
depreciation in its currency exchange rate.
A currency is said to be _____ when only nonresidents may convert it into a foreign currency without any limitations.
externally convertible
A(n) _____ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.
forward exchange
In terms of the approaches to exchange rate forecasting, _____ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements.
fundamental analysis
When a firm insures itself against foreign exchange risk, it is said to be engaging in _____.
hedging
The law of one price states that:
in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of in the same currency.
In terms of exchange rate forecasting, a(n) _____ market is one in which prices do not reflect all available information.
inefficient
The _____ states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.
international Fisher effect
Countertrade makes sense when a country's currency is _____.
nonconvertible
When two parties agree to exchange currency and execute the deal immediately, the transaction is referred to as _____.
spot exchange
The speculative element of the carry trade is that its success is based upon a belief that
there will be no adverse movement in exchange rates or interest rates
The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with _____.
underdeveloped capital markets
The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, a camera that retails for $300 in New York should sell for _____ in Germany.
€250
Which of the following is a key feature of the foreign exchange market?
The foreign exchange market never sleeps.
What is meant by translation exposure?
The impact of currency exchange rate changes on the reported financial statements of a company
A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier ¥150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = ¥110. The importer can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ¥105. Which of the following will happen if the exchange rate after 30 days is $1 = ¥90?
The importer will earn a profit of approximately $171 per computer.
Which of the following refers to currency speculation?
The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
In terms of foreign exchange, which of the following observations is true of leading and lagging strategies?
They can put pressure on a weak currency.
Which of the following is true of the differences in relative demand and supply of currencies?
They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.
Which of the following is true of arbitrage opportunities in foreign exchange markets?
They tend to be small and they disappear in minutes.
Which of the following is a reason why governments limit convertibility of their currency?
To preserve their foreign exchange reserves
Which of the following is a function of the foreign exchange market?
To provide some insurance against foreign exchange risk
_____, a category of foreign exchange risk, refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.
Translation exposure
A dealer wishes to sell Thai baht for Argentine peso. Which of the following currencies is most likely to act as a vehicle currency in this transaction?
U.S. dollar
Which of the following is a vehicle currency due to its central role in foreign exchange deals?
U.S. dollar
The currency of Venadia, a country, falls sharply in value against the currency of Lutetia, a neighboring country. Which of the following is a consequence of this exchange rate movement?
Venadia's exports to Lutetia will increase because Venadian goods will become cheaper in Lutetia.
Which of the following indicates that the dollar is selling at a discount on the 30-day forward market?
When the current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥110 after 30 days
Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market?
When the current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥130 after 30 days
Which of the following refers to the bandwagon effect?
When traders move like a herd, all in the same direction and at the same time, in response to each others' perceived actions
The Fisher effect states that:
a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).
A lead strategy involves:
attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate.
The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to:
borrow money in Rhodian currency, convert it into Maritian currency, and deposit it in a Maritian bank.
The phenomenon of _____ occurs when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency.
capital flight
Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ¥120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ¥123 = $1. Which of the following transactions would yield immediate profit?
Arbitrage
Which of the following refers to countertrade?
Arbitrage
How are spot exchange rates determined?
By the interaction between demand and supply of a currency relative to other currencies
Which of the following caused a decline in the dollar-yen carry trade during 2008-09?
Decrease in interest rate differentials as the U.S. rates came down
Which of the following is a way in which enterprises with some market power limit arbitrage so that their price discrimination policy works?
Differentiating otherwise identical products among nations along some line, such as design or packaging
Which of the following is true of the efficient market school of thought toward exchange rate forecasting?
Inaccuracies in predictions will not be consistently above or below future spot rates; they will be random.
Which of the following results from the output of goods and services not matching the increase in money supply?
Inflation
Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis?
Inflation rate
Which of the following occurs when a government increases money supply?
It makes it easier for banks to borrow from the government.
Which of the following is true of inflation?
It occurs when the quantity of money in circulation rises faster than the stock of goods and services
Which of the following foreign exchange trading centers has the highest percentage of activity?
London
Which of the following is a reason for London's dominance in the foreign exchange market?
London's location making it the link between the East Asian and New York markets
Which of the following is an example of transaction exposure?
Obligations for the purchase of goods at previously agreed prices
Which of the following approaches to forecasting exchange rate movements uses price and volume data to determine past trends?
Technical analysis
Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?
The dollar will appreciate against the euro.
