Chapter 10

A fundamental analysis approach to forecasting relies on _____ theory. Multiple choice question.

economic

Carry Trade

involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high

When a country experiences hyperinflation, money __________ value very rapidly. (Choose gains or loses.)

loses

currency swap

simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

In the mid-1980s, Bolivia was in the midst of hyperinflation. This was partly fueled because of what action by the government?

It prohibited conversion of the peso into other currencies.

The most important foreign exchange trading center (with more than 37% of the market) is ______. Multiple choice question.

London

A key to reducing economic exposure involves ________ so the firm is not severely affected by adverse changes in exchange rates.

distributing a firm's productive assets to various locations

PPP theory shows a direct relationship between a change in relative prices and a change in _____. Multiple choice question.

exchange rates

Transaction _____ refers to the extent that income from individual transactions is affected by changes in foreign exchange values.

exposure

When only nonresidents can convert a currency into a foreign currency with no limitations, the currency is considered

externally convertible

True or false: Most companies focus on reducing their economic exposure while ignoring strategies to reduce their transaction and translation exposure.

false

Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?

formalized

When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is

freely convertible.

When a country's money supply grows faster than goods and services can be produced, it results in _____.

inflation

Increases in interest rates reflect likely increases in ______, which is connected to depreciating ______ rates.

inflation; exchange

What are the three fundamental determinants of exchange rates?

interest rates inflation rates monetary growth

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

According to research, the PPP is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.

long-run; short-run

No one in Trevor's country is allowed to convert currency into any foreign currency. This is an example of ____ currency.

nonconvertible

spot exchange rate

the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day

law of one price

the notion that a good should sell for the same price in all markets

Suppose a US company agrees to buy products worth 1 million euros. At the time of the agreement, the dollar/euro 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

True or false: Empirical evidence suggest that the International Fisher effect does NOT explain short-term exchange rate movements well.

true

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 efficient market school suggests that ______ exchange rates are optimal at forecasting future ______ exchange rates.

forward; spot

The approach to forecasting that draws on economic theory to develop models that predict exchange rate movements is the _____ approach.

fundamental

The link between price changes and changes in exchange rates is further weakened by ______ intervention in foreign exchange markets in their attempt to affect the value of their currencies. Multiple choice question.

gov

A(n) ______ market is one in which prices do not reflect all available information, and forward exchange rates will not be the best predictors of future spot exchange rates.

inefficient

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. Multiple choice question.

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 demonstrates the idea of __________ in an economy.

inflation

Interest rates reflect expectations about future ____ rates, which has been shown to lead to a depreciation in exchange rates.

inflation

One main reason why the International Fisher Effect is NOT good at explaining short-term exchange rate movements is the impact of ______ on those movements.

investor psychology

It would be possible to determine the PPP exchange rate that would exist if markets were efficient by comparing _____.

the prices of identical products in different currencies

currency speculation

the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

True or False: If many national markets are controlled by a few multinational enterprises with the power to influence prices and distribution channels, PPP theory may not hold. True false question.

true

For most major currencies, forward exchange rates are commonly quoted for which three periods of time?

90 days 180 days 30 days

What is hyperinflation?

An explosive and seemingly uncontrollable price inflation in which money loses value very rapidly

The PPP, according to research, seems to predict exchange rate movements best for countries exhibiting which two characteristics?

Countries with underdeveloped capital markets Countries with high inflation rates

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. Multiple choice question.

appreciate

The failure to find a link between which two conditions has been referred to as the purchasing power parity puzzle?

Exchange rates Inflation rates

True or false: Short-term exchange rate movements are simple to predict.

false

What two things does the foreign exchange market do?

-convert currency of one nation to another and provide some insurance against foreign exchange risk

Fit-Right Shoe Company is a shoe distribution center. The company agrees to buy 1,000 pairs of shoes from a factory in China. Fit-Right enters into a 30-day forward exchange transaction with the factory. What is the result of this type of agreement?

Fit-Right will be guaranteed that they will have to pay no more than the 30-day forward exchange rate, insuring a profit.

The five most important foreign exchange trading centers are

London, New York, Zurich, Tokyo and Singapore.

What determines the value of a spot exchange rate?

demand and supply

Forward Exchange

When two parties agree to exchange currency and execute a deal at some specific date in the future.

A lead strategy occurs when a firm attempts to collect foreign currency receivables early when a currency is expected to ______ and pay foreign currency payables before they are due when a currency is expected to ______. Multiple choice question.

depreciate; appreciate

A country in which inflation is on the rise will have a currency that ____ compared to a country in which inflation is low. Multiple choice question.

depreciates

When a dominant enterprise is able to set different prices in different markets to reflect varying demand conditions, it is practicing price ______.

discrimination