Final Exam review
What are the two main functions of the foreign exchange market
converting currency and providing some insurance against foreign exchange risk
The ________ helps consumers compare the relative prices of goods and services in different countries
exchange rate
Which term refers to the rate at which one currency is converted into another
exchange rate
An effective business strategy to reduce economic exposure is to contract out high-value-added manufacturing
false
Carry trade is non-speculative in nature.
false
Economist Martin Feldstein has coined the term "hot money" to pertain to long-term capital flows
false
Fixed exchange rates lead to speculation and uncertainty in the value of currencies
false
Fixed exchange rates lead to speculation and uncertainty in the value of currencies.
false
Gold was declared as the formal reserve asset in the Jamaica agreement of 1976
false
Governments allow convertibility to preserve their foreign exchange reserves
false
Governments give banks less freedom when they deal in foreign currencies
false
If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a premium on the 30-day forward market
false
If the international capital market continues to grow, financial intermediaries likely will provide less quality information about foreign investment opportunities
false
If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated
false
If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a discount in the forward market
false
Implementing a fixed exchange rate regime increases the price inflation in countries
false
Market forces have produced a stable dollar exchange rate under a floating exchange rate regime
false
The IMF does not expect governments to meet any obligations except to pay back the money it borrows
false
The cost of capital is the difference between cost of inputs and outputs
false
The cost of recording, transmitting, and processing information has doubled with advancements in technology since 1964
false
The globalization of capital has been universally seen as a positive development
false
The gold standard called for fixed exchange rates against the U.S. dollar
false
The impact of currency exchange rates on the reported financial statements of a company is called economic exposure
false
The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney
false
The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less
false
The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less. False
false
The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more than the spread between the domestic deposit and lending rates
false
There are many impediments to the free flow of goods and services in an efficient market
false
There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates
false
Using floating exchange rates will help countries reduce the risk of investing in foreign assets
false
A capital market brings together those who want to invest money and those who want to borrow money
true
A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate
true
A currency swap deal enables companies to insure themselves against foreign exchange risk.
true
After the agreement reached at Bretton Wood, the dollar was the only currency that could be convertible into gold
true
Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly
true
Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings in the home currency
true
By using the global capital market, investors have a much wider range of investment opportunities than in a purely domestic capital market
true
Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa
true
Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to investors
true
Depositors are not protected against bank failures in the Eurocurrency market
true
Eurocurrency can be created anywhere in the world
true
Financial services has historically been the most tightly regulated of all industries
true
Financial services is an information-intensive industry
true
If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices
true
Interest rates adjust automatically under a strict currency board system
true
Investors can reduce the level of risk by diversifying a portfolio internationally
true
Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the hope that she would make money based on the exchange rates. This demonstrates a carry trade
true
The Eurocurrency market has been one cause of a decrease in global financial regulations
true
The International Fisher Effect 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
true
The International Monetary Fund's original function was to provide a pool of money from which members could borrow in the short term
true
The agreement reached at Bretton Woods established the International Monetary Fund (IMF) and the World Bank
true
The current system of foreign exchange is a mixed system of government intervention and speculative activity
true
The efficient market school argues that investing in exchange rate forecasting services would be a waste of money
true
The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar
true
The foreign exchange market converts the currency of one country into that of another country
true
The global capital market often lacks information about the fundamental quality of foreign investments
true
The international monetary system refers to the institutional arrangements that govern exchange rates
true
The relatively low correlation between the movements of stock markets in different countries indicates that countries face different economic conditions
true
The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies
true
To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract
true
Transaction exposure 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
true
When Krista traveled from the United States to England, she had to change her money from dollars into pounds. Krista was participating in the currency exchange market
true
World Bank offers low-interest loans to risky customers whose credit rating is often poor
true
