Global Econ Ch 10 - Additional Practice + Homework

Tom boasts that he is often one of the first buyers of any new technology product. Tom saw a new Apple watch at the Amsterdam airport when he was hurrying to catch a flight back home to New York. Tom saw that the watch sold for 100 euros. Tom did not have time to buy the watch in Amsterdam. Assume that the euro/dollar exchange rate is €1 = $1.20. According to the law of one price, at what price would it make sense to buy the watch in New York? a. $150 b. $140 c. $120 d. $105 e. $100

c. $120

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? a. $550 b. $523 c. $450 d. $600 e. $500

c. $450

_____ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. a. A currency swap b. Carry trade c. A forward exchange d. Currency speculation e. A spot exchange

c. A forward exchange

To jumpstart its slow economy, the government of Mesoma increased the money supply. Which of the following is a likely consequence of Mesoma's action? a. It results in an overall decrease in credit. b. It makes it difficult for individuals and companies to borrow from banks. c. It makes it easier for banks to borrow from the government. d. It causes a decrease in demand for goods and services. e. It causes price deflation as the money supply exceeds goods and services output.

c. It makes it easier for banks to borrow from the government.

Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting? a. Forward exchange rates are the best possible predictors of future spot exchange rates. b. Forward exchange rates represent market participants' collective predictions of likely spot exchange rates. c. Companies cannot beat the markets because forward rates reflect all available information about likely future changes in exchange rates. d. Investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates. e. The foreign exchange market is efficient at setting forward rates, which are unbiased predictors of future spot rates.

d. Investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates.

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately? a. It assumes away transportation costs and trade barriers. b. It does not take into account the law of one price. c. It does not take into account the practice of arbitrage. d. It assumes that the markets are not efficient. e. It does not consider government influence on a nation's money supply.

a. It assumes away transportation costs and trade barriers.

During inflation, an increase in the amount of currency available leads to a. overheating of the economy thereby reducing the production levels in the economy. b. changes in the relative demand-and-supply conditions in the foreign exchange market. c. a reduction in the rate of inflation thus leading to an appreciation of the currency. d. decreased lending by banks thereby resulting in more savings. e. a decrease in the demand for goods and services, which drives currency value higher.

b. changes in the relative demand-and-supply conditions in the foreign exchange market.

Assume that the interest rate on borrowings in South Korea is 1 percent, but the interest rate on deposits in British banks is 7 percent. A trader borrows 1 million South Korean won, then converts the money into British pounds and deposits it in a British bank. What is the trader involved in? a. countertrade b. carry trade c. barter d. forward exchange e. a swap

b. carry trade

An American company sold heavy construction equipment to the government of Romania. Instead of receiving U.S. dollars, the company agreed to take payment in the form of Romanian goods. This is an example of a. short selling. b. countertrade. c. capital flight. d. a carry trade. e. arbitrage.

b. countertrade.

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009? a. increase in risk appetite making the carry trade less attractive b. decrease in interest rate differentials as the U.S. rates came down c. increase in interest rate differentials as Japanese interest rates came down d. decrease in interest rate differentials as the U.S. interest rates went up e. decrease in interest rate differentials as the Japanese rates went up

b. decrease in interest rate differentials as the U.S. rates came down

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should a. appreciate by 3 percent against the Japanese yen. b. depreciate by 3 percent against the Japanese yen. c. appreciate by 1.5 percent against the Japanese yen. d. depreciate by 1.5 percent against the Japanese yen. e. appreciate by 15 percent against the Japanese yen.

b. depreciate by 3 percent against the Japanese yen.

When a firm insures itself against foreign exchange risk, it is engaging in a. forecasting. b. hedging. c. currency speculation. d. countertrade. e. arbitrage.

b. hedging

What is meant by translation exposure? a. long-run effect of changes in exchange rates on future prices, sales, and costs b. impact of currency exchange rate changes on the reported financial statements of a company c. extent to which a firm's future international earning power is affected by changes in exchange rates d. extent to which the income from individual transactions is affected by fluctuations in foreign exchange values e. The obligations for the purchase or sale of goods and services at previously agreed prices

b. impact of currency exchange rate changes on the reported financial statements of a company

What is meant by translation exposure? extent to which the money supply increases faster than output increases a. extent to which the money supply increases faster than output increases b. impact of currency exchange rate changes on the reported financial statements of a company c. extent to which the income from individual transactions is affected by fluctuations in foreign exchange values d. extent to which the government allows residents and nonresidents to convert a currency into a foreign currency e. extent to which a firm's future international earning power is affected by changes in exchange rates

b. impact of currency exchange rate changes on the reported financial statements of a company

In terms of the approaches to exchange rate forecasting, which of the following is based on the premise that there are analyzable market trends and waves and that previous trends and waves can be used to predict future trends and waves? a. chart analysis b. technical analysis c. behavioral equilibrium model d. fundamental analysis e. portfolio balance model

b. technical analysis

A base model Fitbit costs $100 in the United States and €125 in Europe. What would the purchasing power parity theory's prediction of the dollar/euro exchange rate be based on this example? a. $1 = €1.25 b. $1 = €1 c. $1 = €0.80 d. $1 = €0.90 e. $1 = €1.10

a. $1 = €1.25

Assume that the exchange rate between the euro and the dollar is €1.00 = $1.50. An American tourist in Germany is buying a product whose price is €50. How much in U.S. dollars would the tourist have to pay to buy the product? a.$75 b. $50 c. $33 d. $150 e. $60

a. $75

Which of the following is a drawback of the purchasing power parity theory? a. It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years. b. It does not explain change in exchange rates in terms of change in relative prices. c. It cannot explain when the demand of a particular currency would exceed its supply and vice versa. d. It does not address inflation in situations where governments control the rate of growth in money supply. e. It cannot predict exchange rate changes for countries with high rates of inflation and underdeveloped capital markets.

a. It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years.

Which of the following is a key feature of the foreign exchange market? a. The foreign exchange market never sleeps. b. The foreign exchange market is located in London. c. The foreign exchange market is characterized by high transaction costs. d. The foreign exchange market is shut for two hours every day. e. The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities.

a. The foreign exchange market never sleeps.

A(n) _____ is used to move out of one currency and into another for a limited period without incurring foreign exchange risk. a. currency swap b. currency speculation c. carry trade d. spot exchange e. arbitrage

a. currency swap

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 swap b. carry trade c. hedge d. option trade e. forward exchange

a. currency swap

The extent to which a firm's future international earning power is affected by changes in exchange rates is known as a. economic exposure. b. carry trade. c. translation exposure. d. countertrade. e. transaction exposure.

a. economic exposure.

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets? a. government intervention in cross-border trade b. relationship between money supply and price inflation c. impact of increase in currency on relative demand and supply conditions of currencies d. excessive growth in money supply e. insignificant impact of transportation costs on international trade

a. government intervention in cross-border trade

Assume that the exchange rate between the U.S. dollar and the Japanese yen is $1 = 120 yen. A pen that retails for $10 in New York should sell for 1,200 yen in Tokyo, if there are no trade barriers and transportation costs, according to the a. law of one price. b. theory of demand. c. bandwagon effect. d. inefficient market theory. e. international Fisher effect.

a. law of one price.

Which of the following is an example of transaction exposure? a. obligations for the purchase of goods at previously agreed prices b. borrowing of funds in domestic currency c. impact of currency exchange rate changes on the reported financial statements of a company d. long-term effect of changes in exchange rates e. effect of changing exchange rates on future prices, sales, and costs

a. obligations for the purchase of goods at previously agreed prices

When dominant enterprises in an industry exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions, it is referred to as a. price discrimination. b. premium pricing. c. psychological pricing. d. price skimming. e. price leadership.

a. price discrimination.

Which approach to forecasting exchange rate movements uses price and volume data to determine past trends? a. technical analysis b. behavioral equilibrium model c. interest rate parity equation model d. fundamental analysis e. portfolio balance model

a. technical analysis

According to the Fisher effect, if the "real" rate of interest in a country is 4 percent and the expected annual inflation is 9 percent, what would the "nominal" interest rate be? a. 5 percent b. 13 percent c. 9 percent d. 36 percent e. 2.25 percent

b. 13 percent

_____ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate. a. A lag strategy b. A lead strategy c. Buying swaps d. A forecast strategy e. A spot exchange rate contract

b. A lead strategy

Which of the following is a reason for London's dominance in the foreign exchange market? a. Great Britain's decision to retain the British pound instead of using the euro b. The preeminence of Financial Times Stock Exchange (FTSE) index as an economic health indicator c. London's location making it the link between the East Asian and New York markets d. London being the preferred headquarters destination for major multinational corporations e. London's trading centers opening soon after Tokyo's and New York's trading centers closing for the night

c. London's location making it the link between the East Asian and New York markets

Which of the following indicates that the dollar is selling at a discount on the 30-day forward market? a. The spot exchange rate is $1 = ¥120 currently and $1 = ¥130 after 30 days. b. The spot exchange rate is $1 = ¥120 currently and $1 = ¥100 after 30 days. c. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥110 after 30 days. d. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥130 after 30 days. e. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥120 after 30 days.

c. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥110 after 30 days.

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? a. The dollar will depreciate against the euro. b. The market is undecided about the direction of currency movement. c. The dollar will appreciate against the euro. d. The dollar/euro exchange rate will be steady. e. The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.

c. The dollar will appreciate against the euro.

In terms of foreign exchange, which of the following is true of leading and lagging strategies? a. They primarily protect long-term cash flows from adverse changes in exchange rates. b. They are used to minimize economic exposure of companies. c. They can help firms minimize their transaction and translation exposure. d. They involve accelerating payments from strong-currency to weak-currency countries. e. They are limited by governments because they create pressure on strong currencies.

c. They can help firms minimize their transaction and translation exposure.

Assume the euro/dollar exchange rate quoted in London at 3 p.m. is €1 = $1.10. If the New York euro/dollar exchange rate at the same time (10 a.m. New York time) were €1 = $1.15, a dealer could make a profit through a. countertrade. b. currency swap. c. arbitrage. d. forward exchange. e. carry trade.

c. arbitrage.

Omega, Inc., a U.S.-based firm entered into an agreement with another party to exchange currency and execute the deal at a specific date in the future. What is Omega, Inc. engaging in when it insures itself against foreign exchange risk? a. currency speculation b. carry trade c. hedging d. currency swap e. arbitrage

c. hedging

A(n) _____ market is one in which prices do not reflect all available information. a. free b. black c. inefficient d. perfect e. gray

c. inefficient

Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis? a. relative strength indicator b. moving average c. inflation rate d. business cycles e. regression

c. inflation rate

Which of the following 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? a. bandwagon effect b. law of one price c. international Fisher effect d. Helms-Burton Act e. purchasing power parity (PPP) theory

c. international Fisher effect

A currency is said to be externally convertible when a. both residents and nonresidents are allowed to purchase a limited amount of a foreign currency with it. b. only residents may convert it into a foreign currency without any limitations. c. only nonresidents may convert it into a foreign currency without any limitations. d. neither residents nor nonresidents are allowed to convert it into a foreign currency. e. the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

c. only nonresidents may convert it into a foreign currency without any limitations.

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the a. currency crisis. b. banking crisis. c. purchasing power parity puzzle. d. bandwagon effect. e. foreign exchange risk.

c. purchasing power parity puzzle.

The movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions is called a. the currency effect. b. capital flight. c. the bandwagon effect. d. the Fisher effect. e. the spot effect.

c. the bandwagon effect.

Which of the following refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values? a. economic exposure b. transaction exposure c. translation exposure d. countertrade e. carry trade

c. translation exposure

The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how much would a camera that retails for $300 in New York sell for in Germany? a. €320 b. €300 c. €250 d. €360 e. €150

c. €250

Which of the following is true of inflation? a. It occurs when the demand for a particular currency is more than the supply. b. It occurs when securities are purchased in one market for immediate resale in another. c. It occurs when two parties agree to exchange currency and execute a deal at a specific date in the future. d. It occurs when the quantity of money in circulation rises faster than the stock of goods and services. e. It occurs when output increases faster than the money supply.

d. It occurs when the quantity of money in circulation rises faster than the stock of goods and services.

Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on? a. Price and volume data cannot be used to determine past trends. b. Econometric models drawn from economic theory are best suited to predict exchange rate movements. c. The foreign exchange market is efficient and forward exchange rates are the best predictors of future spot exchange rates. d. Previous market trends and waves can be used to predict future market trends and waves. e. Since forward exchange rates are the best predictors of future spot rates, it makes no sense to invest in forecasting.

d. Previous market trends and waves can be used to predict future market trends and waves.

Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market? a. The spot exchange rate is currently $1 = ¥120 and changes to $1 = ¥130 after 30 days. b. The spot exchange rate is currently $1 = ¥120 and changes to $1 = ¥110 after 30 days. c. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥110 after 30 days. d. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥130 after 30 days. e. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥120.

d. The current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥130 after 30 days.

An American company imports laptop computers from Japan. The company knows that after a shipment arrives, it must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the American company must pay the Japanese supplier ¥150,000 for each computer at the current dollar/yen spot exchange rate of $1 = ¥110. The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold. Which of the following will happen if the exchange rate after 30 days is $1 = ¥90? a. The importer will earn a profit of approximately $236 per computer. b. The importer will earn a profit of approximately $67 per computer. c. The importer will incur a loss of approximately $236 per computer. d. The importer will incur a loss of approximately $67 per computer. e. The importer will incur a loss of approximately $90 per computer.

d. The importer will incur a loss of approximately $67 per computer.

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? a. forward exchange b. carry trade c. currency swap d. arbitrage e. currency speculation

d. arbitrage

When residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency it is an example of a. deflation b. arbitrage c. liquidity rush d. capital flight e. currency swap

d. capital flight

Companies can deal with the nonconvertibility problem of currencies by engaging in a. a currency swap. b. a carry trade. c. capital flight. d. countertrade. e. short selling.

d. countertrade.

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see a. appreciation in its currency exchange rate. b. a decrease in interest rates. c. the collapse of the gold standard. d. depreciation in its currency exchange rate. e. a decrease in its money supply.

d. depreciation in its currency exchange rate.

A country's currency is referred to as _____ when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it. a. externally convertible b. nonconvertible c. leading d. freely convertible e. lagging

d. freely convertible

In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements? a. technical analysis b. fractional integration models c. Markov switching models d. fundamental analysis e. chart analysis

d. fundamental analysis

Which of the following 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? a. law of one price b. purchasing power parity theory c. efficient market hypothesis d. international Fisher effect e. theory of demand

d. international Fisher effect

Mark is the manager of an American company. He expects the value of the British pound to appreciate in the near future. Hence, he delays the collection of payments from British customers until the next month. Which tactic is Mark making use of to minimize the foreign exchange exposure? a. spot exchange rate contracts b. buying swaps c. lead strategy d. lag strategy e. forecast strategy

d. lag strategy

The rate at which a foreign exchange dealer converts one currency into another currency on a particular day is the a. future exchange rate. b. forward exchange rate. c. fixed exchange rate. d. spot exchange rate. e. floating exchange rate.

d. spot exchange rate.

Which of the following observations is true of technical analysis, an approach to exchange rate forecasting? a. It draws on economic theory to construct models for predicting exchange rate movements. b. The variables contained in this model typically include relative money supply growth rates, inflation rates, and interest rates. c. There is a sound theoretical rationale for the assumption of predictability underlying this approach. d. Owing to its drawbacks, this approach has declined in importance over the last few years, giving way to fundamental analysis. e. It does not rely on a consideration of economic fundamentals.

e. It does not rely on a consideration of economic fundamentals.

Which of the following is true of the differences in relative demand and supply of currencies? a. They cannot be used to explain the determination of exchange rates. b. While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors. c. They provide a high-level understanding of exchange rates. d. While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. e. They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

e. They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

Which of the following refers to the purchase of securities in one market for immediate resale in another to profit from a price discrepancy? a. currency swap b. carry trade c. option d. countertrade e. arbitrage

e. arbitrage

Assume that the exchange rate between the British pound and the U.S. dollar is 1 pound = 2 dollars. An Armani jacket sells for $80 in New York and 40 pounds in London. This is an example of a. hedging b. arbitrage. c. currency swap. e. exchange rate risk. f. the law of one price.

f. the law of one price.