HTM- Ch.10
The foreign exchange trading center in ________ has the highest percentage of activity.
London
Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. What 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
Rae feels it is best for her company to pay their foreign supplier in Panama this month even though they will receive product for another six months. She recently learned that the currency in Panama is expected to appreciate and, by paying the supplier now, her company will save money. This is an example of
a lead strategy
Kendall Wood Products Corp. purchased securities on the London Stock Exchange and then immediately resold them on the New York Stock Exchange at a higher price. The profits from this transaction were used to buy new machinery for the mill. This company engaged in
arbitrage
Jin-Lo is investing money for his company. He notices that the interest rate on borrowing in Jakarta is 2 percent and the interest rate on bank deposits in Warsaw is 7.5 percent. In this situation, a carry trade would occur when Jin-Lo
borrows money in Jakarta currency, converts it into Warsaw currency, and deposits it in a Warsaw bank
Assume that the interest rate on borrowings in Argentina is 3 percent, but the interest rate on deposits in British banks is 9 percent. A trader borrows 1 million Argentine pesos, then converts the money into British pounds and deposits it in a British bank. What is the trader involved in?
carry trade
The extent to which a firm's future international earning power is affected by changes in exchange rates is known as
economic exposure
A(n) ________ has no impediments to the free flow of goods and services, such as trade barriers.
efficient market
The purchasing power parity puzzle represents the failure to find a strong link between relative inflation rates and
exchange rate movements
Translation exposure refers to the
impact of currency exchange rates on the reported financial statements of a company
One reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates is due to the
impact of investor psychology on short-run exchange rate movements
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 the same currency.
According to the _____, 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
Carlos is the manager of an American company. He expects the value of the British pound to appreciate in the near future and so delays the collection of payments from British customers until the next month. Which tactic is Carlos using to minimize the foreign exchange exposure?
lag strategy
What happens to the value of money when hyperinflation exists?
money loses value very rapidly
TransWare Inc., based in Atlanta, has a plant in Russia that builds road equipment. Each year this plant has been profitable, but TransWare Inc. is not able to convert the profits into U.S. dollars and take them out of the country. What type of convertibility does this represent?
nonconvertible
A currency is considered freely convertible when
the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it
How are spot exchange rates determined?
the interaction between demand and supply of a currency relative to other currencies
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 €80. How much in U.S. dollars would the tourist have to pay to buy the product?
$120
