International Finance Midterm 1 Conceptual Questions

Exchange rate pass-through may be defined as

the degree to which the prices of imported and exported goods change as a result of exchange rate changes

Which one of the following is NOT included in the most widely accepted statement of good corporate governance practices established by the OECD?

*All are included in the list* - Shareholder rights - Transparency and disclosure - Equitable treatment of shareholders

Which of the following is a way in which the Euro affects markets?

*All of the above* - Consumers and businesses enjoy price transparency and increased price-based competition. - Countries within the Euro zone enjoy cheaper transaction costs. - Currency risks and costs related to exchange rate uncertainty are reduced.

Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out at Bretton Woods?

*All of the above* - Differential rates of inflation across member nations - Several unexpected economic shocks to member nations - Widely divergent national monetary and fiscal policies among member nations.

Under a fixed exchange rate regime, the government of the currency is officially responsible for

*All of the above* - Intervention in the foreign exchange markets using gold and reserves. - maintaining the fixed/parity exchange rate - setting the fixed/parity exchange rate

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

*All of the following contributed to the emerging markets exchange rate collapse of the 1990s.* - Infrastructure weaknesses - the sharp reduction of cross-border foreign direct investment - speculation on the part of market participants.

A United States firm has chosen to deposit money in a British bank and have it denominated in U.S. dollars. This is an example of a...

Eurodollar deposit

According to the IMF survey done in 2014, majority of countries in the world were adopting floating exchange rate arrangements.

False

Assume a country's budget balances. If a country's savings exceed its investment it implies that the nation will run a current account deficit.

False

If a country runs a surplus on the overall account, i.e., BCA + BFA > 0, the central bank can supply foreign exchange out of its reserves. But, if the deficit persists, the central bank will run out of its reserves, and the country may be forced to devalue its currency.

False

In spite of the intervention of G-5 countries after Plaza Accord in 1985, the U.S. dollar value did not fall immediately against major currencies such as D-mark and Japanese yen.

False

Products that are relatively inelastic tend to also demonstrate a low degree of exchange rate pass-through.

False

Which of the following correctly identifies exchange rate regimes from less fixed to more fixed?

Independent floating, crawling pegs, exchange arrangements with no separate legal tender

Which of the following is NOT true reading the "yen carry trade"?

Investors borrow elsewhere at low rates, invest the proceeds in Japan at higher rates, then repay the initial loan making a profit on the proceeds.

A shortfall in domestic savings in a country means that its investment spending, and the job growth associated with it, could only be financed through foreign saving, in the form of a capital inflow to the country.

True

As the U.S. was building up trade deficit, its trading partners were recycling foreign exchange reserves swelled by trade surpluses by investing them in the U.S. securities. That is why the U.S. net portfolio investment has been high during the last 10 years.

True

LIBOR is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market).

True

One of the reasons for the European sovereign debt crisis was the increase in wages in southern Europe and France during the boom years before the crisis because their exports became uncompetitive due to high wages.

True

Purchasing Power Parity doesn't hold exactly because there exist substantial barriers to international commodity arbitrage.

True

Two main reasons for the deviation from interest rate parity are the transaction costs and capital control.

True

Until 2014, both the balance of current account (BCA) and the balance of financial account (BFA) have been positive most of the times in China. That implies that China's official reserve holdings must have gone up for the same period.

True

The J-Curve adjustment path for adjusting trade imbalances hypothesizes that for a country with a trade balance deficit:

a devaluation of the country's currency will result in an initial further deterioration of the trade imbalance before improvement

The _______ is the difference between merchandise imports and exports and a measure of a country's international trade in goods and services.

balance of trade

When the spot and forward exchange markets are not in equilibrium as described by interest rate parity, the potential for "rissoles" arbitrage profit exists. This is called _______

covered interest arbitrage (CIA)

Over the last several years, the United States has run a ______ in the goods trade balance and a ________ in the services trade balance.

deficit; surplus

When categorizing investments for the financial account component of the balance of payments the ______ is an investment where the investor has control whereas the _______ is an invent where the investor has no control over the asset.

direct investment; portfolio investment

On September 9, 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre, with the U.S. dollar. This practice is known as ____

dollarization

You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S. financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States?

dollarization

According to the "Impossible Trinity," if a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?

full financial integration and monetary independence

Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of

income trade

The Special Drawing Right (SDR):

is an international reserve asset created by the IMF

In the Anglo-American model of corporate governance, the primary goal of management is to

maximize shareholder wealth

Which of the following is NOT part of the Financial Account of BOP?

net imports/exports of services

A small economy country whose GDP is heavily dependent on trade with the United States could use an ______ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate.

pegged exchange rate with the United States

The balance of payments

records all international transactions for a country over a period of time

The Sarbanes-Oxley Act, passed by the U.S. Congress in July 2002, was designed to

reform corporate governance

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as

the international Fisher Effect