Question 1

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?

Accepted Answer

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.F) A) and D)
G) A) and C)

Question 2

The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.

Accepted Answer

A) True 
 B)False

Question 3

In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 4

When a firm enters into a spot exchange contract, it is taking out insurance against adverse future exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on?

Accepted Answer

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.F) B) and C)
G) A) and D)

Question 6

The foreign exchange market offers complete insurance against foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following indicates that the dollar is selling at a discount on the 30-day forward market?

Accepted Answer

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.F) A) and B)
G) A) and C)

Question 8

The yen/dollar exchange rate is ×120 = $1 in London and ×123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ×123,000,000 in New York and engages in arbitrage by selling it in London?

Accepted Answer

A)  $34,000
B)  $20,390
C)  $25,000
D)  $46,666
E)  $39,454F) C) and E)
G) A) and B)

Question 9

Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Accepted Answer

A)  Pricing its products identically despite huge differences in demand across different markets
B)  Differentiating otherwise identical products among nations along some line, such as design or packaging
C)  Adopting a pricing strategy that matches what competitors charge in each of the different national markets
D)  Limiting sales of its products to only a few nations
E)  Selling its products at higher prices than normal to break even by selling fewer unitsF) All of the above
G) A) and B) B

Question 10

Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side.

Accepted Answer

A) True 
 B)False

Question 11

The phenomenon of capital flight is most likely to occur when:

Accepted Answer

A)  the recovery phase post an economic depression nears its end.
B)  the value of the domestic currency depreciates rapidly because of hyperinflation.
C)  a country's economic prospects are stable and indicate growth.
D)  interest rates are low for a prolonged period of time.
E)  governments lift convertibility restrictions on their currency.F) A) and E)
G) None of the above B

Question 12

Which of the following approaches to forecasting exchange rate movements uses price and volume data to determine past trends?

Accepted Answer

A)  Technical analysis
B)  Behavioral equilibrium model
C)  Interest rate parity equation model
D)  Fundamental analysis
E)  Portfolio balance modelF) C) and D)
G) B) and C)

Question 13

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as countertrade.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is illustrated by the Big Mac Index published by The Economist?

Accepted Answer

A)  The law of one price
B)  The purchasing power parity theorem
C)  The Fisher effect
D)  Flow of FDI
E)  The bandwagon effectF) C) and E)
G) A) and E)

Question 15

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?

Accepted Answer

A)  €320
B)  €300
C)  €250
D)  €360
E)  €150F) A) and D)
G) A) and C)

Question 16

What is meant by translation exposure?

Accepted Answer

A)  The long-run effect of changes in exchange rates on future prices, sales, and costs
B)  The impact of currency exchange rate changes on the reported financial statements of a company
C)  The extent to which a firm's future international earning power is affected by changes in exchange rates
D)  The 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 pricesF) B) and C)
G) C) and D)

Question 17

Which of the following is a step taken to manage foreign exchange risk?

Accepted Answer

A)  Firms should focus solely on managing transaction and translation exposures.
B)  Forecasting future exchange rate movements should be avoided as it is speculative.
C)  Firms need to develop strategies for dealing with economic exposure.
D)  Firms should avoid central control of exposure.
E)  Firms should not distinguish between transaction and translation exposure and economic exposure.F) A) and B)
G) None of the above C

Question 18

Briefly describe the schools of thought regarding exchange rate forecasting.

Accepted Answer

A company's need to predict future excha...

Question 19

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the:

Accepted Answer

A)  PPP theory puzzle.
B)  lead strategy.
C)  Fisher effect.
D)  bandwagon effect.
E)  international Fisher effect.F) B) and C)
G) All of the above

Question 20

Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates.

Accepted Answer

A) True 
 B)False

Exam 10: The Foreign Exchange Market

Correct Answer
verified

The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.

Correct Answer
verified

In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Correct Answer
verified

When a firm enters into a spot exchange contract, it is taking out insurance against adverse future exchange rate movements.

Correct Answer
verified

Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on?

Correct Answer
verified

The foreign exchange market offers complete insurance against foreign exchange risk.

Correct Answer
verified

Which of the following indicates that the dollar is selling at a discount on the 30-day forward market?

Correct Answer
verified

The yen/dollar exchange rate is ×120 = $1 in London and ×123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ×123,000,000 in New York and engages in arbitrage by selling it in London?

Correct Answer
verified

Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Correct Answer
verified
B

Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side.

Correct Answer
verified

The phenomenon of capital flight is most likely to occur when:

Correct Answer
verified
B

Which of the following approaches to forecasting exchange rate movements uses price and volume data to determine past trends?

Correct Answer
verified

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as countertrade.

Correct Answer
verified

Which of the following is illustrated by the Big Mac Index published by The Economist?

Correct Answer
verified

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?

Correct Answer
verified

What is meant by translation exposure?

Correct Answer
verified

Which of the following is a step taken to manage foreign exchange risk?

Correct Answer
verified
C

Briefly describe the schools of thought regarding exchange rate forecasting.

Correct Answer
verified
A company's need to predict future excha...
View Answer

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the:

Correct Answer
verified

Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates.

Correct Answer
verified

Exam 10: The Foreign Exchange Market

Correct AnswerverifiedShow Answer

The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.

Correct AnswerverifiedShow Answer

In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

Correct AnswerverifiedShow Answer

When a firm enters into a spot exchange contract, it is taking out insurance against adverse future exchange rate movements.

Correct AnswerverifiedShow Answer

Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on?

Correct AnswerverifiedShow Answer

The foreign exchange market offers complete insurance against foreign exchange risk.

Correct AnswerverifiedShow Answer

Which of the following indicates that the dollar is selling at a discount on the 30-day forward market?

Correct AnswerverifiedShow Answer

The yen/dollar exchange rate is ×120 = $1 in London and ×123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ×123,000,000 in New York and engages in arbitrage by selling it in London?

Correct AnswerverifiedShow Answer

Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Correct AnswerverifiedB

Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side.

Correct AnswerverifiedShow Answer

The phenomenon of capital flight is most likely to occur when:

Correct AnswerverifiedB

Which of the following approaches to forecasting exchange rate movements uses price and volume data to determine past trends?

Correct AnswerverifiedShow Answer

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as countertrade.

Correct AnswerverifiedShow Answer

Which of the following is illustrated by the Big Mac Index published by The Economist?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

What is meant by translation exposure?

Correct AnswerverifiedShow Answer

Which of the following is a step taken to manage foreign exchange risk?

Correct AnswerverifiedC

Briefly describe the schools of thought regarding exchange rate forecasting.

Correct AnswerverifiedA company's need to predict future excha...View AnswerShow Answer

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the:

Correct AnswerverifiedShow Answer

Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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B

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B

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C

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A company's need to predict future excha...
View Answer

Correct Answer
verified

Correct Answer
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