Question 1

Which of the following is true of the purchasing power parity (PPP)  theory?

Accepted Answer

A)  A country's "nominal" interest rate (i)  is the sum of the required "real" rate of interest (r)  and the expected rate of inflation over the period for which the funds are to be lent (I) .
B)  The exchange rate will not change if relative prices change.
C)  The price of a "basket of goods" should be roughly equivalent in each country in relatively efficient markets.
D)  In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price.
E)  If the law of one price were true for all goods and services, the PPP exchange rate could not be found from any individual set of prices.F) C) and D)
G) A) and E)

Question 2

What is meant by a currency swap?

Accepted Answer

A currency swap is the simultaneous purc...

Question 3

What happens in the foreign exchange market does not directly impact the sales, profits, and strategy of a multinational enterprise.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following occurs when a government increases the money supply?

Accepted Answer

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.F) B) and D)
G) D) and E)

Question 5

A lead strategy involves:

Accepted Answer

A)  delaying foreign currency payables when a currency is expected to appreciate.
B)  delaying foreign currency payables when a currency is expected to depreciate.
C)  attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate.
D)  attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate.
E)  delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.F) All of the above
G) C) and D)

Question 6

How are spot exchange rates determined?

Accepted Answer

A)  By using historical average prices of different currencies
B)  By the interaction between demand and supply of a currency relative to other currencies
C)  By taking the average of a basket of currencies
D)  By government decree
E)  By predicting future currency movementsF) All of the above
G) A) and D)

Question 7

What is meant by economic exposure?

Accepted Answer

A)  The extent to which a firm's future international earning power is affected by changes in exchange rates
B)  The impact of currency exchange rate changes on the reported financial statements of a company
C)  The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values
D)  The extent to which the quantity of money in circulation rises faster than the stock of goods and services
E)  The extent of disparity in prices, when expressed in the same currency, of similar products in different countriesF) A) and E)
G) A) and D)

Question 8

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?

Accepted Answer

A)  5 percent
B)  13 percent
C)  9 percent
D)  36 percent
E)  2.25 percentF) B) and C)
G) C) and D)

Question 9

A lag strategy involves:

Accepted Answer

A)  delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.
B)  delaying the collection of foreign currency receivables when a foreign currency is expected to depreciate.
C)  attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate.
D)  paying foreign currency payables (to suppliers)  before they are due when a currency is expected to appreciate.
E)  paying foreign currency payables (to suppliers)  before they are due when a currency is expected to depreciate.F) D) and E)
G) A) and B)

Question 10

Which of the following transactions is used to move out of one currency and into another for a limited period without incurring foreign exchange risk?

Accepted Answer

A)  Currency swap
B)  Currency speculation
C)  Carry trade
D)  Spot exchange
E)  ArbitrageF) C) and D)
G) All of the above

Question 11

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

Accepted Answer

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.F) B) and E)
G) None of the above

Question 12

Companies can deal with the problem of nonconvertibility of currency by engaging in:

Accepted Answer

A)  price discrimination.
B)  countertrade.
C)  arbitrage.
D)  price skimming.
E)  currency speculation.F) C) and D)
G) B) and D)

Question 13

Which of the following has no impediments to the free flow of goods and services, such as trade barriers?

Accepted Answer

A)  Economic Union
B)  Currency Board
C)  Efficient market
D)  Carry trade
E)  European Monetary SystemF) A) and E)
G) All of the above

Question 14

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should:

Accepted Answer

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

Question 15

Companies engage in currency speculation to get minimal but assured returns from idle cash.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is true of inflation?

Accepted Answer

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.F) A) and B)
G) A) and E)

Question 17

Which of the following enables organizations to conduct international trade without having to resort to barter?

Accepted Answer

A)  Foreign exchange market
B)  Caribbean Single Market and Economy
C)  Auction market
D)  Countertrade
E)  Balance-of-trade equilibriumF) D) and E)
G) B) and D)

Question 18

A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier ×150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = ×110. The importer can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ×105. 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 $171 per computer.
C)  The importer will earn a profit of approximately $65 per computer.
D)  The importer will incur a loss of approximately $67 per computer.
E)  The importer will incur a loss of approximately $105 per computer.F) B) and D)
G) A) and E)

Question 19

To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P× be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP)  theory predict to be the equivalent of the dollar/yen exchange rate, E$/×?

Accepted Answer

A)  E$/× = (1 + P×) /P$
B)  E$/× = (1 + P$) /P×
C)  E$/× = P×/P$
D)  E$/× = P$/P×
E)  E$/× = (1 + P$) /(1 + P×) F) A) and B)
G) A) and D)

Question 20

Which of the following is a reason for London's dominance in the foreign exchange market?

Accepted Answer

A)  Great Britain's decision to retain the British pound instead of using the euro
B)  The preeminence of Financial Times Stock Exchange (FTS
E)   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 nightF) B) and D)
G) All of the above

Exam 10: The Foreign Exchange Market

Which of the following occurs when a government increases the money supply?

Correct Answer
verified

Companies can deal with the problem of nonconvertibility of currency by engaging in:

Correct Answer
verified

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

Correct Answer
verified

What is meant by economic exposure?

Correct Answer
verified

How are spot exchange rates determined?

Correct Answer
verified

Companies engage in currency speculation to get minimal but assured returns from idle cash.

Correct Answer
verified

Which of the following is true of inflation?

Correct Answer
verified

To express the PPP theory in symbols, let P_$ be the U.S. dollar price of a basket of particular goods and P_× be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory predict to be the equivalent of the dollar/yen exchange rate, E_$/×?

Correct Answer
verified

Which of the following enables organizations to conduct international trade without having to resort to barter?

Correct Answer
verified

A lead strategy involves:

Correct Answer
verified

What happens in the foreign exchange market does not directly impact the sales, profits, and strategy of a multinational enterprise.

Correct Answer
verified

Which of the following has no impediments to the free flow of goods and services, such as trade barriers?

Correct Answer
verified

What is meant by a currency swap?

Correct Answer
verified
A currency swap is the simultaneous purc...
View Answer

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?

Correct Answer
verified

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should:

Correct Answer
verified

Correct Answer
verified

Which of the following is a reason for London's dominance in the foreign exchange market?

Correct Answer
verified

A lag strategy involves:

Correct Answer
verified

Which of the following transactions is used to move out of one currency and into another for a limited period without incurring foreign exchange risk?

Correct Answer
verified

Which of the following is true of the purchasing power parity (PPP) theory?

Correct Answer
verified

Exam 10: The Foreign Exchange Market

Which of the following occurs when a government increases the money supply?

Correct AnswerverifiedShow Answer

Companies can deal with the problem of nonconvertibility of currency by engaging in:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What is meant by economic exposure?

Correct AnswerverifiedShow Answer

How are spot exchange rates determined?

Correct AnswerverifiedShow Answer

Companies engage in currency speculation to get minimal but assured returns from idle cash.

Correct AnswerverifiedShow Answer

Which of the following is true of inflation?

Correct AnswerverifiedShow Answer

To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P× be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory predict to be the equivalent of the dollar/yen exchange rate, E$/×?

Correct AnswerverifiedShow Answer

Which of the following enables organizations to conduct international trade without having to resort to barter?

Correct AnswerverifiedShow Answer

A lead strategy involves:

Correct AnswerverifiedShow Answer

What happens in the foreign exchange market does not directly impact the sales, profits, and strategy of a multinational enterprise.

Correct AnswerverifiedShow Answer

Which of the following has no impediments to the free flow of goods and services, such as trade barriers?

Correct AnswerverifiedShow Answer

What is meant by a currency swap?

Correct AnswerverifiedA currency swap is the simultaneous purc...View AnswerShow Answer

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?

Correct AnswerverifiedShow Answer

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following is a reason for London's dominance in the foreign exchange market?

Correct AnswerverifiedShow Answer

A lag strategy involves:

Correct AnswerverifiedShow Answer

Which of the following transactions is used to move out of one currency and into another for a limited period without incurring foreign exchange risk?

Correct AnswerverifiedShow Answer

Which of the following is true of the purchasing power parity (PPP) theory?

Correct AnswerverifiedShow Answer

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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Correct Answer
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Correct Answer
verified

To express the PPP theory in symbols, let P_$ be the U.S. dollar price of a basket of particular goods and P_× be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory predict to be the equivalent of the dollar/yen exchange rate, E_$/×?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A currency swap is the simultaneous purc...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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