Question 1

The purchasing power parity (PPP)  theory best predicts exchange rate changes for countries with

Accepted Answer

A)   low rates of inflation.
B)   stable currencies.
C)   underdeveloped capital markets.
D)   small differentials in inflation rates.
E)   industrialized economies.F) A) and B)
G) A) and D)

Question 2

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 B)
G) B) and E) C

Question 3

How does an increase in money supply in an economy lead to inflation?

Accepted Answer

A government increasing the money supply...

Question 4

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 D)
G) None of the above D

Question 5

The purchasing power parity (PPP)  theory tells us that a country with a high inflation rate will see

Accepted Answer

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)   no change in its exchange rates.F) B) and E)
G) D) and E)

Question 6

When only non-residents of a country may convert currency into a foreign currency without any limitations it is called freely convertible.

Accepted Answer

A) True 
 B)False

Question 7

________ is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months.

Accepted Answer

A)   Purchasing power parity
B)   Transaction exposure
C)   Economic exposure
D)   Translation exposure
E)   Currency speculationF) B) and E)
G) A) and B)

Question 8

Currency swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 9

The Fisher effect is used to demonstrate a strong correlation between inflation rates and

Accepted Answer

A)   interest rates.
B)   competition.
C)   entrepreneurial activity.
D)   spot exchange rates.
E)   forward rates.F) A) and B)
G) A) and C) A

Question 10

A fundamental approach to exchange rate forecasting would focus on relative money supply growth rates, inflation rates, and interest rates.

Accepted Answer

A) True 
 B)False

Question 11

In terms of foreign exchange, what is true of leading and lagging strategies?

Accepted Answer

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

Question 12

The phenomenon of capital flight is most likely to occur when

Accepted Answer

A)   the recovery phase of 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) All of the above
G) A) and E)

Question 13

Countertrade is a logical choice when a country's currency is freely convertible.

Accepted Answer

A) True 
 B)False

Question 14

According to the efficient market school, ________ do the best job at predicting future spot exchange rates.

Accepted Answer

A)   forecasting services
B)   government institutions
C)   inflationary trends
D)   forward exchange rates
E)   arbitration resultsF) A) and D)
G) A) and E)

Question 15

Investor psychology has an effect on short-run exchange rate movements.

Accepted Answer

A) True 
 B)False

Question 16

Assume that the yen/dollar exchange rate quoted in London at 3:00 p.m. is ¥115 = $1. Rinaldo finds out that the rate quoted in New York at 10:00 a.m. (3:00 p.m. London time)  is ¥135 = $1. Rinaldo decides to buy yen in New York and sell it in London. Rinaldo is engaging in

Accepted Answer

A)   currency swapping.
B)   currency speculation.
C)   carry trade.
D)   arbitrage.
E)   hedging.F) C) and D)
G) A) and C)

Question 17

________ refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.

Accepted Answer

A)   Economic exposure
B)   Transaction exposure
C)   Translation exposure
D)   Countertrade
E)   Carry tradeF) A) and B)
G) All of the above

Question 18

Inflation occurs when the money supply in a country increases faster than output increases.

Accepted Answer

A) True 
 B)False

Question 19

Cyber Corp., based in Toronto, decided it wanted to collect all of its foreign currency receivables from Indonesia early because the currency in Indonesia was expected to depreciate. This is an example of

Accepted Answer

A)   the efficient market school.
B)   the inefficient market school.
C)   arbitration.
D)   a lead strategy.
E)   a lag strategy.F) B) and D)
G) None of the above

Question 20

To jumpstart its slow economy, Greece increased the money supply. What is a likely consequence of this action?

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) A) and E)
G) A) and D)

Exam 10: The Foreign Exchange Market

The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with

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 AnswerverifiedC

How does an increase in money supply in an economy lead to inflation?

Correct AnswerverifiedA government increasing the money supply...View AnswerShow 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 AnswerverifiedD

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see

Correct AnswerverifiedShow Answer

When only non-residents of a country may convert currency into a foreign currency without any limitations it is called freely convertible.

Correct AnswerverifiedShow Answer

________ is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months.

Correct AnswerverifiedShow Answer

Currency swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Correct AnswerverifiedShow Answer

The Fisher effect is used to demonstrate a strong correlation between inflation rates and

Correct AnswerverifiedA

A fundamental approach to exchange rate forecasting would focus on relative money supply growth rates, inflation rates, and interest rates.

Correct AnswerverifiedShow Answer

In terms of foreign exchange, what is true of leading and lagging strategies?

Correct AnswerverifiedShow Answer

The phenomenon of capital flight is most likely to occur when

Correct AnswerverifiedShow Answer

Countertrade is a logical choice when a country's currency is freely convertible.

Correct AnswerverifiedShow Answer

According to the efficient market school, ________ do the best job at predicting future spot exchange rates.

Correct AnswerverifiedShow Answer

Investor psychology has an effect on short-run exchange rate movements.

Correct AnswerverifiedShow Answer

Assume that the yen/dollar exchange rate quoted in London at 3:00 p.m. is ¥115 = $1. Rinaldo finds out that the rate quoted in New York at 10:00 a.m. (3:00 p.m. London time) is ¥135 = $1. Rinaldo decides to buy yen in New York and sell it in London. Rinaldo is engaging in

Correct AnswerverifiedShow Answer

________ refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values.

Correct AnswerverifiedShow Answer

Inflation occurs when the money supply in a country increases faster than output increases.

Correct AnswerverifiedShow Answer

Cyber Corp., based in Toronto, decided it wanted to collect all of its foreign currency receivables from Indonesia early because the currency in Indonesia was expected to depreciate. This is an example of

Correct AnswerverifiedShow Answer

To jumpstart its slow economy, Greece increased the money supply. What is a likely consequence of this action?

Correct AnswerverifiedShow Answer

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A government increasing the money supply...
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