Question 1

When two parties agree to exchange currency and execute the deal immediately,the transaction is referred to as _____.

Accepted Answer

A)   forward exchange
B)   countertrade
C)   arbitrage
D)   spot exchange
E)   currency swapF) A) and B)
G) B) and C)

Question 2

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) C) and E)
G) C) and D)

Question 3

A(n) _____ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Accepted Answer

A)   forward exchange
B)   spot exchange
C)   carry trade
D)   currency swap
E)   arbitrageF) A) and B)
G) None of the above

Question 4

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 ¥1,23,000,000 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) A) and C)
G) D) and E)

Question 5

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

Accepted Answer

A)   appreciating currencies
B)   stable currencies
C)   underdeveloped capital markets
D)   small differentials in inflation rates
E)   industrialized economiesF) A) and B)
G) D) and E)

Question 6

Which of the following caused a decline in the dollar-yen carry trade during 2008-09?

Accepted Answer

A)   Increase in risk appetite making the carry trade less attractive
B)   Decrease in interest rate differentials as the U.S. rates came down
C)   Increase in interest rate differentials as Japanese interest rates came down
D)   Decrease in interest rate differentials as the U.S. interest rates went up
E)   Decrease in interest rate differentials as the Japanese rates went upF) A) and E)
G) D) and E)

Question 7

A common kind of currency swap is spot against forward.

Accepted Answer

A) True 
 B)False

Question 8

Technical analysis,an approach to foreign exchange forecasting,does not rely on a consideration of economic fundamentals.

Accepted Answer

A) True 
 B)False

Question 9

In terms of exchange rate forecasting,a(n) _____ market is one in which prices do not reflect all available information.

Accepted Answer

A)   inefficient
B)   spot
C)   futures
D)   efficient
E)   forwardF) None of the above
G) All of the above

Question 10

London has lost its leading position in the global foreign exchange market due to the diminishing importance of the British pound.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following observations is true of technical analysis,an approach to exchange rate forecasting?

Accepted Answer

A)   It draws on economic theory to construct models for predicting exchange rate movements.
B)   The variables contained in this model typically include relative money supply growth rates, inflation rates, and interest rates.
C)   There is a sound theoretical rationale for the assumption of predictability underlying this approach.
D)   Owing to its drawbacks, this approach has declined in importance over the last few years giving way to fundamental analysis.
E)   It does not rely on a consideration of economic fundamentals.F) A) and D)
G) A) and E)

Question 12

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

Question 13

A country's currency is said to be _____ when the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

Accepted Answer

A)   externally convertible
B)   nonconvertible
C)   leading
D)   freely convertible
E)   laggingF) None of the above
G) B) and E)

Question 14

The currency of Venadia,a country,falls sharply in value against the currency of Lutetia,a neighboring country.Which of the following is a consequence of this exchange rate movement?

Accepted Answer

A)   Lutetia's products will achieve a competitive pricing in Venadia.
B)   Venadia's exports to Lutetia will increase because Venadian goods will become cheaper in Lutetia.
C)   Venadia's products will cost more in Lutetia.
D)   There will be no difference in the volume or direction of trade.
E)   Lutetia's exports to Venadia will increase because Lutetian goods will become cheaper in Venadia.F) B) and C)
G) A) and D)

Question 15

Which of the following occurs when a government increases 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) D) and E)
G) C) and E)

Question 16

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

Accepted Answer

A)   When the spot exchange rate is $1 = ¥120 currently and $1 = ¥130 after 30 days
B)   When the spot exchange rate is $1 = ¥120 currently and $1 = ¥100 after 30 days
C)   When the current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥110 after 30 days
D)   When the current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥130 after 30 days
E)   When the current spot exchange rate is $1 = ¥120 and the 30-day forward rate is $1 = ¥120 after 30 daysF) A) and B)
G) All of the above

Question 17

The key to reducing _____ is to distribute the firm's productive assets to various locations so the firm's long-term financial well-being is not severely affected by adverse changes in exchange rates.

Accepted Answer

A)   transaction exposure
B)   economic exposure
C)   countertrade
D)   arbitrage
E)   translation exposureF) B) and E)
G) None of the above

Question 18

In terms of the approaches to exchange rate forecasting,_____ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Accepted Answer

A)   technical analysis
B)   fractional integration models
C)   Markov switching models
D)   fundamental analysis
E)   chart analysisF) B) and E)
G) All of the above

Question 19

Which of the following foreign exchange trading centers has the highest percentage of activity?

Accepted Answer

A)   Frankfurt
B)   London
C)   Paris
D)   Hong Kong
E)   SydneyF) A) and C)
G) A) and B)

Question 20

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.The (purchasing power parity) PPP theory predicts that the dollar/yen exchange rate,E$/¥,should be equivalent to _____.

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) All of the above
G) D) and E)

Exam 10: The Foreign Exchange Market

The currency of Venadia,a country,falls sharply in value against the currency of Lutetia,a neighboring country.Which of the following is a consequence of this exchange rate movement?

Correct AnswerverifiedShow Answer

Which of the following foreign exchange trading centers has the highest percentage of activity?

Correct AnswerverifiedShow Answer

Which of the following caused a decline in the dollar-yen carry trade during 2008-09?

Correct AnswerverifiedShow Answer

In terms of the approaches to exchange rate forecasting,_____ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

Correct AnswerverifiedShow Answer

The key to reducing _____ is to distribute the firm's productive assets to various locations so the firm's long-term financial well-being is not severely affected by adverse changes in exchange rates.

Correct AnswerverifiedShow Answer

London has lost its leading position in the global foreign exchange market due to the diminishing importance of the British pound.

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.The (purchasing power parity) PPP theory predicts that the dollar/yen exchange rate,E$/¥,should be equivalent to _____.

Correct AnswerverifiedShow Answer

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

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

When two parties agree to exchange currency and execute the deal immediately,the transaction is referred to as _____.

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 ¥1,23,000,000 in New York and engages in arbitrage by selling it in London?

Correct AnswerverifiedShow Answer

Technical analysis,an approach to foreign exchange forecasting,does not rely on a consideration of economic fundamentals.

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

Which of the following observations is true of technical analysis,an approach to exchange rate forecasting?

Correct AnswerverifiedShow Answer

A common kind of currency swap is spot against forward.

Correct AnswerverifiedShow Answer

In terms of exchange rate forecasting,a(n) _____ market is one in which prices do not reflect all available information.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A country's currency is said to be _____ when the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.

Correct AnswerverifiedShow Answer

A(n) _____ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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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.The (purchasing power parity) PPP theory predicts that the dollar/yen exchange rate,E_$/¥,should be equivalent to _____.

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