Question 1

If a country's government does not control the rate of growth in money supply:

Accepted Answer

A)  its future inflation rate will be low.
B)  its taxes will decrease in the future.
C)  it will see reduced spending on public infrastructure projects.
D)  its currency could depreciate in the future.
E)  its output of goods and services will exceed money supply, thereby fueling deflation.F) B) and E)
G) B) and D)

Question 2

During inflation, an increase in the amount of currency available leads to:

Accepted Answer

A)  overheating of the economy thereby reducing the production levels in the economy.
B)  changes in the relative demand-and-supply conditions in the foreign exchange market.
C)  a reduction in the rate of inflation thus leading to an appreciation of the currency.
D)  decreased lending by banks thereby resulting in more savings.
E)  a decrease in the demand for goods and services, which drives currency value higher.F) B) and D)
G) A) and B)

Question 3

When companies wish to convert currencies, they typically enter the foreign exchange market directly.

Accepted Answer

A) True 
 B)False

Question 4

Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is a reason for the failure of the purchasing power parity (PPP)  theory to predict exchange rates accurately?

Accepted Answer

A)  It assumes away transportation costs and trade barriers.
B)  It does not take into account the law of one price.
C)  It does not take into account the practice of arbitrage.
D)  It assumes that the markets are not efficient.
E)  It does not consider government influence on a nation's money supply.F) A) and B)
G) B) and D)

Question 6

Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis?

Accepted Answer

A)  Relative strength indicator
B)  Moving average
C)  Inflation rate
D)  Business cycles
E)  RegressionF) B) and D)
G) C) and D)

Question 7

If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be?

Accepted Answer

A)  $1 = €1.20
B)  $1 = €1
C)  $1 = €0.80
D)  $1 = €0.90
E)  $1 = €1.10F) C) and D)
G) A) and C)

Question 8

Which of the following 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 E)
G) A) and C)

Question 9

Which of the following is an example of transaction exposure?

Accepted Answer

A)  Obligations for the purchase of goods at previously agreed prices
B)  Borrowing of funds in domestic currency
C)  Impact of currency exchange rate changes on the reported financial statements of a company
D)  Long-term effect of changes in exchange rates
E)  The effect of changing exchange rates on future prices, sales, and costsF) B) and E)
G) All of the above

Question 10

Spot exchange rates and the 30-day forward rates are the same.

Accepted Answer

A) True 
 B)False

Question 11

A French company wants to invest 20 million euros for three months. The company found that investing in a Thai money market account would give it a higher interest rate than domestic investments. Which of the following is true about this investment?

Accepted Answer

A)  The investment is risk-free because money market investments are considered to be equivalent to bank deposits.
B)  The investment is not risk-free because foreign currency movements in the intervening period can affect the profitability of the firm.
C)  The investment is risk-free because such investments also lock foreign exchange rates for the duration of the investment.
D)  The investment is not risk-free because money market instruments are considered to be the most speculative of all investments.
E)  The investment is risk-free because the Thai money market is considered to be more stable and secure than other markets.F) A) and B)
G) A) and D)

Question 12

Which of the following is a reason why governments limit convertibility of their currency?

Accepted Answer

A)  To encourage foreign investments
B)  To control currency appreciation
C)  To encourage capital flight
D)  To preserve their foreign exchange reserves
E)  To promote neo-mercantilismF) A) and B)
G) C) and D)

Question 13

Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting?

Accepted Answer

A)  Forward exchange rates are the best possible predictors of future spot exchange rates.
B)  Forward exchange rates represent market participants' collective predictions of likely spot exchange rates.
C)  Companies cannot beat the markets because forward rates reflect all available information about likely future changes in exchange rates.
D)  Investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates.
E)  The foreign exchange market is efficient at setting forward rates, which are unbiased predictors of future spot rates.F) B) and C)
G) A) and E)

Question 14

Which of the following is true when a government is strongly committed to controlling the rate of growth in money?

Accepted Answer

A)  The country's future inflation rate may be low.
B)  The country's currency will steadily depreciate significantly and instantly in the foreign exchange market.
C)  The country's economy will be marked by an abundance of liquidity.
D)  The country will see a good number of populist measures not funded by taxation.
E)  The country will struggle to match money supply with adequate supply of goods and services.F) A) and B)
G) A) and C)

Question 15

Which of the following 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) B) and E)
G) A) and E)

Question 16

The currency of the country of Venadia 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) B) and D)

Question 17

Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Accepted Answer

A) True 
 B)False

Question 18

Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

Accepted Answer

Empirical evidence suggests that neither...

Question 19

What is meant by arbitrage?

Accepted Answer

A)  To provide insurance or hedge against the risks that arise from volatile changes in exchange rates
B)  A transaction between two parties that involves exchanging currency and executing a deal at some specific date in the future
C)  Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates
D)  The purchase of securities in one market for immediate resale in another to profit from a price discrepancy
E)  To borrow in one currency where interest rates are low and use the proceeds to invest in another currency where interest rates are highF) A) and D)
G) B) and E)

Question 20

Which of the following is true of the determination of exchange rates?

Accepted Answer

A)  Differences in relative demand and supply do not explain the determination of exchange rates.
B)  Differences in relative demand and supply explain the factors underlying the phenomenon behind the demand for and supply of a currency.
C)  The differences in relative demand and supply alone provide a high-level understanding of what's behind the determination of exchange rates.
D)  While the differences in relative demand and supply provide an accurate explanation for appreciation of currencies, they fail to explain depreciation.
E)  The differences in relative demand and supply cannot explain or predict the conditions under which a particular currency will be in demand or not.F) A) and B)
G) A) and E)

Exam 10: The Foreign Exchange Market

The currency of the country of Venadia 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 is true when a government is strongly committed to controlling the rate of growth in money?

Correct AnswerverifiedShow Answer

Which of the following 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

Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

Correct AnswerverifiedEmpirical evidence suggests that neither...View AnswerShow Answer

When companies wish to convert currencies, they typically enter the foreign exchange market directly.

Correct AnswerverifiedShow Answer

If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be?

Correct AnswerverifiedShow Answer

Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run changes in spot exchange rates.

Correct AnswerverifiedShow Answer

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately?

Correct AnswerverifiedShow Answer

Which of the following 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 variable used in exchange rate forecasting models based on fundamental analysis?

Correct AnswerverifiedShow Answer

A French company wants to invest 20 million euros for three months. The company found that investing in a Thai money market account would give it a higher interest rate than domestic investments. Which of the following is true about this investment?

Correct AnswerverifiedShow Answer

If a country's government does not control the rate of growth in money supply:

Correct AnswerverifiedShow Answer

What is meant by arbitrage?

Correct AnswerverifiedShow Answer

Which of the following is true of the determination of exchange rates?

Correct AnswerverifiedShow Answer

Which of the following is an example of transaction exposure?

Correct AnswerverifiedShow Answer

Which of the following is a reason why governments limit convertibility of their currency?

Correct AnswerverifiedShow Answer

Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting?

Correct AnswerverifiedShow Answer

During inflation, an increase in the amount of currency available leads to:

Correct AnswerverifiedShow Answer

Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.

Correct AnswerverifiedShow Answer

Spot exchange rates and the 30-day forward rates are the same.

Correct AnswerverifiedShow Answer

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Empirical evidence suggests that neither...
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