Question 1

Assume that a Big Mac costs $4.93 in the United States and that the Brazilian real is undervalued by 23 percent. According to the Big Mac Index published by The Economist, a Big Mac would

Accepted Answer

A)   cost a bit more in Brazil than in the United States.
B)   cost less in Brazil than in the United States.
C)   cost the same in both countries.
D)   would cost twice as much in Brazil.
E)   would cost less than half of the United States price in Brazil.F) A) and B)
G) C) and E)

Question 2

Describe the Fisher effect.

Accepted Answer

Economic theory tells us that interest r...

Question 3

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)   purchasing power parity puzzle.
B)   lead strategy.
C)   Fisher effect.
D)   bandwagon effect.
E)   international Fisher effect.F) A) and E)
G) C) and D)

Question 4

How are spot exchange rates determined?

Accepted Answer

A)   using historical average prices of different currencies
B)   the interaction between demand and supply of a currency relative to other currencies
C)   taking the average of a basket of currencies
D)   by government decree
E)   predicting future currency movements in nonmember countriesF) B) and C)
G) A) and B)

Question 5

According to the Fisher effect, if the "real" rate of interest in a country is 3 percent and the expected annual inflation is 8 percent, what would the "nominal" interest rate be?

Accepted Answer

A)   5.5 percent
B)   11 percent
C)   9 percent
D)   24 percent
E)   2.25 percentF) C) and D)
G) D) and E)

Question 6

The spot exchange rate is the rate at which the foreign exchange dealer will convert one currency into another on a particular day.

Accepted Answer

A) True 
 B)False

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

Question 8

A company's translation exposure is based on the

Accepted Answer

A)   long-run effect of changes in exchange rates on future prices, sales, and costs.
B)   impact of currency exchange rate changes on the reported financial statements of a company.
C)   extent to which a firm's future international earning power is affected by changes in exchange rates.
D)   extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.
E)   obligations for the purchase or sale of goods and services at previously agreed prices.F) B) and E)
G) All of the above

Question 9

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

Accepted Answer

Empirical evidence suggests that neither...

Question 10

Why do 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) B) and E)

Question 11

Assume that the yen/dollar exchange rate quoted in Tokyo at 5 p.m. is ¥120 = $1, and the New York yen/dollar exchange rate at the same time (noon New York time)  is ¥123 = $1. What action should a broker take to yield immediate profit?

Accepted Answer

A)   forward exchange
B)   carry trade
C)   currency swap
D)   arbitrage
E)   currency speculationF) D) and E)
G) A) and B)

Question 12

________ refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

Accepted Answer

A)   Translation exposure
B)   Economic exposure
C)   Purchasing power parity
D)   Transaction exposure
E)   Forward exchange rateF) All of the above
G) A) and C)

Question 13

Jin-Lo is investing money for his company. He notices that the interest rate on borrowing in Jakarta is 2 percent and the interest rate on bank deposits in Warsaw is 7.5 percent. In this situation, a carry trade would occur when Jin-Lo

Accepted Answer

A)   borrows money in Warsaw currency, converts it into Jakarta currency, and deposits it in a Jakarta bank.
B)   borrows money in Jakarta currency and invests in stocks with good growth potential in Jakarta.
C)   borrows money in Jakarta currency, converts it into Warsaw currency, and deposits it in a Warsaw bank.
D)   invests in bank deposits of Warsaw and reinvests the earnings in Jakarta.
E)   invests in bank deposits of Jakarta and reinvests the earnings in Warsaw.F) C) and E)
G) C) and D)

Question 14

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Accepted Answer

A) True 
 B)False

Question 15

Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Accepted Answer

A firm needs to develop a mechanism for ...

Question 16

Explain when a business would use countertrade. Provide an example.

Accepted Answer

Companies can deal with the nonconvertib...

Question 17

One way a business can deal with nonconvertibility of a currency is to engage in

Accepted Answer

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

Question 18

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

Accepted Answer

A)   externally convertible
B)   nonconvertible
C)   leading
D)   freely convertible
E)   laggingF) B) and C)
G) D) and E)

Question 19

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) B) and E)
G) B) and D)

Question 20

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

Exam 10: The Foreign Exchange Market

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

One way a business can deal with nonconvertibility of a currency is to engage in

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

According to the Fisher effect, if the "real" rate of interest in a country is 3 percent and the expected annual inflation is 8 percent, what would the "nominal" interest rate be?

Correct AnswerverifiedShow 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

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Correct AnswerverifiedShow Answer

The spot exchange rate is the rate at which the foreign exchange dealer will convert one currency into another on a particular day.

Correct AnswerverifiedShow Answer

Why do governments limit convertibility of their currency?

Correct AnswerverifiedShow Answer

Assume that the yen/dollar exchange rate quoted in Tokyo at 5 p.m. is ¥120 = $1, and the New York yen/dollar exchange rate at the same time (noon New York time) is ¥123 = $1. What action should a broker take to yield immediate profit?

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

Assume that a Big Mac costs $4.93 in the United States and that the Brazilian real is undervalued by 23 percent. According to the Big Mac Index published by The Economist, a Big Mac would

Correct AnswerverifiedShow Answer

Describe the Fisher effect.

Correct AnswerverifiedEconomic theory tells us that interest r...View AnswerShow Answer

Jin-Lo is investing money for his company. He notices that the interest rate on borrowing in Jakarta is 2 percent and the interest rate on bank deposits in Warsaw is 7.5 percent. In this situation, a carry trade would occur when Jin-Lo

Correct AnswerverifiedShow Answer

Explain when a business would use countertrade. Provide an example.

Correct AnswerverifiedCompanies can deal with the nonconvertib...View AnswerShow 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

Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Correct AnswerverifiedA firm needs to develop a mechanism for ...View AnswerShow Answer

A company's translation exposure is based on the

Correct AnswerverifiedShow Answer

________ refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values.

Correct AnswerverifiedShow Answer

How are spot exchange rates determined?

Correct AnswerverifiedShow Answer

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

Correct AnswerverifiedShow Answer

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Empirical evidence suggests that neither...
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Economic theory tells us that interest r...
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Companies can deal with the nonconvertib...
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A firm needs to develop a mechanism for ...
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