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Exam 9: The Foreign Exchange Market

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Question 21

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For most major currencies,forward exchange rates are usually quoted for 1 year,2 years,and 3 years into the future.

A) True
B) False

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Question 22

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Studies indicate that the PPP theory seems to best predict exchange rate changes for countries with:

A) appreciating currencies.
B) stable currencies.
C) underdeveloped capital markets.
D) small differentials in inflation rates.

E) B) and C)
F) A) and D)

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Question 23

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Capital flight is most likely to occur when the value of the domestic currency depreciates because of deflation.

Dominant enterprises in an industry may be able to exercise a degree of pricing power,setting different prices in different markets to reflect varying demand conditions.This is referred to as:

Which of the following analysis is based on the premise that there are analyzable market trends and waves and that previous trends and waves can be used to predict future trends and waves?

Economic exposure is distinct from transaction exposure,which 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.

International businesses have four main uses of foreign exchange markets.Describe them.

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

The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers.

Assume that current dollar/yen spot exchange rate is $1 = $\times$ 110.If the 30-day forward exchange rate for converting dollars into yen is $1 = $\times$ 105,we say the dollar is selling at a discount on the 30-day forward market.

Borrowing or lending of funds in foreign currencies involves transaction exposure.

The _____ is the rate at which one currency is converted into another.

_____ refers to adverse consequences of unpredictable changes in exchange rates.

Assume that the interest rate on borrowings in Country A is 2 percent and that on bank deposits in Country B is 7.5 percent.A carry trade in this scenario would be to:

Differentiate between a lead strategy and a lag strategy.

Relative monetary growth,relative inflation rates,and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates.

What is the Fisher effect?

A currency is said to be _____ when only nonresidents may convert it into a foreign currency without any limitations.

Why has the newsmagazine The Economist selected McDonald's Big Mac as a proxy for a "basket of goods" in publishing its own version of the PPP theorem?

Applying the international Fisher effect,if the interest rate in Brazil is 9 percent and in Japan is 6 percent,we would expect the value of the Brazilian real to: