Question 1

Which of the following refers to currency speculation?

Accepted Answer

A)  The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
B)  The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day
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)  The growth in a country's money supply exceeding the growth in its output, leading to price inflationF) D) and E)
G) B) and C)

Question 2

In terms of the approaches to exchange rate forecasting, which of the following 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) A) and B)
G) B) and E)

Question 3

Which of the following is a key feature of the foreign exchange market?

Accepted Answer

A)  The foreign exchange market never sleeps.
B)  The foreign exchange market is located in London.
C)  The foreign exchange market is characterized by high transaction costs.
D)  The foreign exchange market is shut for two hours every day.
E)  The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities.F) A) and C)
G) C) and D)

Question 4

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to:

Accepted Answer

A)  borrow money in Maritian currency, convert it into Rhodian currency, and deposit it in a Rhodian bank.
B)  borrow money in Rhodian currency and invest in stocks with good growth potential in Rhodia.
C)  borrow money in Rhodian currency, convert it into Maritian currency, and deposit it in a Maritian bank.
D)  invest in bank deposits of Maritia and reinvest the earnings in Rhodia.
E)  invest in bank deposits of Rhodia and reinvest the earnings in Maritia.F) A) and D)
G) A) and C)

Question 5

The law of one price states that:

Accepted Answer

A)  by comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient.
B)  a country's "nominal" interest rate (i)  is the sum of the required "real" rate of interest (r)  and the expected rate of inflation over the period for which the funds are to be lent (I) .
C)  a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower.
D)  when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled.
E)  in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.F) C) and D)
G) B) and C)

Question 6

In countries where inflation is expected to be high, interest rates also will be high.

Accepted Answer

A) True 
 B)False

Question 7

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the:

Accepted Answer

A)  currency crisis.
B)  banking crisis.
C)  purchasing power parity puzzle.
D)  bandwagon effect.
E)  foreign exchange risk.F) C) and D)
G) B) and D)

Question 8

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)  a decrease in its money supply.F) B) and D)
G) A) and B)

Question 9

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time)  is ×123 = $1. Which of the following transactions would yield immediate profit?

Accepted Answer

A)  Forward exchange
B)  Carry trade
C)  Currency swap
D)  Arbitrage
E)  Currency speculationF) D) and E)
G) All of the above

Question 10

The forward exchange rate refers to the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Accepted Answer

A) True 
 B)False

Question 11

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 12

For price discrimination to work, arbitrage opportunities must be unlimited.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

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 D)
G) A) and E)

Question 14

Which of the following is true of the differences in relative demand and supply of currencies?

Accepted Answer

A)  They cannot be used to explain the determination of exchange rates.
B)  While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors.
C)  They provide a high-level understanding of exchange rates.
D)  While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation.
E)  They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.F) A) and E)
G) None of the above

Question 15

How do foreign exchange markets benefit international businesses?

Accepted Answer

International businesses have four main ...

Question 16

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

Question 17

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP)  theory by violating the assumption of efficient markets?

Accepted Answer

A)  Government intervention in cross-border trade
B)  The relationship between money supply and price inflation
C)  The impact of increase in currency on relative demand and supply conditions of currencies
D)  Excessive growth in money supply
E)  The insignificant impact of transportation costs on international tradeF) A) and B)
G) A) and C)

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

Accepted Answer

A)  The impact of investor psychology on short-run exchange rate movements
B)  The strong relationship between inflation rates and interest rates
C)  The impact of interest rates and short-term exchange rate movements
D)  The strong relationship between interest rate differentials and subsequent changes in spot exchange rates
E)  Government intervention in cross-border trade that violates the assumption of efficient marketsF) All of the above
G) C) and D)

Question 20

Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?

Accepted Answer

A)  A loss of $62,500
B)  A loss of $66,667
C)  A gain of $50,000
D)  A gain of $62,500
E)  A loss of $50,000F) C) and E)
G) B) and E)

Exam 10: The Foreign Exchange Market

Which of the following is a key feature of the foreign exchange market?

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 caused a decline in the dollar/yen carry trade during 2008-2009?

Correct AnswerverifiedShow Answer

The forward exchange rate refers to the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Correct AnswerverifiedShow Answer

The law of one price states that:

Correct AnswerverifiedShow Answer

Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?

Correct AnswerverifiedShow Answer

For price discrimination to work, arbitrage opportunities must be unlimited.

Correct AnswerverifiedShow Answer

In countries where inflation is expected to be high, interest rates also will be high.

Correct AnswerverifiedShow Answer

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

Correct AnswerverifiedShow Answer

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ×123 = $1. Which of the following transactions would yield immediate profit?

Correct AnswerverifiedShow Answer

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

How do foreign exchange markets benefit international businesses?

Correct AnswerverifiedInternational businesses have four main ...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?

Correct AnswerverifiedShow Answer

Which of the following refers to currency speculation?

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

Which of the following is true of the differences in relative demand and supply of currencies?

Correct AnswerverifiedShow Answer

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to:

Correct AnswerverifiedShow Answer

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International businesses have four main ...
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