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Question
The Theory of Exchange Rate Overshooting explains high exchange rate volatility by assuming that CIRP does not hold in the short run, but PPP does.
Answer
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Related questions
Q:
The variability of the firms foreign exchange risk arises from uncertainty about future exchange rates.
Q:
In foreign exchange forecasting, what is a good forecast?
a. When the forecast encourages the firm to buy.
b. When the forecast is close.
c. When the forecast is high.
d. When the forecast predicts the right hedging strategy.
Q:
Suppose for two currencies the forward premium is 8.5% and the expected premium is 5%. Then the risk premium is:
a. -13.5%
b. -3.5%
c. 3.5%
d. 13.5%
Q:
Suppose that the 1-year forward rate of dollar per pound is $1.32, the current spot rate ($/pound) is $1.20, and the expected future spot rate ($/pound) is $1.40. The expected premium on the pound is:
a. -6.7%
b. 5.7%
c. 10%
d. 16.7%
Q:
Which of the following best describes economic exposure?
a. The sensitivity of the domestic currency value of future operating income to unexpected changes in exchange rate.
b. The risk of operating in politically risky countries.
c. When a business leaves only one branch to operate in a foreign country.
d. Exposure from uncertainty about the currency value of a foreign-denominated transaction to be fulfilled in the future.
Q:
Which of the following best describes translation exposure?
a. Operating banks in a remote location with an uncommon language
b. Accounting exposure from translating interest rates from different regions
c. Translating financial statements from one currency to another
d. Creating more than one offshore branch
Q:
The ________ in the forward exchange market is equal to the effective return differential.
a. Strike price
b. Exposure risk
c. Future spot exchange rate
d. Risk premium
Q:
Information exposure is a type of foreign exchange risk.
Q:
Suppose for two currencies the forward premium is 4% and the expected premium is 8%. Then the risk premium is:
a. -4%
b. -2%
c. 2%
d. 4%
Q:
A U.S. firm has a 1 million payment due to a Dutch firm in 90 days. The current spot rate is $1.00 per euro, and the 90-day forward rate is $1.11. Ben forecasts that the spot rate in 90 days will be $0.99. Jerry forecasts that the spot rate will be $1.12 in 90 days. The actual spot rate in 90 days turns out to be $1.10. Whose advice, between Ben and Jerry, will save the companys money?
a. Ben
b. Jerry
c. Both Ben and Jerry
d. Neither Ben nor Jerry
Q:
Suppose that the 1-year forward rate of dollar per Swiss franc is $0.42, the current spot rate ($/SFr) is $0.40, and the expected future spot rate ($/SFr) is $0.45. The forward premium equals to:
a. 7.5%
b. 5%
c. 6.67%
d. 12.5%
Q:
Risk premium equals to:a. expected premium minus forward premium.b. expected premium plus forward premium.c. forward premium minus expected premium.d. exchange rate premium plus forward premium.
Q:
Risk premium equals to: a. expected premium minus forward premium. b. expected premium plus forward premium. c. forward premium minus expected premium. d. exchange rate premium plus forward premium.
Q:
People in the Bahamas use both Bahamian dollars and U.S. dollars to pay for goods and services. Suppose that the Fed increases money supply, causing higher inflation rate in the U.S. If the exchange rate were allowed to float, the U.S. dollar will ________ against the Bahamian dollar and Bahamians will substitute toward more __________ holding.
a. appreciate; Bahamian dollars
b. appreciate; U.S. dollars
c. depreciate; Bahamian dollars
d. depreciate; U.S. dollars
Q:
Which of the following statements describes the Currency Substitution Approach?
a. As expectations of a trade deficit change, the exchange rate today will change due to the expected change in asset holdings.
b. Exchange rate adjusts to compensate for changes in international currency portfolios.
c. Slowly adjusting goods prices may cause the exchange rate to over-react in the short run.
d. All of the above are correct.
Q:
When citizens anticipate a country to experience trade deficits in the near future, the domestic currency would:
a. Appreciate immediately
b. Appreciate only in the future
c. Depreciate immediately
d. Depreciate only in the future
Q:
Use the Portfolio-Balance Approach to answer this question. Other things remaining constant, if the supply of domestic bonds increases, what would happen to the domestic currency?
a. The domestic currency would appreciate.
b. The domestic currency would depreciate.
c. The domestic currency would not change.
d. The domestic currency would sharply depreciate and then appreciate later.
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: The announcement of a new trade deal between South Korea and Japan, lead investors to predict that Japan may be a path to a trade deficit. Thus, the Japanese yen saw an immediate decline in value.
a. Portfolio balance approach
b. Trade balance approach
c. News approach
d. Currency substitution approach
Q:
The following example supports which extension to the Monetary Approach to Exchange rates: Due to changes in the pricing of risk premiums, investors adjust holdings of foreign assets causing an appreciation of domestic currency.
a. Portfolio balance approach
b. Trade balance approach
c. Overshooting approach
d. Currency substitution approach
Q:
What approach assumes that assets are imperfect substitutes internationally because investors perceive foreign exchange risk to be attached to foreign assets?
a. Balance of payments approach
b. Equilibrium approach
c. Portfolio-balance approach
d. Trade balance approach
Q:
Which of the following equations correctly represents the monetary approach to the exchange rate (MAER)?
a. b. c. d.
Q:
According to the monetary approach of the balance of payments (MABP), if the foreign inflation rate decreases 50%, the U.S. foreign reserves will
a. increase because foreign central bank buys U.S. dollars and sells its currency.
b. increase because foreign central bank buys its currency and sells U.S. dollars.
c. decrease because foreign central bank buys U.S. dollars and sells its currency.
d. decrease because foreign central bank buys its currency and sells U.S. dollars.
Q:
When the central bank increases the money supply,
a. the money supply curve shifts to the left and interest rate rises.
b. the money supply curve shifts to the left and interest rate falls.
c. the money supply curve shifts to the right and interest rate rises.
d. the money supply curve shifts to the right and interest rate falls.
Q:
Inflation from one country can be transmitted to another if a floating exchange rate is being used.
Q:
Suppose the Bank of England is using a managed floating exchange regime. In order to keep money supply constant the Bank of England exchanges domestic bonds for foreign bonds to slow any appreciation of the pound while keeping the British money supply unchanged. This process is known as:
a. Sterilized intervention
b. The monetary approach
c. Exchange rate intervention
d. Balancing official settlements.
Q:
The offsetting of international reserve flows by central banks that wish to follow an independent monetary policy is known as:
a. Printing money
b. Balancing the official settlements
c. The monetary approach
d. Sterilization
Q:
Assume floating exchange rates. Suppose there are a 5% growth in U.S output and the Fed increases in U.S. money supply by 5%. Then, which of the following will offset these changes?
a. 10% increase in exchange rate.
b. 10% decrease in exchange rate.
c. 10% increase in the foreign inflation.
d. The two changes offset each other.
Q:
Assume floating exchange rates. Suppose there are a 5% growth in U.S output and a 5% increase in foreign inflation. Then, which of the following will offset these changes?
a. 10% increase in money supply.
b. 10% decrease in money supply.
c. 10% increase in the exchange rate.
d. The two changes offset each other.
Q:
Suppose that the U.S. Fed increases the money supply by 10%. Then under MAER:
a. The exchange rate (dollar/foreign currency) rises by 10%
b. The exchange rate (dollar/foreign currency) falls by 10%
c. Foreign inflation rises by 10%
d. Foreign inflation falls by 10%
Q:
One key implication of the MABR is that expansionary monetary policy:
a. Always increases output.
b. Always decreases output.
c. Alters output in the short run, but not in the long run.
d. Does not alter output in the short run or the long run.