Q&A Hero

Q: What is meant by arbitrage? 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 high

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

Q: Which of the following is a reason for London's dominance in the foreign exchange market? A. Great Britain's decision to retain the British pound instead of using the euro B. The preeminence of Financial Times Stock Exchange (FTSE) index as an economic health indicator C. London's location making it the link between the East Asian and New York markets D. London being the preferred headquarters destination for major multinational corporations E. London's trading centers opening soon after Tokyo's and New York's trading centers closing for the night

Q: Which of the following foreign exchange trading centers has the highest percentage of activity? A. Frankfurt B. London C. Paris D. Hong Kong E. Sydney

Q: Which of the following transactions is used to move out of one currency into another for a limited period without incurring foreign exchange risk? A. Currency swap B. Currency speculation C. Carry trade D. Spot exchange E. Arbitrage

Q: _____ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. A. Carry trade B. Forward exchange C. Spot exchange D. Currency swap E. Arbitrage

Q: Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days? A. The dollar will depreciate against the euro. B. The market is undecided about the direction of currency movement. C. The dollar will appreciate against the euro. D. The dollar/euro exchange rate will be steady. E. The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.

Q: Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market? A. When the spot exchange rate is currently $1 = 120 and changes to $1 = 130 after 30 days B. When the spot exchange rate is currently $1 = 120 and changes to $1 = 110 after 30 days C. When the current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 110 after 30 days D. When the current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 130 after 30 days E. When the current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 120

Q: Which of the following indicates that the dollar is selling at a discount on the 30-day forward market? A. When the spot exchange rate is $1 = 120 currently and $1 = 130 after 30 days B. When the spot exchange rate is $1 = 120 currently and $1 = 100 after 30 days C. When the current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 110 after 30 days D. When the current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 130 after 30 days E. When the current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 120 after 30 days

Q: A(n) _____ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. A. forward exchange B. spot exchange C. carry trade D. currency swap E. arbitrage

Q: A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier 150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = 110. The importer can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = 105. Which of the following will happen if the exchange rate after 30 days is $1 = 90? A. The importer will earn a profit of approximately $236 per computer. B. The importer will earn a profit of approximately $171 per computer. C. The importer will earn a profit of approximately $65 per computer. D. The importer will incur a loss of approximately $67 per computer. E. The importer will incur a loss of approximately $105 per computer.

Q: An American company imports laptop computers from Japan. The company knows that after a shipment arrives, it must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the American company must pay the Japanese supplier 150,000 for each computer at the current dollar/yen spot exchange rate of $1 = 110. The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold. Which of the following will happen if the exchange rate after 30 days is $1 = 90? A. The importer will earn a profit of approximately $236 per computer. B. The importer will earn a profit of approximately $67 per computer. C. The importer will incur a loss of approximately $236 per computer. D. The importer will incur a loss of approximately $67 per computer. E. The importer will incur a loss of approximately $90 per computer.

Q: How are spot exchange rates determined? A. By using historical average prices of different currencies B. By the interaction between demand and supply of a currency relative to other currencies C. By taking the average of a basket of currencies D. By government decree E. By predicting future currency movements

Q: When two parties agree to exchange currency and execute the deal immediately, the transaction is referred to as _____. A. forward exchange B. countertrade C. arbitrage D. spot exchange E. currency swap

Q: When a firm insures itself against foreign exchange risk, it is said to be engaging in _____. A. currency speculation B. carry trade C. hedging D. currency swap E. arbitrage

Q: Which of the following caused a decline in the dollar-yen carry trade during 2008-09? 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 up

Q: The speculative element of the carry trade is that its success is based upon a belief that: A. there will be no adverse movement in exchange rates or interest rates. B. liquidity is the key factor in determining interest rates. C. increasing money supply will not drive inflation. D. spot exchange rates are more favorable than forward exchange rates. E. hedging insures a company against foreign exchange risks.

Q: Carry trade, a kind of speculation, takes advantage of the: A. temporary undervaluation of one currency vis--vis another. B. disparity between spot exchange rates and forward exchange rates. C. the collapse of the gold standard. D. differences in interest rates between countries. E. the rise of the fixed exchange rate system.

Q: 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: 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.

Q: Which of the following refers to carry trade? A. Providing insurance or hedging 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. Borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high

Q: 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? 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 $50,000

Q: Which of the following refers to currency speculation? 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 countrys money supply exceeding the growth in its output, leading to price inflation

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

Q: Steven converted $1,000 to 105,000 for a trip to Japan. However, he spent only 50,000. During this period, the value of the dollar weakened against the yen. Considering a current exchange rate of $1=100, how many dollars did Steven spend on the trip? A. $550 B. $523 C. $450 D. $600 E. $500

Q: _____ refers to the adverse consequences of unpredictable changes in exchange rates. A. Countertrade B. Foreign exchange risk C. Currency speculation D. Forward exchange E. Floating exchange rate

Q: Which of the following is a function of the foreign exchange market? A. To provide some insurance against foreign exchange risk B. To protect short-term cash flow from adverse changes in exchange rates C. To eliminate volatile changes in exchange rates D. To reduce the economic exposure of a firm E. To enable companies to engage in capital flight when countertrade is not possible

Q: The currency of Venadia, a country, falls sharply in value against the currency of Lutetia, a neighboring country. Which of the following is a consequence of this exchange rate movement? 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.

Q: Which of the following enables organizations to conduct international trade without having to resort to barter? A. Foreign exchange market B. Caribbean Single Market and Economy C. Auction market D. Countertrade E. Balance-of-Trade Equilibrium

Q: A(n) _____ refers to the rate at which one currency is converted into another. A. economic exposure B. arbitrage C. exchange rate D. tariff rate E. currency swap

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

Q: Economic exposure, a category of foreign exchange risk, 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.

Q: Since translation exposure, a category of foreign exchange risk, is concerned with the present measurement of past events, the resulting accounting gains or losses are said to be unrealized, and therefore unimportant.

Q: Transaction exposure, a category of foreign exchange risk, refers to the impact of currency exchange rate changes on the reported financial statements of a company.

Q: When residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency, the phenomenon is generally referred to as capital flight.

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

Q: In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements.

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

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

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

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

Q: Inflation occurs when the money supply in a country increases faster than output increases.

Q: Theoretically, a country in which price inflation is very high should expect to see its currency depreciate against that of countries in which inflation rates are lower.

Q: In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate. The average price of a Big Mac in the United States is $3.58. This suggests that the Korean won is overvalued against the U.S. dollar.

Q: If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices. TRUE

Q: London has lost its leading position in the global foreign exchange market due to the diminishing importance of the British pound.

Q: Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side. TRUE

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

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

Q: A common kind of currency swap is spot against forward.

Q: 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.

Q: When a firm enters into a spot exchange contract, it is taking out insurance against adverse future exchange rate movements.

Q: Assume that current dollar/yen spot exchange rate is $1 = 110. If the 30-day forward exchange is $1 = 105, we say the dollar is selling at a premium on the 30-day forward market.

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

Q: For most major currencies, forward exchange rates are quoted for 30 days, 90 days, and 180 days into the future.

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

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

Q: Companies engage in currency speculation to get minimal but assured returns from idle cash.

Q: The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as countertrade.

Q: The euro/dollar exchange rate is 1 = $1.20. If it costs $36 to buy a European product, the stated price of the product would be 36.

Q: Foreign exchange risk refers to the risk of not getting paid for a product that is exported from one country to another.

Q: The foreign exchange market offers complete insurance against foreign exchange risk.

Q: The currency of Argonia falls sharply in value against the currency of Palladia. This exchange rate movement will boost Palladia's exports to Argonia.

Q: The foreign exchange market is a market for converting the currency of one country into that of another country.

Q: What happens in the foreign exchange market does not directly impact the sales, profits, and strategy of a multinational enterprise.

Q: _____ refers to the pact among Argentina, Brazil, Paraguay, and Uruguay that originated in 1988 to establish a free trade area. A. ASEAN B. NAFTA C. Mercosur D. CARICOM E. CAFTA

Q: The Andean Community now operates as a _____. A. common market B. economic union C. customs union D. command economy E. political union

Q: Which of the following is true of the Andean Pact during the mid-1980s? A. Tariff-free trade existed between member countries. B. Harmonization of economic policies between member countries had been achieved. C. Successful integration of member economies had been achieved. D. The Pact had failed to achieve the objective of a common external tariff. E. The dominant political ideology in many of the Andean countries tended toward democracy.

Q: Which of the following is true of the Andean Pact of 1969? A. Political and economic problems seem to have hindered cooperation among member-countries of the Andean Pact. B. By the mid-1980s, the Andean Pact achieved most of its stated objectives. C. The dominant political ideology in many of the Andean countries tended toward the democratic end of the political spectrum. D. The Galpagos Declaration effectively replaced the Andean Pact in 1997. E. The Andean Pact sought to remove a common external tariff.

Q: The _____ refers to a 1969 agreement among Bolivia, Chile, Ecuador, Colombia, and Peru to establish a customs union. A. Andean Pact B. ASEAN C. Mercosur D. CARICOM E. Caribbean Single Market and Economy

Q: Which of the following is an issue confronting the North American Free Trade Agreement? A. Economic stability B. Reduction in purchasing power C. Political stability D. Expanding the membership of the agreement E. Lack of resources

Q: Which of the following is a significant impact of the North American Free Trade Agreement (NAFTA)? A. It led to decreased economic stability in Canada. B. It led to a major trade deficit for Canada. C. It helped create the background for increased political stability in Mexico. D. It led to trade surplus for all the three member-nations. E. It led to a reduction in purchasing power of consumers in America.

Q: An argument against the North American Free Trade Agreement centered on the fear that ratification would result in: A. low interest rates in the U.S. and Canada. B. mass exodus of jobs from the United States into Mexico. C. a move towards a common currency for NAFTA member-nations. D. competition from the members of the European Union. E. high inflation in the U.S. and Canada.

Q: Which of the following is a consequence of the implementation of the North American Free Trade Agreement? A. Low-skilled jobs will be moved out to Mexico resulting in lowering of average wage rates in U.S. and Canada. B. Increased imports from Mexico will help reduce the huge trade deficit for United States and Canada. C. Lower incomes of the Mexicans would allow them to import less U.S. and Canadian goods, thereby decreasing demand. D. A large number of Mexican firms will hire low-skilled workers from the United States. E. Some U.S. and Canadian firms would move production to Mexico to take advantage of lower labor costs.

Q: Which of the following is true of the provisions of the North American Free Trade Agreement? A. It does not allow financial institutions unrestricted access to the Mexican market. B. It abolishes special treatment (protection) given to Mexican energy and railway industries. C. It allows lowering of national environmental standards to lure investment. D. It seeks the removal of most barriers on the cross-border flow of services. E. It does not deal with the protection of intellectual property rights.

Q: Which of the following is true of the criteria to qualify for membership to the European Union (EU)? A. The applicants were not required to privatize state assets. B. The applicants were not required to adopt EU laws. C. The applicants were required to tame inflation. D. The applicants were required to refrain from restructuring industries. E. The applicants were required to prevent deregulation of markets.

Q: The _____ refers to a permanent bailout fund, worth about 500 billion, set up by the euro zone nations to restore confidence in the euro. A. European Fiscal Union B. European Fiscal Compact C. Troubled Assets Relief Program D. European Stability Mechanism E. European Financial Stability Facility

Q: Which of the following is true of the euro since its establishment in 1999? A. The value of the euro has been stable against the U.S. dollar. B. The euro's value has steadily appreciated against the U.S. dollar. C. The euro's value initially appreciated and then steadily depreciated against the U.S. dollar. D. The euro has had a volatile trading history against the U.S. dollar. E. The value of the euro has been constant when compared to the U.S. dollar.

Q: In a(n) ______, similarities in the underlying structure of economic activity make it feasible to adopt a single currency and use a single exchange rate as an instrument of macroeconomic policy. A. managed currency zone B. open exchange regime C. optimal currency area D. free trade area E. advanced monetary zone

Q: Which of the following is a reason for Great Britain, Denmark, and Sweden to stay out of the euro zone? A. The dollar peg advocated by some members of the European Union B. The implied loss of national sovereignty to the European Central Bank C. The volatility of the euro D. The reluctance to compete directly against the U.S. dollar E. The reluctance to be considered an optimal currency area

Q: The Maastricht Treaty called for: A. establishment of the independent European Central Bank (ECB). B. the abolition of restrictions on cabotage. C. establishment of the European Parliament. D. the formation of a single market for the European Union. E. placing restrictions on foreign exchange transactions between member-countries.