Q&A Hero

Q: Which of the following has no impediments to the free flow of goods and services, such as trade barriers? A.Economic Union B.Currency Board C.Efficient market D.Carry trade E.European Monetary System

Q: The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how much would a camera that retails for $300 in New York sell for in Germany? A.€320 B.€300 C.€250 D.€360 E.€150

Q: The law of one price states that: 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.

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

Q: Which of the following is true of the determination of exchange rates? A.Differences in relative demand and supply do not explain the determination of exchange rates. B.Differences in relative demand and supply explain the factors underlying the phenomenon behind the demand for and supply of a currency. C.The differences in relative demand and supply alone provide a high-level understanding of what's behind the determination of exchange rates. D.While the differences in relative demand and supply provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. E.The differences in relative demand and supply cannot explain or predict the conditions under which a particular currency will be in demand or not.

Q: 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? A.$34,000 B.$20,390 C.$25,000 D.$46,666 E.$39,454

Q: 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? A.Forward exchange B.Carry trade C.Currency swap D.Arbitrage E.Currency speculation

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 and 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: 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.The spot exchange rate is currently $1 = 120 and changes to $1 = 130 after 30 days. B.The spot exchange rate is currently $1 = 120 and changes to $1 = 110 after 30 days. C.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 110 after 30 days. D.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 130 after 30 days. E.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.The spot exchange rate is $1 = 120 currently and $1 = 130 after 30 days. B.The spot exchange rate is $1 = 120 currently and $1 = 100 after 30 days. C.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 110 after 30 days. D.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 130 after 30 days. E.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 120 after 30 days.

Q: Which of the following 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: What is a firm engaging in when it insures itself against foreign exchange risk? 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 2008-2009? 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: 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 country's 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 would 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: 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 the country of Venadia 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: 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: 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: 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.

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

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

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

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

Q: Which of the following is true of the Court of Justice? A.The judges are required to act as representatives of national interests. B.It comprises several judges from a few selected countries. C.It is the supreme appeals court for European Union law. D.A member country cannot bring another member country to this court. E.Member countries cannot bring the commission or the council to this court.

Q: Which of the following is true of the Treaty of Lisbon that was signed in 2007? A.It defined the European Commission's role in competition policy. B.It brought the commission to the court for failure to act according to a European Union treaty. C.It created the position of the president of the European Council. D.It lifted barriers to competition in the retail banking and insurance businesses. E.It created the Court of Justice, the supreme appeals court for European Union law.

Q: Which of the following is true about the European Parliament? A.It cannot propose amendments to legislations. B.It is directly elected by the populations of the member-states. C.It is primarily a legislative body rather than a consultative body. D.It does not have the right to veto laws such as single-market legislation. E.The European Parliament does not have the right to vote on the appointment of commissioners.

Q: Which of the following meets in Strasbourg, France, is primarily a consultative rather than a legislative body, and debates legislation proposed by the commission and forwarded to it by the council? A.European Parliament B.European Central Bank C.Court of Justice D.European Free Trade Association E.European Community

Q: Which of the following has 754 members as of 2014, and is directly elected by the populations of the member-states? A.Court of Justice B.European Council C.European Commission D.European Parliament E.European Community

Q: The European Council is considered to be the ultimate controlling authority within the European Union (EU) because: A.it monitors member-states to make sure they are complying with EU laws. B.it has a monopoly in proposing EU legislation. C.it has 754 members that are directly elected by the populations of the member-states. D.draft legislation from the European Commission can become EU law only if the council agrees. E.it is the supreme appeals court for EU law.

Q: Which of the following is considered to be the ultimate controlling authority within the European Union? A.Court of Justice B.European Commission C.European Council D.European Parliament E.European Community

Q: Which of the following is true about the European Commission? A.The European Union's competition commissioner has been gaining influence as the chief regulator of competition policy in the member nations of the European Union. B.The European Commission has to be approved by the Council of the European Union before it can begin work. C.The European Commission does not have a policing role with respect to European Union laws. D.The legislation proposed by the European Commission goes directly to the European Parliament. E.The European Commission is the ultimate controlling authority within the European Union.

Q: Which of the following institutions has a monopoly in proposing European Union legislation? A.Council of the European Union B.Court of Justice C.European Commission D.European Parliament E.European Community

Q: Which of the following is responsible for proposing European Union legislation, implementing it, and monitoring compliance with European Union laws by member-states? A.Council of the European Union B.European Commission C.European Parliament D.Court of Justice E.European Community

Q: Which of the following is true of the Treaty of Rome? A.It obliged all European Union members to adopt the euro. B.It committed the European Community to establish common policies in agriculture and transportation. C.It called for the establishment of internal trade barriers. D.It allowed members to determine the level of protection applied to goods coming from outside. E.It called for the abolition of a common external tariff.

Q: The European Community became the European Union in 1993 following the ratification of the: A.Maastricht Treaty. B.Warsaw Pact. C.Treaty of Rome. D.Single European Act. E.Lisbon Treaty.

Q: The European Community was established with the signing in 1957 of the Treaty of: A.Paris. B.Brussels. C.Switzerland. D.Rome. E.Lisbon.

Q: Which of the following is a factor that resulted in the establishment of the European Union (EU)? A.The spectacular success of the North American Free Trade Agreement (NAFTA) B.The trade impasse following the oil crisis in the 1970s that occurred due to collusion among oil producing nations C.The devastation of Western Europe during two world wars and the desire for a lasting peace D.The emergence of Japan as an economic and industrial superpower despite the nuclear holocaust E.The rise of communism in Europe

Q: Which of the following are significant trade blocs in Europe? A.The European Union and the European Free Trade Association B.The European Federation and the European Trade Block C.The European Commission and the COMINTERN D.The European Federation and the European Trade Association E.The European Economic Community and the European Federation

Q: Suppose the country of Ceria and Lithinia imposed tariffs on imports from all countries, and then they set up a free trade area, scrapping all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. Now, Ceria begins to import sugar from Lithinia. However, Ceria had previously been importing sugar from another country, Cadnia, which produced sugar more cheaply than Ceria or Lithinia. This is known as: A.trade creation B.strategic pricing C.synergy D.trade diversion E.protectionism

Q: The country of Argonia and the country of Berylia imposed tariffs on imports from all countries. They set up a free trade area, removing all trade barriers between themselves but maintaining tariffs on imports from the rest of the world. Argonia now begins to import sugar from Berylia. Previously, Argonia was indigenously producing sugar at a higher cost. Thus, Argonia benefits from this transaction. This is known as: A.trade creation B.strategic pricing C.synergy D.trade diversion E.protectionism

Q: A regional free trade agreement will benefit the world only if: A.it raises the standard of living in one of the member countries. B.the amount of trade it creates exceeds the amount it diverts. C.the currencies of the nations involved appreciate. D.the balance-of-trade situation remains stable in the region. E.it creates trade surplus for one of the countries involved.

Q: Which of the following occurs when lower-cost external suppliers are replaced by higher-cost suppliers within a free trade area? A.Trade creation B.Strategic pricing C.Synergy D.Trade diversion E.Protectionism

Q: Which of the following occurs when high-cost domestic producers are replaced by low-cost producers within a free trade area? A.Value creation B.Strategic pricing C.Trade creation D.Trade diversion E.Economic exposure

Q: Which of the following is an example of concerns over national sovereignty acting as an impediment to regional economic integration? A.The Organization of the Petroleum Exporting Countries regulating the supply of petroleum as a cartel B.The Asia-Pacific Economic Cooperation failing to establish itself as a regional arrangement C.Admission of Eastern European nations into the European Union D.Great Britain refusing to adopt the common currency of the European Union, the euro E.The rise of the World Trade Organization

Q: Which of the following are the two impediments to regional economic integration? A.Labor activism and political ideologies B.Immigration and political ideologies C.Costs and national sovereignty D.Political will and popular support E.Political ideologies and international policies