Question 1

The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with

Accepted Answer

A)  appreciating currencies.
B)  stable currencies.
C)  underdeveloped capital markets.
D)  small differentials in inflation rates.
E)  industrialized economies.F) C) and E)
G) A) and B)

Question 2

A common kind of currency swap is spot against forward.

Accepted Answer

A) True 
 B)False

Question 3

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S.bank is 6 percent.John,an active currency trader borrows in Japanese yen,converts the money into U.S.dollars and deposits it in a U.S.bank.John is engaging in

Accepted Answer

A)  currency speculation.
B)  hedging.
C)  currency swap.
D)  arbitrage.
E)  carry trade.F) None of the above
G) All of the above

Question 4

A lag strategy involves

Accepted Answer

A)  delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.
B)  delaying the collection of foreign currency receivables when a foreign currency is expected to depreciate.
C)  attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate.
D)  paying foreign currency payables (to suppliers) before they are due when a currency is expected to appreciate.
E)  paying foreign currency payables (to suppliers) before they are due when a currency is expected to depreciate.F) B) and C)
G) A) and B)

Question 5

What is meant by carry trade? Why is it risky? Explain with an example.

Accepted Answer

A kind of speculation that has become mo...

Question 6

How do the purchasing power parity theory and the law of one price relate the prices of commodities to exchange rate movements?

Accepted Answer

Purchasing power parity (PPP)theory and ...

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

Question 8

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?

Accepted Answer

A)  €320
B)  €300
C)  €250
D)  €360
E)  €150F) None of the above
G) C) and D)

Question 9

When residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency it is an example of

Accepted Answer

A)  deflation.
B)  arbitrage.
C)  liquidity rush.
D)  capital flight.
E)  currency swap.F) A) and D)
G) B) and D)

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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

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

When dominant enterprises in an industry exercise a degree of pricing power,setting different prices in different markets to reflect varying demand conditions,it is referred to as

Accepted Answer

A)  price discrimination.
B)  premium pricing.
C)  psychological pricing.
D)  price skimming.
E)  price leadership.F) None of the above
G) A) and E)

Question 14

Which of the following states that for any two countries,the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries?

Accepted Answer

A)  Bandwagon effect
B)  Law of one price
C)  International Fisher effect
D)  Helms-Burton Act
E)  Purchasing power parity (PPP) theoryF) None of the above
G) B) and D)

Question 15

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 D)
G) C) and D)

Question 16

In countries where inflation is expected to be high,interest rates also will be high,because investors want compensation for the decline in the value of their money.This relationship is referred to as the

Accepted Answer

A)  PPP theory puzzle.
B)  lead strategy.
C)  Fisher effect.
D)  bandwagon effect.
E)  international Fisher effect.F) All of the above
G) D) and E)

Question 17

Which of the following refers to countertrade?

Accepted Answer

A)  A 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)  A range of barter-like agreements by which goods and services can be exchanged for other goods and servicesF) A) and E)
G) A) and B)

Question 18

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?

Accepted Answer

A)  $550
B)  $523
C)  $450
D)  $600
E)  $500F) B) and C)
G) B) and D)

Question 19

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 E)

Question 20

The phenomenon of capital flight is most likely to occur when

Accepted Answer

A)  the recovery phase post an economic depression nears its end.
B)  the value of the domestic currency depreciates rapidly because of hyperinflation.
C)  a country's economic prospects are stable and indicate growth.
D)  interest rates are low for a prolonged period of time.
E)  governments lift convertibility restrictions on their currency.F) A) and D)
G) B) and D)

Exam 10: The Foreign Exchange Market

How do the purchasing power parity theory and the law of one price relate the prices of commodities to exchange rate movements?

Correct AnswerverifiedPurchasing power parity (PPP)theory and ...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

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

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,because investors want compensation for the decline in the value of their money.This relationship is referred to as the

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with

Correct AnswerverifiedShow Answer

A lag strategy involves

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A common kind of currency swap is spot against forward.

Correct AnswerverifiedShow Answer

Which of the following states that for any two countries,the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries?

Correct AnswerverifiedShow Answer

The phenomenon of capital flight is most likely to occur when

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

When residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency it is an example of

Correct AnswerverifiedShow Answer

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S.bank is 6 percent.John,an active currency trader borrows in Japanese yen,converts the money into U.S.dollars and deposits it in a U.S.bank.John is engaging in

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

Which of the following refers to countertrade?

Correct AnswerverifiedShow Answer

What is meant by carry trade? Why is it risky? Explain with an example.

Correct AnswerverifiedA kind of speculation that has become mo...View AnswerShow Answer

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

Correct AnswerverifiedShow Answer

When dominant enterprises in an industry exercise a degree of pricing power,setting different prices in different markets to reflect varying demand conditions,it is referred to as

Correct AnswerverifiedShow Answer

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A kind of speculation that has become mo...
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