Deck 12: Foreign Exchange Markets

Question 1

From the perspective of the Australian foreign exchange market a direct quotation gives the quantity of foreign currency that can be obtained in exchange for one unit of the domestic currency.

Answer 1

False

Question 2

Currency risk stems from market volatility.

Answer 2

False

Question 3

A strong dollar reduces the cost of imported goods,puts pressure on domestic producers to lower their prices to meet import competition and,as a result,increases inflation.

Answer 3

False

Question 4

In international trade transactions,the practice of accepting locally produced merchandise in lieu of money as payment for goods and services is known as countertrade.

Question 5

The TWI is an index of the price or value of the Australian dollar in terms of a weighted average of the US dollar,Canadian dollar and Euro.

Question 6

A deficit in a nation's balance of payments means that collectively the nation is paying out more money abroad for imports and foreign services than they are collecting from foreigners who buy our exported goods and services.

Question 7

A surplus in the Australian balance of payments has been a persistent phenomenon in recent years.

Question 8

If a country experiences a huge deficit in the current account it is thought to result in the 'exporting of jobs.'

Question 9

If an Australian exporter agrees to receive payment in 60 days in pounds,the British importer has assumed the exchange risk in the transaction.

Question 10

The IMF requires that countries reduce their budget deficits and the growth rate of their money supplies as a condition for lending them money.

Question 11

A Canadian dollar cost $0.84 in U.S.dollars and later costs $0.86.The U.S.dollar has depreciated relative to the Canadian dollar.

Question 12

A base currency is:

A)the first-named currency in the foreign exchange quote where one unit expressed in terms of another currency being traded.
B)the second-named currency in the foreign exchange quote used to express the value or price of the base currency.
C)the rate at which one nation's currency can be exchanged for another's at the present time.
D)none of the above.

Question 13

Currency risk is largely caused by country risk.

Question 14

The current account in the balance of payments summarises a country's international balance of trade (exports less imports)and the payments to and the receipts from foreigners.

Question 15

A crawling peg regime is an exchange rate that is allowed to crawl or move within a defined or set band relative to another currency.

Question 16

Today,the Euromarkets are vast,largely regulated money and capital markets with centres in Europe,the Middle East and Asia.

Question 17

If a Canadian dollar costs $0.83 in U.S.dollars,a U.S.dollar costs a Canadian $1.00 in Canadian dollars.

Question 18

A pegged exchange rate regime is an exchange rate determined by the supply and demand factors in the foreign exchange markets.

Question 19

Terms currency is the currency in the foreign exchange quote where one unit is expressed in terms of another currency being traded.

Question 20

Between the end of World War II and 1997,most industrialised nations adhered to a system of fixed exchange rates known as the managed floating system.

Question 21

An importer who must pay yen in 60 days may hedge the foreign exchange risk:

A)in the forward market.
B)in the spot market today.
C)in the spot market 60 days from now.
D)all of the above

Question 22

What is Purchasing Power Parity? Why does it fail to hold in the real world?

Question 23

The balance of payments financial account measures?

A)both short term and long term capital flows into or out of the country
B)short term capital flows into or out of the country
C)long term capital flows into or out of the country
D)any errors or omissions between a country's current account and its long-term trading account

Question 24

Political capital flows are:

A)the transfer of wealth out of a country by its owners,typically in response to political instability.
B)international capital flows that respond to changed political conditions in a country
C)international capital flows that respond to changes in a country's foreign exchange market.
D)the transfer of wealth out of a country by its owners in response to government intervention in the foreign exchange market.

Question 25

To be admitted into the single currency community,a prospective EU member must meet

A)the European Central Bank directives.
B)strict fiscal and monetary qualifications.
C)strict foreign exchange regulations.
D)all of the above.

Question 26

Differences in real interest rates between countries produce the following type of capital flows:

A)Investment capital flows.
B)Political capital flows
C)Speculative capital flows
D)Capital flight

Question 27

Which of the following types of international capital flows can affect a currency's exchange rate:

A)investment capital flows only.
B)political capital flows only and central banks' foreign exchange market operations.
C)investment and political capital flows.
D)investment capital flows,political capital flows and central banks' foreign exchange market operations.

Question 28

What are some of the issues related to international trading?

Question 29

If the cost of yen per dollar changes from 100 to 110 yen per dollar,

A)the yen has appreciated against the dollar.
B)the dollar has depreciated against the yen.
C)the dollar has appreciated against the yen.
D)the cost of a yen has increased in terms of dollars.

Question 30

Today the Euromarkets are vast,largely unregulated money and capital markets with centres in:

A)Europe.
B)Europe and Asia.
C)Europe,Asia and the Middle East.
D)Europe,Asia,the Middle East and the US

Question 31

If interest rates in Australia are high and Australian inflation is expected to be low:

A)foreigners can expect to earn low real returns if they invest in Australia.
B)foreigners can expect to earn between high and low real returns if they invest in Australia.
C)foreigners can expect to earn between high real returns if they invest in Australia.
D)foreigners will not invest in Australia because of the uncertainty.

Question 32

Dollarisation refers to:

A)the growing trend of foreign currency to be named the dollar.
B)the process of converting any currency to dollars.
C)the process of converting any currency to US dollars.
D)the practice of some countries in adopting the US currency as a medium of exchange.

Question 33

If it is properly prepared,a bill of lading is also a:

A)sight draft.
B)letter of credit.
C)document of title.
D)letter of credit and a document of title.

Question 34

In the Eurozone and countries such as the UK,Singapore and Australia,the custom is to express the exchange rate as:

A)an indirect or quantity quotation.
B)a direct or price quotation.
C)an indirect price quotation.
D)none of the above are correct.

Question 35

Foreign exchange rates are best described as

A)the cost of a unit of foreign currency.
B)the current interest rates of varying countries.
C)the cost of a unit of foreign currency in terms of another currency.
D)the expected change in prices of international goods.

Question 36

A government that believes its currency is becoming overvalued may fear that currency appreciation will hinder its producers' abilities to export goods and will encourage imports.In this case,a government may:

A)buy assets from abroad.
B)sell assets abroad.
C)sell foreign currencies in the foreign exchange markets.
D)buy foreign currencies in the foreign exchange markets.

Question 37

The spot price for a unit of currency is:

A)what you pay to buy currency today for delivery in two weeks.
B)what you pay to buy currency today for delivery within 24 hours.
C)what you pay to buy currency today for delivery in two days.
D)what you pay to buy currency today for delivery at a point in time that suits the purchaser.

Question 38

The current account in the balance of payment summarises:

A)foreign trade in goods and services less investment income and gifts or grants to other countries.
B)foreign trade in goods and services plus investment income less gifts or grants to other countries.
C)foreign trade in goods and services plus investment income and gifts or grants to other countries.
D)None of the above.

Question 39

A managed floating exchange rate regime is:

A)a constant rate of exchange between currencies.
B)an exchange rate determined by the supply and demand factors in the foreign exchange markets.
C)an exchange rate that is allowed to float or move within a defined or set band relative to another currency.
D)a managed float where an exchange rate is allowed to appreciate in controlled steps over time.

Question 40

Countertrade in an international transaction is:

A)the practice of accepting locally produced merchandise in lieu of money as payment for goods and services.
B)passing the risk associated with changes in exchange rates to another.
C)transferring purchasing power from those who normally deal in one currency to those who generally do business in another.
D)a market in which parties agree to exchange a fixed amount of one currency for a fixed amount of a second currency.

Question 41

Explain why Central banks undertake foreign exchange market operations.

Question 42

What is a bill of lading and why is it important in an international transaction?

Question 43

Discuss how letters of credit are used in international trade.