Deck 23: International Transactions and Currency Values

Question 1

In 2000, the U.S. balance on goods and services deficit stands at about $350 billion.

Answer 1

True

Question 2

In and is exported from the United States exceeded service pours into the United States by 42 billion.

Answer 2

True

Question 3

A nation should acquire goods and services from those sources - foreign or domestic - which result in the lowest cost of its own resources. The foregoing is a statement of the Principle of _____

A) Minimum Resource Cost
B) Diminishing Returns
C) Operating Resource Leverage
D) Comparative Advantage
E) International Specialization
F) None of the above

Answer 3

Comparative Advantage

Question 4

The currency exchange rate between euros (€) and pounds (£) is €/£ = 1.500 or € 1.50/£. What is the £/€?

A) £ 0.67/€
B) £ 1.50/€
C) £ 3.0/€
D) £ 1.33/€
E) None of the above

Question 5

The prices of currency futures contracts traded on an exchange are normally quoted in terms of:

A) U.S. dollars
B) British pounds
C) Japanese yen
D) Canadian dollars
E) SDRs

Question 6

The Euro fell against the U.S. dollar in international markets, at least during its earliest period of international trading, probably because

A)Observers had believed all along that the Euro would not be able to challenge the U.S. dollar for global leadership as an international reserve currency
B) Several European economies, including Germany, weakened shortly after the Euro appeared, such that inflation began to gather momentum
C) The European Central Bank did not appear to be interested in establishing for itself a strong international leadership position, at least initially
D) B and C only
E) A, B and C

Question 7

The United States can consume more than it producers, provided _____________, such as, by issuing
Government and private securities, to finance the consumption.

A) It borrows from Social Security
B) It borrows from the United States trade Representative
C) It borrows from overseas
D) Establishes a payment plan
E) None of the above

Question 8

Please explain what is meant by the term balance of payments. Describe and list the principal components of a nation's balance-of -payments accounts.

Question 9

Current Account - a component of the BOP; it includes the merchandise trade balance, service balance, income receipts and payments and unilateral current transfers.

Question 10

Please describe and then discuss the major trends that have occurred in the following segments of the United States' balance-of-payments accounts in recent years.

Question 11

Please explain the meaning of currency risk. How does currency risk affect exporters, importers and investors active in the international financial marketplace?

Question 12

Why was the gold standard developed _____ What problems did it appear to solve and what problems did it create _____ What exactly is the difference between the gold standard and the gold exchange standard?

Question 13

When and where was the so-called modified exchange standard created _____ Explain how this

Question 14

The international monetary system we have today has often been labeled the floating currency standard. Briefly explain what this term means in today's world. Can you anticipate any problems that might emerge with this standard for handling currency values and currency risk?

Question 15

What exactly are SDRs and what are they for?

Question 16

Why do you think the U.S. dollar is such an important currency within the international financial system _____ Is the dollar's importance around the globe a matter of history, resources, economic strength, cultural values or what?

Question 17

What are the principal factors affecting the value of any particular foreign currency in the international exchange markets?

Question 18

Distinguish between the spot and forward markets for foreign currencies. Why is it necessary to have two markets rather than one?

Question 19

What exactly are the advantages of a hedged position in one or more foreign currencies _____ What about the disadvantages (if any)?

Question 20

What is a buying hedge in currency futures _____ A selling hedge _____ Under what circumstances is each of these hedges likely to be employed?

Question 21

Exactly what is meant by the phrase interest rate parity ____ How does it influence the flow of capital from one nation to another in international markets?

Question 22

In recent years central banks have intervened in the foreign exchange markets from time to time to support one foreign currency or another. Why might central bank intervention in the currency markets be a necessity _____ What impact are central bank operations most likely to have?

Question 23

What does the term sterilization refer to when talking about central bank intervention in the foreign currency markets?

Question 24

What is the purpose of currency swaps _____ How exactly do they work?

Question 25

Suppose the exchange rate between British pounds (£) and U.S. dollar ($) is $1.35 per pound. What is the correct way to write this pound-dollar exchange rate _____ The dollar-pound exchange rate?

Question 26

Suppose the pound-dollar exchange rate is now 1.3500. Then the U.S. dollar increases in value by 5 percent. What is the new pound-dollar exchange rate _____ What is the new exchange rate if the U.S. dollar appreciated by 10 percent?

Question 27

If the pound-dollar exchange rate is 1.4000 and the pound declines 10 percent in value, what is the new pound-dollar exchange rate?

Question 28

Suppose the pound-dollar exchange rate is 1.4000 and the yen-dollar exchange rate is 2.3000. What is the yen-pound exchange rate?

Question 29

In 1995 the Japanese yen was trading at 93.96 yen per dollar and by the summer of 1998 the yen/dollar exchange rate stood at 140.79, having risen in every year of the 1995-98 period. What economic and financial factors would likely have contributed the most to this sharp fall in the exchange value of the Japanese yen against the U. S. dollar _____ Using the demand and supply framework shown in Exhibit 25- 5 illustrate diagrammatically how the economic and financial factors you cited above would have lowered the international value of the yen vis-a-vis the American dollar. Should the Bank of Japan have intervened more aggressively during this period of erosion in the value of the yen _____ Why or why not?

Question 30

Suppose the dollar-Euro spot exchange rate is 0.8620 and the 3 -month forward exchange rate for these two currencies is 0.8315. What then is the percentage discount on Euros slated for delivery in 3 months?

Question 31

You are asked to calculate the forward exchange rate on Euros versus the U. S. dollar. You find out that the current dollar-Euro spot exchange rate is 0.8555 and that forward Euros scheduled for delivery in six months are selling at a 3 percent premium over the spot rate. What is the Euro-dollar forward exchange rate?