Deck 9: Foreign Exchange Rate Determination and Forecasting

Question 1

The Chinese government announces that on December 31,2006 the value of the Yuan will officially change from 6.40 Yuan/$ to 6.00 Yuan/$.This would be an official ________ of the Chinese currency of ________.

A)revaluation; 6.25%
B)revaluation; 6.679%
C)devaluation; 6.25%
D)devaluation; 6.67%

Answer 1

revaluation; 6.679%

Question 2

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

Answer 2

True

Question 3

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.

A)balance of payments
B)parity conditions
C)managed float
D)asset market

Answer 3

asset market

Question 4

A country's Central Bank may have the policy to ________.

A)fight inflation
B)fight slow economic growth
C)either A or B
D)none of the above

Question 5

There is a long-standing saying that "what worries bankers is unemployment,but what worries elected officials is inflation."

Question 6

The Central Bank practice of the active buying and selling of the domestic currency against foreign currencies is the process of ________.

A)direct intervention
B)indirect intervention
C)coordinated intervention
D)capital controls

Question 7

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

A)infrastructure weaknesses
B)speculation on the part of market participants
C)the sharp reduction of cross-border foreign direct investment
D)All of the above contributed to the emerging markets exchange rate collapse of the 1990s.

Question 8

The important thing to remember about foreign exchange rate determination is that parity conditions,asset approach,and balance of payments approaches are ________ theories rather than ________ theories.

A)competing; complementary
B)competing; contemporary
C)complementary; contiguous
D)complementary; competing

Question 9

The more efficient the foreign exchange market is,the more likely it is that exchange rate movements are random walks.

Question 10

The fall in the value of the domestic currency will sharply reduce the purchasing power of its people.

Question 11

"Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of

A)a market inefficiency.
B)a market efficiency.
C)the Fisher Effect.
D)none of the above.

Question 12

A currency board is

A)a structure, rather than a mere commitment, to limiting the growth of the money supply in the economy.
B)a recipe for conservative and prudent financial management.
C)designed to eliminate the power of politicians to exercise judgment by relying on an automatic and unbendable rule.
D)all of the above.

Question 13

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks,as well as the expected future levels and rates of growth of monetary stock

A)balance of payments
B)monetary
C)asset market
D)law of one price

Question 14

________,traditionally referred to as chartists,focus on price and volume data to determine past trends that are expected to continue into the future.

A)Mappists
B)Trappist Monks
C)Filibusters
D)Technical analysts

Question 15

Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.

A)long-term investment; long-term capital appreciation
B)long-term capital appreciation; desire to hedge a receivable
C)the desire to hedge a payable; the desire for long-term investment
D)the desire for long-term investment; the desire to hedge a payable

Question 16

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate.i.e.,they are linked AND mutually determined.

Question 17

The authors compromise as to the key factors for exchange rate determination.They conclude that ________ are important in the short run,but that ________ determines long run exchange rates.

A)Fisher effect; PPP
B)asset markets, interest rates, and expectations; PPP
C)PPP; Fisher effect
D)Fisher effect; asset prices, interest rates, and expectations

Question 18

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets

A)balance of payments
B)monetary
C)asset market
D)law of one price

Question 19

The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be.

Question 20

A major U.S.multinational firm has forecast the euro/dollar rate to be euro1.10/$ one year hence,and an exchange rate of $1.40 for the British pound (£)in the same time period.What does this imply the company's expected rate for the euro per pound to be in one year?

A)euro 1.40/£
B)£1.40/euro
C)£1.54/euro
D)euro 1.54/£

Question 21

When the Russian Ruble reached the limits of the bands about its managed float targets (Ru5.70/$ to Ru6.35/$)in 1997,the Russian government would intervene in the markets to stabilize the Ruble.If the exchange rate approached Ru5.70/$ the government would ________ Rubles using foreign exchange and gold,or if the exchange rate approached Ru6.35/$ they would ________ Rubles.

A)buy; sell
B)sell; buy
C)buy; buy
D)sell; sell

Question 22

The ________ is the Argentine currency unit.

A)peso
B)dollar
C)real
D)peseta

Question 23

If the Central Bank's goal was to decrease the value of its currency,or to fight an appreciation of its currency's value on the foreign exchange market,the bank could ________.

A)buy its own currency with foreign currency
B)sell its own currency in exchange for foreign currency
C)sell foreign currency
D)do all of the above

Question 24

Which of the following was NOT an international currency crisis in the 1990s and early 2000s?

A)The Asian Crisis
B)The Russian Crisis
C)The Argentine Crisis
D)All of the above were currency crises in the 1990s and 2000s.

Question 25

The authors did not identify which of the following as a root of the Asian currency crisis?

A)the collapse of some Asian currencies
B)the rate of inflation in the United States
C)corporate socialism
D)banking stability and management

Question 26

The Asian Currency crisis appeared to begin in ________.

A)South Korea
B)Taiwan
C)Thailand
D)Japan

Question 27

The Asian currency crisis was primarily a

A)parity conditions problem.
B)an asset markets problem.
C)balance of payments problem.
D)PPP problem.

Question 28

The Russian Ruble crisis of 1998 was a complex combination of speculative pressures best explained by ________ to exchange rate determination.

A)parity conditions approach
B)asset approach
C)balance of payments approach
D)PPP approach

Question 29

The "tequila effect" is a slang term used to describe a form of financial panic called ________.

A)run on the market
B)speculation
C)contrary investing
D)contagion

Question 30

In the years immediately preceding 1998 the Russian Ruble operated under a ________ type of exchange rate regime.

A)fixed
B)free floating (market determined)
C)managed floating
D)pegged (to the U.S. dollar)

Question 31

The authors refer to the practice of many Asian firms being largely controlled by families of groups related to the governing body of the country as ________.

A)illegal
B)insider trading
C)cronyism
D)not in my backyard

Question 32

When country Central banks work together to intervene and push a particular currency's value in
a desired direction,this is known as coordinated intervention.

Question 33

________ is the official Chinese currency.

A)Baht
B)Won
C)Ringgit
D)Renminbi

Question 34

After the Russian government (in August 1998)allowed the Ruble to move outside its official trading range of between Ru5.70/$-Ru6.35/$,the value of the Ruble eventually ________ to around ________ by May 1999.

A)increased; Ru13/$
B)increased; Ru4.50/$
C)decreased; Ru13/$
D)decreased; Ru25/$

Question 35

The stability of the Russian Ruble in the 1990s (until the Russian debt crisis)was considered an observable success of the Yeltsin administration.

Question 36

________ is the alteration of economic or financial fundamentals which are thought to be drivers of capital to flow in and out of specific currencies.

A)Proportional intervention
B)Direct intervention
C)Indirect intervention
D)Hopeless intervention

Question 37

The principle focus of the IMF bailout efforts during the Asian financial crisis was ________.

A)banking liquidity
B)shareholder's wealth
C)reestablishing fixed currency exchange rates in Asia
D)dollarization of Asian currencies

Question 38

Corporate socialism in the Asian markets could be contributed in part

A)to the relatively short and stable post-WWII history of capitalism in their markets.
B)a belief by the owners of Asian companies that their governments would not allow them to fail.
C)the practice of lifetime employment at many corporations.
D)all of the above.

Question 39

Prior to July 2,1997,the Thai government

A)allowed the Thai Bhat to float against major currencies.
B)fixed the Bhat's value against the Korean won only.
C)fixed the Bhat's value against major currencies especially the U.S. dollar.
D)None of the above.

Question 40

It is safe to say that the Russian transition from a communist economy to a capitalist economy has been smooth for the Russian people

Question 41

The more INEFFICIENT the market is,the more likely it is that exchange rates are "random walks," with past price behavior providing no clues to the future.

Question 42

Describe the asset market approach to exchange rate determination.How is this consistent with economic theory of (say,security)prices in general?

Question 43

Describe the Russian ruble collapse through August of 1998.

Question 44

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

Question 45

In 1991 the Argentine peso was fixed to the value of the U.S.dollar on a one-to-one basis.

Question 46

Short-term forecasts are typically motivated by a desire to hedge a receivable,payable,or dividend for perhaps a period of three months.

Question 47

Foreign exchange forecasting can be either long-term,or short-term in duration.Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.

Question 48

Argentina's economic performance in the 1990s while their peso was pegged to the U.S.dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.

A)high; high
B)low; low
C)low; high
D)high; low

Question 49

Assume your country has a balance of payments surplus.How would the government and markets react to "correct" this imbalance under a fixed exchange rate regime? Under a floating exchange rate regime?

Question 50

During the 1990s Argentina's exports became some of the least expensive in all of South America thanks in part to the pegging of the Argentine peso to the U.S.dollar.

Question 51

The authors claim that random events,institutional frictions,and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

Question 52

Which of the following is a driver in the determination of foreign exchange rates under the Asset Market Approach to forecasting?

A)relative inflation rates
B)relative real interest rates
C)forward exchange rates
D)the current account balance

Question 53

The authors claim that the theories of international currency values hold better for less liquid and poorly capitalized markets.