Deck 9: The Foreign Exchange Market

Question 1

Barrick Gold used,until 2009,a(n)_______________ strategy to protect itself against changes in the price of gold.

A) Gold swap
B) forward gold exchange
C) insurance
D) spot gold exchange
E) gold hedging

Answer 1

E

Question 2

When a tourist exchanges one currency into another,she is participating in the:

A) foreign barter market
B) foreign exchange market
C) foreign replacement market
D) foreign swap market
E) international trade exchange

Answer 2

B

Question 3

The rate at which one currency is converted into another is called the ___________.

A) replacement percentage
B) resale rate
C) exchange rate
D) interchange ratio
E) valuation rate

Answer 3

C

Question 4

The movement of foreign exchange rates

A) provide some insurance against foreign exchange risk.
B) has significantly deteriorated the overall volume of foreign trade.
C) sets interest rates charged to foreign investors.
D) introduces many risks into international trade and investment.
E) is a natural function of supply and demand among currency traders.

Question 5

Canadian businesses will normally use the ________________ in international transactions.

A) German mark
B) Euro
C) U.S. dollar
D) Japanese yen
E) British pound

Question 6

The foreign exchange market converts the currency of one country into the currency of another and:

A) provides some insurance against foreign exchange risk
B) collects duties on imported products
C) sets interest rates charged to foreign investors
D) arbitrates disputes between trade partners
E) reduces trade imbalances between countries

Question 7

Small Canadian businesses will be ____________ than large Canadian businesses to be exposed to currency risk associated with the Canadian dollar.

A) less likely
B) unlikely
C) likely
D) probably likely
E) more likely

Question 8

Although the _____________ offers some insurance against foreign exchange risk,it cannot provide complete insurance.

A) foreign exchange market
B) the Euro
C) World Bank
D) foreign currency exchange
E) the CDC

Question 9

Which of the following is not one of the four main uses that international businesses have for the foreign exchange market?

A) International businesses use foreign exchange markets to convert money they earn in foreign currencies to their home currencies
B) International businesses use foreign exchange markets in determining domestic wage rates
C) International businesses use foreign exchange markets when they have spare cash that they wish to invest for short terms in money markets
D) Currency speculation
E) Short term money market investments

Question 10

The foreign exchange market serves two main functions.These are what?

A) collect duties on imported products and convert the currency of one country into the currency of another.
B) insure companies against foreign exchange risk and set interest rates charged to foreign investors.
C) collect duties on imported products and set interest rates charged to foreign investors.
D) convert the currency of one country into the currency of another and provide some insurance against foreign exchange risk.
E) reduce the trade imbalances between countries and convert the currency of one country into another.

Question 11

Which of the following statements is true?

A) The existence of the foreign exchange market has removed all forms of foreign exchange risk for business organizations.
B) Despite the existence of the foreign exchange market, firms do suffer losses because of unpredicted changes in exchange rates, although these occasions are rare.
C) The foreign exchange market eliminates very little foreign exchange risk.
D) The foreign exchange market is characterized by large numbers of speculators who increase the foreign exchange risk for firms
E) Despite the existence of the foreign exchange market, it is not unusual for international businesses to suffer losses because of unpredicted changes in exchange rates.

Question 12

Without the ____________ market,international trade and international investment on the scale that we see today would be impossible.

A) foreign exchange
B) financial barter
C) foreign resale
D) monetary replacement
E) capital market

Question 13

A stronger Korean won,remembering that Kia cars sold in the United States are paid for in dollars,means what for the Korean based Kia?

A) a need to hedge Japanese yen
B) a use for the Euro, a neutral currency
C) less profit
D) a use for gold to protect against currency fluctuations
E) more profit

Question 14

The _____________ is a market for converting the currency of one country into that of another.

A) foreign exchange market
B) cross-cultural interchange
C) financial barter market
D) monetary replacement market
E) international currency spot market

Question 15

Tourists are minor participants in what?

A) the currency conversion exchange
B) capital venturing
C) foreign traveling
D) FDI
E) the foreign exchange market

Question 16

Currency speculation typically involves what?

A) the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates
B) the permanent movement of funds from one currency to another in the hopes of profiting from long-term investment in a particular country
C) the simultaneous purchase of currencies from several countries in hopes of profiting from increasing economic prosperity
D) the liquidation of currency in favour of precious metals as a hedge against inflation
E) Buying low and holding currency until it stabilizes, than selling

Question 17

The ______________ is the market that enables companies based in countries that use different currencies to trade with each other.

A) World Bank
B) foreign currency exchange
C) foreign exchange market
D) foreign monetary mart
E) foreign exchange mechanism

Question 18

One function of the foreign exchange market is to provide some insurance against the risks that arise from changes in exchange rates,commonly referred to as:

A) foreign market hazard
B) global jeopardy
C) foreign exchange risk
D) commerce uncertainty
E) trade payment risk

Question 19

_____________ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

A) Capital venturing
B) Currency speculation
C) Monetary risk taking
D) Investment contemplation
E) Currency conversion

Question 20

The ______________ is the rate at which the market converts one currency into another.

A) international conversion factor
B) world barter factor
C) foreign exchange rate
D) global replacement percentage
E) discount rate

Question 21

The foreign exchange market:

A) is not located in any one place
B) is located in New York City
C) has offices in the Capitols of the five most powerful industrialized nations in the world
D) is located in London
E) is managed by the UN

Question 22

Rates for currency exchange quoted for 30,90,or 180 days into the future are referred to as _____________.

A) forward exchange rates
B) foreign exchange quotes
C) united trade rates
D) generic exchange quotes
E) future exchange rates

Question 23

A(n)______________ is purchase and sale of a given amount of foreign exchange for two different value dates,at the same time.

A) currency swap
B) FDI
C) economic fund
D) short selling
E) arbitrage group

Question 24

When two parties agree to exchange currency and execute the deal immediately,the transaction is referred to as a ______________.

A) point-in-time exchange
B) temporal exchange
C) spot exchange
D) forward exchange
E) transaction

Question 25

The most important trading centers for the foreign exchange market are in

A) New York, Singapore, Tokyo.
B) San Paulo, New York, and Paris.
C) San Francisco, Tokyo, and Singapore.
D) New York, Hong Kong, and Paris.
E) London, New York, and Tokyo.

Question 26

An importer enters into a 60 day forward exchange rate for converting dollars into yuan.The spot exchange rate is 5.28 yuan for 1 dollar.The forward exchange rate is 5.27 yuan for 1 dollar.How many yuan would the importer get for 50,000 dollars?

A) 264,000
B) 364,000
C) 364,500
D) 353,500
E) 263,500

Question 27

When the dollar buys more yen on the spot market than the 30-day forward market,we say the dollars is selling at a ______________.Conversely,when the dollars buys fewer yen on the spot market than the 30-day forward market,we say the dollar is selling at a ______________.

A) premium; discount
B) handicap; bonus
C) discount; premium
D) subsidy; handicap
E) gain; loss

Question 28

What do many Canadian businesspeople NOT buy into with respect to the value of the Canadian dollar?

A) A stronger dollar will result in more outbound tourism
B) A weaker dollar is good for tourists coming to Canada
C) A stronger dollar means that Canadian resources are more in demand
D) A weaker dollar will make imports more expensive
E) A stronger dollar will reduce demand for Canada's exports

Question 29

_____________ occurs when an investor purchases securities in one market for immediate resale in another.

A) Hedge fund
B) Foreign direct investment
C) Foreign exchange risk
D) Arbitrage
E) Financial gain

Question 30

A ______________ exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

A) reverse
B) spot
C) hedge
D) forward
E) futures

Question 31

The largest trading center in the foreign exchange market is __________.

A) Hong Kong
B) London
C) San Paulo
D) Paris
E) New York

Question 32

______________ exchange rates represent market participants' collective predictions of likely spot exchange rates at specified future dates.

A) Reciprocal
B) Hedge
C) Reverse
D) Forward
E) Future

Question 33

It is necessary to use a ______________ exchange rate to execute a transaction immediately.

A) real time
B) spot
C) statutory
D) sanctioned
E) bank determined

Question 34

Current estimates are that currencies worth approximately __________ trillion dollars (U.S.)were traded every day.

A) 1
B) 200
C) 13
D) 4.2
E) 5.3

Question 35

An importer enters into a 60 day forward exchange rate for converting dollars into yuan.The spot exchange rate is 5.28 yuan for 1 dollar.The forward exchange rate is 5.27 yuan for 1 dollar.What is the difference in the amount the importer receives using the forward exchange rate and the spot exchange rate.

A) 100,000
B) 5,000
C) 500
D) 50
E) 250

Question 36

_____________ are reported on a real time basis on many financial Web sites.

A) Real time rates
B) Spot exchange rates
C) Sanctioned rates
D) Statutory exchange rates
E) Hedging costs

Question 37

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

A) The market never sleeps
B) The market has not yet created a global link
C) There are not yet significant differences in the exchange rates
D) High-speed computer linkages between trading centers have yet to be created
E) Prices for various currencies are primarily set in New York and London

Question 38

The value of a currency is determined by

A) the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.
B) a consortium of international currency traders.
C) the World Trade Organization.
D) negotiations between the central banks of the leading five industrial powers of the world.
E) currency speculators.

Question 39

One feature of the London exchange market is _____________

A) Lower exchange fees.
B) Higher margins.
C) New investment products.
D) The ability to short the market.
E) Its geography between the Tokyo and New York Markets.

Question 40

When a U.S.tourist in Japan goes to a bank to convert her dollars into Japanese yen,the exchange rate is the

A) forward exchange rate.
B) regulated exchange rate.
C) sanctioned exchange rate.
D) spot exchange rate.
E) Japanese central bank rate.

Question 41

Although a foreign exchange transaction can involve any two currencies,most transactions involve

A) Japanese yen.
B) British pounds.
C) U.S. dollars.
D) French francs.
E) Euros.

Question 42

A(n)_______________ is a market in which few impediments to international trade and investment exist.

A) relatively efficient market
B) consistently inefficient market
C) absolutely free market
D) absolutely closed
E) free market

Question 43

The _____________ states that in competitive markets free of transportation costs and barriers to trade,identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

A) law of one price
B) principle of consistent pricing
C) model of fair pricing
D) principle of equitable pricing
E) law of purchasing power equity

Question 44

A less extreme version of the PPP theory state that given _____________ the price of a "basket of goods" should be roughly equivalent in each country.

A) tolerant markets
B) relatively efficient markets
C) classical markets
D) closed markets
E) free markets

Question 45

If the law of one price were true for all goods and services,the _____________ exchange rate could be found from any individual set of prices.

A) stability power similarity (SPS)
B) purchasing ability adeptness (PAA)
C) buying prowess equality (BPE)
D) purchasing power parity (PPP)
E) spot

Question 46

The text gives Bolivia as an example of the impact of ______________ on exchange rates.

A) interest rates
B) trade imbalances
C) market psychology
D) bad economic management
E) money supply

Question 47

In essence,PPP theory predicts that

A) there is no relationship between changes in relative prices and changes in exchange rates.
B) changes in relative prices will result in stability in exchange rates.
C) stability in relative prices will result in a change in exchange rates.
D) changes in relative prices will result in a change in exchange rates.
E) changes in market barriers will result in changes in exchange rates

Question 48

The three factors that have the most important impact on future exchange rate movement include the country's price inflation,its market philosophy,and its ______________.

A) rate of economic growth
B) unemployment rate
C) interest rate
D) participation in the World Trade Organization
E) current account balance

Question 49

In essence,the _______________ theory predicts that changes in relative prices will result in a change in exchange rates.

A) buying power equality (BPE)
B) purchasing power parity (PPP)
C) stability power similarity (SPS)
D) buying prowess equality (BPE)
E) price stabilization potential

Question 50

PPP theory stands for what?

A) productivity power premium theory
B) process productivity predictor theory
C) purchasing power parity theory
D) personal power predictor theory
E) production possibilités parameter theory

Question 51

The law of one price and purchasing power parity are two components of

A) market psychology.
B) price and exchange rates.
C) interest rate.
D) prices inflation.
E) economic theory.

Question 52

The _____________ theory tells us that a country with a high inflation rate will see deprecation in its currency exchange rate.

A) law of one price
B) monetary system
C) PPP
D) price inflation
E) currency determinism

Question 53

A(n)_______________ has no impediments to the free flow of goods and services.

A) classical market
B) efficient market
C) traditional market
D) inefficient market
E) free market

Question 54

According to the ______________,identical products sold in different countries must sell for the same price when their price is expressed in the same currency in competitive markets free of transportation costs and barriers to trade.

A) model of fair pricing
B) law of purchasing power equity
C) principle of equitable pricing
D) principle of consistent pricing
E) law of one price

Question 55

At the most basic level,exchange rates are determined by the demand and supply of one currency relative to the

A) permanent value of another.
B) 30-day average of another.
C) 90-day average of another.
D) demand and supply of another.
E) market psychology.

Question 56

The exchange rate between the British pound and the dollar is 1 = $1.50 and a jacket that retails for $75 in New York sells for 50 in London ($75/1.5 = 50).This reflects what?

A) model of fair pricing.
B) law of one price.
C) principle of equitable pricing.
D) principle of consistent pricing.
E) purchasing power equity

Question 57

Most economic theories suggest that three import factors have an important impact on future exchange rate movements in a country's currency.These factors are

A) the country's price inflation, its interest rate, and its market philosophy.
B) the country's rate of GNP, its unemployment rate, and its economic policy.
C) the country's participation in the World Trade Organization, its monetary policy, and its market philosophy.
D) the country's rate of economic growth, its participation in the World Trade Organization, and its economy policy.
E) the country's economic policy, its trade balance, and its national deficits.

Question 58

A less extreme version of the PPP theory states that given ______________,that is,markets in which few impediments to international trade and investment exist-the price of a "basket of goods" should be roughly equivalent in each country.

A) relatively efficient markets
B) statutory markets
C) stable markets
D) absolutely free markets
E) mixed economies

Question 59

If the prices differed in London and New York and a dealer spent $1 million to purchase 125 million,then sold that 125 immediately for $1.046666 million,the trader would earn a profit of $46,666 on the transaction.This is accomplished through

A) arbitrage.
B) skimming.
C) FDI.
D) pre exchange agreements.
E) buying low and selling high.

Question 60

The process of buying a currency low and selling it high at the same time is called

A) forward exchange.
B) skimming
C) profiteering
D) arbitrage
E) hedging

Question 61

The ______________ is less useful for predicting exchange movements between the currencies of advanced industrialized nation that have relatively small differentials in inflation rates.

A) tolerant market
B) efficiency theory
C) PPP theory
D) closed market
E) supply and demand mechanism

Question 62

According to our textbook,when the growth in a country's money supply is faster than the growth in its output,_____________ is(are)fuelled.

A) economic growth
B) unemployment
C) inflation
D) per capita savings
E) wage increases

Question 63

The International Fisher Effect states that for any two countries,the _____________ exchange rate should change in an equal amount but in the opposite direction to the difference in the nominal interest rates between the two countries.

A) reciprocal
B) spot
C) forward
D) inward
E) future

Question 64

The inevitable result of excessive growth in money supply is called

A) interest rate.
B) price inflation.
C) economic growth.
D) per capita savings.
E) wage increases

Question 65

The PPP theory tells us that a country with a high inflation rate will see:

A) a depreciation in its currency exchange rate
B) an appreciation in its currency exchange rate
C) no change in its currency exchange rate as a result of the inflation rate
D) economic stability as a result of high inflation
E) price rises to match neighbouring country prices

Question 66

Empirical evidence suggests that neither PPP theory nor the International Fisher Effect is particularly good at explaining

A) long-term movements in exchange rates.
B) interest rates.
C) short-term movements in exchange rates.
D) unemployment rates.
E) short-term wage levels.

Question 67

Short run exchange rate movements may be explained by ______________.

A) the bandwagon effect
B) investor expectations
C) psychological factors
D) nominal interest rates
E) the bandwagon effect, investor expectations, and psychological factors

Question 68

PPP theory predicts that changes in ______________ will result in a change in exchange rates.

A) relative prices
B) interest rates
C) unemployment rates
D) statutory prices
E) wholesale prices

Question 69

Economic theory tells us that _____________ rates reflect expectations about likely future inflation rates.

A) currency
B) exchange
C) interest
D) unemployment
E) forward

Question 70

According to the textbook,PPP theory does not seem to be a particularly good predictor of exchange rate movements for time spans of

A) one year or less.
B) three years or less.
C) five years or less.
D) ten years or less.
E) twenty years or less.

Question 71

The _____________ market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates,so investing in exchange rate forecasting services would be a waste of time.

A) efficient
B) closed
C) inefficient
D) free
E) open

Question 72

According to the International Fisher Effect,if the real rate of interest in a country is 5 percent and the annual inflation is expected to be 10 percent,the nominal interest rate will be

A) 5 percent.
B) 10 percent.
C) 12.5 percent.
D) 15 percent.
E) 20 percent.

Question 73

The _____________ 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 the nominal interest rates between the two countries.

A) Worldwide James Effect
B) Universal Phillips Effect
C) International Fisher Effect
D) Global Miller Effect
E) Law of One Price Effect

Question 74

______________ determines whether the rate of growth in a country's money supply is greater than the rate of growth in output.

A) The international monetary authority
B) Market mechanisms
C) The private sector
D) Government policy
E) Demand for money

Question 75

Theoretically,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 refers to

A) buying purchase power.
B) purchasing power parity.
C) power similarities.
D) comparative advantage.
E) national competitive disadvantage.

Question 76

Inflation is a(n)_____________ phenomenon.

A) legal
B) political
C) monetary
D) social
E) economic

Question 77

The Canadian money supply is growing more rapidly than Canadian output.Dollars will be relatively more plentiful than the currencies of countries where monetary growth is closer to output growth.This is an example of

A) buying purchase power.
B) buying prowess equality.
C) stability power similarities.
D) purchasing power parity.
E) inflationary pressures.

Question 78

Investor expectations about likely future exchange rates have a tendency to become __________.

A) the PPP
B) speculative exchange rates
C) self-fulfilling prophecies
D) the IFE
E) interest rates

Question 79

The PPP theory seems to best predict exchange rate changes for countries with what?

A) very low rates of inflation and developed capital markets.
B) very low rates of inflation and underdeveloped capital markets.
C) very high rates of inflation and underdeveloped capital markets.
D) very high rates of inflation and developed capital markets.
E) low rates of inflation and underdeveloped capital markets

Question 80

Calculate the forward exchange rate using the following information.Spot exchange rate is $1.45 for 1 Euro.The nominal interest rate in Canada is 6 percent and the nominal interest rate in Europe is 4%.

A) 1.44
B) 1.43
C) 1.45
D) 1.41
E) 1.42