Deck 10: Foreign Exchange Rate Determination and Forecasting

Question 1

An 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

Answer 1

complementary; competing

Question 2

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

Answer 2

True

Question 3

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.

Answer 3

The rate of inflation in the United States.

Question 4

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

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

Question 5

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 6

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.

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

Question 7

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

Question 8

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 9

The asset market approach to forecasting is not applicable to emerging markets.

Question 10

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

Question 11

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 12

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 13

The ________ provides a means to account for international cash flows in a standardized and systematic manner.

A)parity conditions
B)asset approach
C)balance of payments
D)international Fisher effect

Question 14

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

Question 15

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 16

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 17

The balance of payments approach of exchange rate theory is largely dismissed by the academic community today, while the practitioner public still rely on different variations of the theory for their decision making.

Question 18

The Asian Currency crisis appeared to begin in ________.

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

Question 19

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 20

The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices?

A)Relative real interest rates.
B)Capital market liquidity.
C)Political safety.
D)All of the above are considered by investors in their decision process.

Question 21

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

Question 22

A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ 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)€1.40/£
B)£1.40/€
C)£1.54/€
D)€1.54/£

Question 23

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 24

________, 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 25

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

Question 26

The single most important element of technical analysis is that future exchange rates are based on the current exchange rate.

Question 27

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 28

The ________ is the Argentine currency unit.

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

Question 29

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 back yard

Question 30

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 31

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

Question 32

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 33

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 34

Examples of a business motivation for long-run exchange rate forecasts include all but which of the following?

A)A major capital investment in a foreign country.
B)The desire to hedge a 90-day security.
C)A portfolio manager considering investing in foreign securities.
D)All of the above are examples of a business motivation for long-run exchange rate forecast.