Question 1

In a(n)____ exchange rate system, the foreign exchange market is totally free from government intervention.

Accepted Answer

In a freely floating exchange rate system, the value of currencies is determined by the forces of supply and demand in the foreign exchange market without government intervention.

Question 2

The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period.

Accepted Answer

Currency options grant the holder the right, but not the obligation, to buy or sell a currency at a specified exchange rate during a specified period, offering more flexibility compared to forwards and futures, which obligate the parties to execute the contract.

Question 3

Purchasing power parity suggests that the forward rate premium (or discount)should be about equal to the differential in interest rates between the countries of concern.

Accepted Answer

Purchasing power parity (PPP) relates to the relative price levels between countries, while the forward rate premium or discount is explained by interest rate parity, which states that the forward rate premium or discount should equal the interest rate differential between two countries.

Question 4

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called ​

Accepted Answer

Covered interest arbitrage involves taking advantage of the difference between the forward rate premium and the interest rate differential by investing in different currencies and covering the exchange rate risk with a forward contract.

Question 5

The forward rate is the exchange rate for immediate delivery.

Accepted Answer

The forward rate is the exchange rate agreed upon for delivery and payment at a future date, not for immediate delivery. Immediate delivery exchange rates are referred to as spot rates.

Question 6

If a country in the eurozone suffers from a weak economy, it may devalue its currency to increase demand for its exports and thereby stimulate its economy.

Accepted Answer

Countries in the eurozone do not have control over their individual currencies as they all use the euro. Monetary policy, including currency valuation, is managed by the European Central Bank.

Question 7

The indirect exchange rate is always the reciprocal of the direct exchange rate.

Accepted Answer

The indirect exchange rate is the reciprocal of the direct exchange rate because it expresses the amount of foreign currency per unit of domestic currency, whereas the direct exchange rate expresses the amount of domestic currency per unit of foreign currency.

Question 8

The following information refers to Fresno Bank and Champaign Bank.

Accepted Answer

The answer of The following information refers to Fresno Bank...

Question 9

Exchange rates usually change precisely as suggested by the purchasing power parity (PPP)theory.

Accepted Answer

While the purchasing power parity (PPP) theory provides a long-term equilibrium exchange rate between two currencies based on their relative purchasing powers, in reality, exchange rates fluctuate due to a variety of factors such as interest rates, political stability, and market speculation, and do not always align precisely with PPP predictions.

Question 10

When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency.

Accepted Answer

Raising interest rates makes domestic investments more attractive, which can reduce the outflow of funds by encouraging both domestic and foreign investors to invest within the country, thereby supporting the value of the country's currency.

Question 11

A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when it is received, sell it in the spot market.

Accepted Answer

A speculator expecting a foreign currency to appreciate can buy the currency forward, locking in a price now, and then sell it in the spot market at a potentially higher price when the contract matures, making a profit from the appreciation.

Question 12

Which of the following is typically used as the basis of a market-based forecast?

Accepted Answer

Market-based forecasts often use both the currency's spot rate and the currency's forward rate as these rates reflect current market conditions and expectations about future movements in currency values.

Question 13

Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity.

Accepted Answer

The answer of Assume an equilibrium state in which European...

Question 14

____ are not foreign exchange derivatives.

Accepted Answer

All of the listed options (Forward contracts, Currency futures contracts, Currency swaps, Currency options) are types of foreign exchange derivatives. These financial instruments derive their value from the exchange rates of two different currencies, allowing parties to hedge against foreign exchange risk or speculate on currency movements.

Question 15

The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.

Accepted Answer

The forward rate premium reflects the percentage by which the forward rate exceeds the spot rate on an annualized basis, not the other way around.

Question 16

Which of the following does NOT influence the supply of and demand for a currency?

Accepted Answer

All of the options listed (differential interest rates, differential inflation rates, direct government intervention, and indirect government intervention) influence the supply of and demand for a currency. Interest rates and inflation rates affect investment flows and purchasing power, while government interventions can directly or indirectly influence currency value through various policies and measures.

Question 17

The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.

Accepted Answer

The Smithsonian Agreement, reached in December 1971, allowed for a devaluation of the US dollar and expanded the fluctuation bands within which currencies could move against the dollar, marking a significant shift from the fixed exchange rate system established by the Bretton Woods Agreement.

Question 18

On a financial website, you observe that the euro (€)is quoted for $1.67. The Canadian dollar (C$)is quoted for $0.62. What is the value of the Canadian dollar in euros?

Accepted Answer

To find the value of the Canadian dollar in euros, divide the value of the Canadian dollar in US dollars ($0.62) by the value of the euro in US dollars ($1.67). This gives approximately €0.37.

Question 19

The European Central Bank is responsible for setting fiscal policy for all countries in the eurozone.

Accepted Answer

The European Central Bank is responsible for monetary policy, not fiscal policy, in the eurozone. Fiscal policy is determined by the individual governments of the member countries.

Question 20

If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

Accepted Answer

When U.S. inflation is higher than European inflation, U.S. goods become relatively more expensive, increasing demand for cheaper European goods. This leads to a decline in the supply of euros to be sold for dollars as Europeans find U.S. goods more expensive and buy less. Both factors contribute to upward pressure on the euro's value.

Quiz 16: Foreign Exchange Derivative Markets

In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention.

The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period.

Purchasing power parity suggests that the forward rate premium (or discount)should be about equal to the differential in interest rates between the countries of concern.

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called

The forward rate is the exchange rate for immediate delivery.

If a country in the eurozone suffers from a weak economy, it may devalue its currency to increase demand for its exports and thereby stimulate its economy.

The indirect exchange rate is always the reciprocal of the direct exchange rate.

The following information refers to Fresno Bank and Champaign Bank.

Exchange rates usually change precisely as suggested by the purchasing power parity (PPP)theory.

When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency.

A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when it is received, sell it in the spot market.

Which of the following is typically used as the basis of a market-based forecast?

Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will against the dollar by approximately percent, according to purchasing power parity.

____ are not foreign exchange derivatives.

The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.

Which of the following does NOT influence the supply of and demand for a currency?

The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.

On a financial website, you observe that the euro (€) is quoted for $1.67. The Canadian dollar (C$) is quoted for $0.62. What is the value of the Canadian dollar in euros?

The European Central Bank is responsible for setting fiscal policy for all countries in the eurozone.

If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will . In addition, the supply of euros to be sold for dollars will ; both forces will place pressure on the value of the euro.

Quiz 16: Foreign Exchange Derivative Markets

In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention.

The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period.

Purchasing power parity suggests that the forward rate premium (or discount)should be about equal to the differential in interest rates between the countries of concern.

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called ​

The forward rate is the exchange rate for immediate delivery.

If a country in the eurozone suffers from a weak economy, it may devalue its currency to increase demand for its exports and thereby stimulate its economy.

The indirect exchange rate is always the reciprocal of the direct exchange rate.

The following information refers to Fresno Bank and Champaign Bank.

Exchange rates usually change precisely as suggested by the purchasing power parity (PPP)theory.

When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency.

A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when it is received, sell it in the spot market.

Which of the following is typically used as the basis of a market-based forecast?

Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity.

____ are not foreign exchange derivatives.

The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.

Which of the following does NOT influence the supply of and demand for a currency?

The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.

On a financial website, you observe that the euro (€) is quoted for $1.67. The Canadian dollar (C$) is quoted for $0.62. What is the value of the Canadian dollar in euros?

The European Central Bank is responsible for setting fiscal policy for all countries in the eurozone.

If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called

Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will against the dollar by approximately percent, according to purchasing power parity.

If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will . In addition, the supply of euros to be sold for dollars will ; both forces will place pressure on the value of the euro.