Question 1

________, 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

Accepted Answer

Technical analysts use price and volume data to analyze past trends and make predictions about future trends. Charting various technical indicators and patterns, they attempt to identify trading opportunities based on market movements. The other options, mappists, Trappist monks, and filibusters, have no relevance to financial market analysis.

Question 2

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

Accepted Answer

Efficient markets hypothesis suggests that exchange rates reflect all relevant information available at any point in time. Random walk theory states that future exchange rate movements cannot be predicted from the past movements since they follow a random pattern. Therefore, if the foreign exchange market is efficient, exchange rate movements are more likely to be random walks.

Question 3

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.

Accepted Answer

Most determinants of the spot exchange rate, such as interest rates, inflation, political events, and economic growth, can impact the spot rate and, in turn, are affected by it. This illustrates a two-way relationship or mutual determination between the spot rate and its determinants. However, some determinants may have a stronger influence on the spot rate than vice versa, depending on the circumstances.

Question 4

The ________ 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

Accepted Answer

The asset market theory argues that exchange rates are determined by the supply and demand for a wide variety of financial assets, such as stocks, bonds, and currency. This theory suggests that exchange rates can fluctuate based on changes in the perceived value of these assets, which can be influenced by factors such as interest rates, inflation, and political stability. The balance of payments theory focuses on the overall balance of a country's international transactions, while the monetary theory emphasizes the role of monetary policy in determining exchange rates. The law of one price states that identical goods should have the same price in different countries when expressed in the same currency.

Question 5

Which of the following is NOT a current account activity?
A) Net import/export of goods (Balance of Trade).
B) Net import/export of services.
C) Net portfolio investment.
D) All of the above are activities of the current account.

Accepted Answer

Net portfolio investment is a capital account activity, not a current account activity.

Question 6

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.

Accepted Answer

The answer of Which of the following did NOT contribute...

Question 7

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

Accepted Answer

Technical analysis primarily focuses on patterns and price movements in the short term, and its predictive accuracy does not necessarily improve with longer time horizons, especially given the volatility and unpredictability of foreign exchange markets.

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

Accepted Answer

The parity conditions, asset approach, and balance of payments approaches all provide different perspectives on how foreign exchange rates are determined, but they are not necessarily competing theories. Rather, they are complementary, each providing unique insights into the complex factors that influence exchange rate movements. Therefore, the best answer is D, complementary; competing would imply that these theories are in direct opposition to one another, which is not necessarily the case.

Question 9

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

Accepted Answer

Short-term foreign exchange forecasts are typically motivated by immediate needs such as the desire to hedge a payable, reflecting a company's need to manage its short-term financial commitments and currency exposure. In contrast, long-term forecasts are driven by broader investment strategies, such as the desire for long-term investment, where companies look to assess and manage their exposure to currency fluctuations over a longer period to support strategic investment decisions.

Question 10

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

Accepted Answer

The authors state that studies suggest that fundamentals do apply to the long-term for foreign exchange, indicating that the answer is true.

Question 11

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

Accepted Answer

The asset market 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. This approach assumes that exchange rates are largely determined by supply and demand in the foreign exchange market.

Question 12

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

Accepted Answer

Technical analysis of exchange rates employs the use of charts, patterns, and statistical indicators to predict future exchange rate movements. This approach was developed in response to the limitations of fundamental exchange rate theories, which struggled to accurately forecast exchange rate fluctuations.

Question 13

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/£

Accepted Answer

The answer of A major U.S. multinational firm has forecast...

Question 14

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

Accepted Answer

The authors believe that multiple factors can cause currency values to deviate from their long-term fundamental path.

Question 15

The authors compromise as to the key factors for exchange rate determination. They conclude that ________ is 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

Accepted Answer

The authors conclude that asset markets, interest rates, and expectations are important factors in the short run, but that PPP (purchasing power parity) determines long run exchange rates. This is in contrast to the Fisher effect, which relates to the relationship between nominal interest rates, inflation, and real interest rates.

Question 16

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

Accepted Answer

The answer of The authors claim that the theories of...

Question 17

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

Accepted Answer

The approach described in the question is the balance of payments approach, which asserts that at equilibrium, a country's payments to other countries for imports and exports will be equal to its receipts from other countries for its exports and imports. This is often used in conjunction with the exchange rate determination model to determine the value of a country's currency.

Question 18

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

Accepted Answer

The balance of payments provides a systematic and standardized way to record and analyze international cash flows, including trade in goods and services, capital flows, and transfers between countries. Parity conditions are economic theories that explain relationships between exchange rates and interest rates, while the asset approach and international Fisher effect are models used to predict exchange rate movements.

Question 19

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

Accepted Answer

The given approach relates to the monetary approach to exchange rates, which emphasizes the factors affecting the supply and demand for national currency stocks, such as the monetary policies of the countries concerned, domestic economic conditions, interest rate levels, and expectations about future monetary growth. The balance of payments approach, on the other hand, focuses on the current account trade flows and capital flows to explain exchange rate movements. The asset market approach is a broader concept that takes into account the supply and demand for various financial assets, while the law of one price asserts that identical goods should cost the same in different markets after accounting for exchange rates.

Question 20

A popular speculation in the 1990s was
A) U.S. investors investing in Japanese securities to take advantage of Japan's higher nominal and real interest rates.
B) Japanese investors investing in the United States securities to take advantage of the higher U.S. nominal and real interest rates.
C) selling short the U.S. dollar against the Russian Ruble.
D) None of the above was a popular speculation technique in the 1990s.

Accepted Answer

The popular speculation in the 1990s was Japanese investors investing in United States securities to take advantage of the higher nominal and real interest rates in the U.S. This was known as the "carry trade," where investors borrow in a country with low interest rates and invest in a country with high interest rates.

Quiz 7: Foreign Exchange Rate Determination and Forecasting

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

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

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.

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

Which of the following is NOT a current account activity?

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

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

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.

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

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

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.

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

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?

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

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

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

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.

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

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 popular speculation in the 1990s was