Question 1

If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated.

Accepted Answer

Each pound now buys fewer dollars than at the start of the day. The dollar has appreciated, and the pound has depreciated.

Question 2

Governments allow convertibility to preserve their foreign exchange reserves.

Accepted Answer

Governments limit convertibility to preserve their foreign exchange reserves.

Question 3

The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney.

Accepted Answer

The most important trading centers are London (37 percent of activity), New York (18 percent of activity), and Zurich, Tokyo, and Singapore (all with around 5 to 6 percent of activity). Major secondary trading centers include Frankfurt, Paris, Hong Kong, and Sydney.

Question 4

There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates.

Accepted Answer

Evidence reveals that various psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates.

Question 5

There are many impediments to the free flow of goods and services in an efficient market.

Accepted Answer

An efficient market has no impediments to the free flow of goods and services, such as trade barriers.

Question 6

The foreign exchange market converts the currency of one country into that of another country.

Accepted Answer

One function of the foreign exchange market is to convert the currency of one country into the currency of another country.

Question 7

The International Fisher Effect 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 nominal interest rates between the two countries.

Accepted Answer

The International Fisher Effect 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 nominal interest rates between the two countries.

Question 8

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

Accepted Answer

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

Question 9

Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the hope that she would make money based on the exchange rates. This demonstrates a carry trade.

Accepted Answer

A carry trade involves borrowing money from a low-interest rate currency to invest in a high-interest rate currency, with the goal of making a profit from the interest rate differential. While Parla's actions may not constitute a traditional carry trade, she is still engaging in currency speculation by moving her funds between dollars and euros in the hope of making a profit based on exchange rate fluctuations.

Question 10

Carry trade is nonspeculative in nature.

Accepted Answer

The speculative element of carry trade is that its success is based upon a belief that there will be no adverse movement in exchange rates (or interest rates for that matter) that will make the trade unprofitable.

Question 11

The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

Accepted Answer

While PPP theory seems to yield relatively accurate predictions in the long run, it does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

Question 12

To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract.

Accepted Answer

When a firm enters into a forward exchange contract, it is taking out insurance against the possibility that future exchange rate movements will make a transaction unprofitable by the time that transaction has been executed.

Question 13

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

Accepted Answer

The efficient market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money.

Question 14

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa.

Accepted Answer

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable, and vice versa.

Question 15

A currency swap deal enables companies to insure themselves against foreign exchange risk.

Accepted Answer

A currency swap deal enables companies to insure themselves against foreign exchange risk.

Question 16

If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a premium on the 30-day forward market.

Accepted Answer

If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates foreign exchange dealers expected the dollar to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a discount on the 30-day forward market.

Question 17

If the law of one price were correct for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.

Accepted Answer

If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.

Question 18

Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly.

Accepted Answer

Because foreign exchange dealers are always watching their computer screens for arbitrage opportunities, the few that arise tend to be small, and they disappear in minutes.

Question 19

When Krista traveled from the United States to England, she had to change her money from dollars into pounds. Krista was participating in the currency exchange market.

Accepted Answer

When a tourist changes one currency into another, she is participating in the foreign exchange market.

Question 20

If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a discount in the forward market.

Accepted Answer

In this case, the dollar is selling at a premium on the 30-day forward market.

Quiz 10: The Foreign Exchange Market

If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated.

Governments allow convertibility to preserve their foreign exchange reserves.

The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney.

There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates.

There are many impediments to the free flow of goods and services in an efficient market.

The foreign exchange market converts the currency of one country into that of another country.

The International Fisher Effect 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 nominal interest rates between the two countries.

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the hope that she would make money based on the exchange rates. This demonstrates a carry trade.

Carry trade is nonspeculative in nature.

The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract.

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa.

A currency swap deal enables companies to insure themselves against foreign exchange risk.

If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a premium on the 30-day forward market.

If the law of one price were correct for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.

Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly.

When Krista traveled from the United States to England, she had to change her money from dollars into pounds. Krista was participating in the currency exchange market.

If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a discount in the forward market.