Question 1

Consider the role of investor psychology and bandwagon Effects on how well purchasing power parity and the international Fisher effect explain short-term movements in exchange rates.

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Question 2

Discuss the two schools of thought on exchange rate forecasting.

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Question 3

A lag strategy involves

Accepted Answer

A lag strategy involves delaying collection of foreign currency receivables if that currency is expected to appreciate and delaying payables if the currency is expected to depreciate.

Question 4

Where is the foreign exchange market located? What is the nature of the market? Is the market growing or shrinking on a global basis?

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Question 5

What is meant by the phrases "the dollar is selling at a discount" on the 30-day forward market and "the dollar is selling at a premium" on the 30-day forward market?

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Question 6

A(n) ________ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

Accepted Answer

Leading involves accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Question 7

________ is the impact of currency exchange rate changes on the reported financial statements of a company.

Accepted Answer

Translation exposure is concerned with the present measurement of past events.

Question 8

Discuss the failure of PPP theory to predict exchange rates accurately. What is the purchasing power parity puzzle?

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Question 9

Why do governments limit currency convertibility?

Accepted Answer

Governments limit convertibility to preserve their foreign exchange reserves. A country needs an adequate supply of these reserves to service its international debt commitments and to purchase imports.

Question 10

The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as ________ exposure.

Accepted Answer

Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. It includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

Question 11

What are the main uses of foreign exchange markets for international business?

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Question 12

Restrictions on external convertibility can

Accepted Answer

External convertibility restrictions can limit domestic companies' ability to invest abroad, but they represent few problems for foreign companies wishing to do business in that country.

Question 13

Compare and contrast the Fisher Effect and the International Fisher Effect.

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Question 14

What is the law of one price?

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Question 15

What concept is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs?

Accepted Answer

Economic exposure is the extent to which a firm's future international earning power is affected by changes in exchange rates. Economic exposure is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs.

Question 16

Capital flight is most likely to occur when

Accepted Answer

Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation, or when a country's economic prospects are shaky in other respects.

Question 17

________ is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects.

Accepted Answer

Governments typically impose convertibility restrictions on their currency when they fear that free convertibility will lead to a run on their foreign exchange reserves. This occurs when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency-a phenomenon generally referred to as capital flight.

Question 18

________ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services.

Accepted Answer

Countertrade refers to a range of barter-like agreements by which goods and services can be traded for other goods and services. Companies can deal with the nonconvertibility problem by engaging in countertrade.

Question 19

________ includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

Accepted Answer

Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies. Transaction exposure can be minimized by entering into forward contracts or swaps, or by leading and lagging payables and receivables.

Question 20

With the help of an example, explain how a tourist participates in the foreign exchange market.

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Quiz 10: The Foreign Exchange Market