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 are the ones who use price and volume data to analyze past trends and predict future movements. Mappists are not a real term and Filibusters are individuals involved in political obstructionism, while Trappist Monks are a Catholic religious order.

Question 2

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 is based on the assumption that exchange rates are determined by the supply and demand for assets denominated in different currencies. The most important factors in this approach are the relative real interest rate and a country's outlook for economic growth and profitability. The balance of payments approach looks at the current account and capital account balances to determine exchange rates, while parity conditions focus on the relationship between spot and forward exchange rates. The managed float approach is a government-managed exchange rate system that allows the exchange rate to fluctuate within a certain range.

Question 3

A country's Central Bank may have the policy to
A) fight inflation.
B) fight slow economic growth.
C) either A or B
D) none of the above

Accepted Answer

A

Question 4

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 5

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 answer of The ________ approach states that the exchange...

Question 6

The Chinese government announces that on December 31, 2006 the value of the Yuan will officially change from 6.40 Yuan/$ to 6.00 Yuan/$. This would be an official ________ of the Chinese currency of ________.
A) revaluation; 6.25%
B) revaluation; 6.67%
C) devaluation; 6.25%
D) devaluation; 6.67%

Accepted Answer

Revaluation is an increase in the value of a currency in relation to foreign currencies. The Yuan's value increased from 6.40 to 6.00 per dollar, which is a revaluation. The percentage change is calculated as (6.40 - 6.00) / 6.40 = 0.0625, or 6.67%.

Question 7

If the Central Bank's goal was to decrease the value of its currency, or to fight an appreciation of its currency's value on the foreign exchange market, the bank could
A) buy its own currency with foreign currency.
B) sell its own currency in exchange for foreign currency.
C) sell foreign currency.
D) do all of the above

Accepted Answer

Selling its own currency in exchange for foreign currency would decrease the demand for its currency, thereby decreasing its value relative to other currencies. Buying its own currency with foreign currency or selling foreign currency would have little to no effect on the value of its own currency. Therefore, option B is the best choice.

Question 8

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 9

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 three approaches mentioned (parity conditions, asset approach, and balance of payments approaches) are not competing but rather complementary theories that provide different perspectives on how exchange rates are determined.

Question 10

There is a long-standing saying that "what worries bankers is unemployment, but what worries elected officials is inflation."

Accepted Answer

The answer of There is a long-standing saying that "what...

Question 11

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

Accepted Answer

The asset market approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets such as stocks, bonds, commodities, and derivatives. This approach takes into account factors such as interest rates, inflation rates, risk perception, and macroeconomic indicators, which affect the demand and supply of financial assets and hence, impact exchange rates. The balance of payments approach focuses on the trade flows and capital movements, while the monetary approach emphasizes the role of central bank policies in determining exchange rates. The law of one price states that identical goods should have the same price in different countries, but it does not explain how exchange rates are determined.

Question 12

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

To find the expected euro per pound rate, divide the expected euro/dollar rate by the expected dollar/pound rate: (euro1.10/$) / ($1.40/£) = euro1.54/£.

Question 13

"Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of
A) a market inefficiency.
B) a market efficiency.
C) the Fisher Effect.
D) none of the above.

Accepted Answer

Overshooting exchange rate changes mean that the exchange rate moves more than what is necessary to balance the market after a change in monetary policy. This indicates a temporary market inefficiency as the exchange rate eventually adjusts to its equilibrium level.

Question 14

Indirect intervention is
A) the alteration of economic and financial fundamentals driving currency capital flows.
B) Central Bank implementing restrictive monetary policy aiming to drive real rates up.
C) the sharp increase in Turkish repo rates from 4.5% to 10% in 2014.
D) All of the above

Accepted Answer

All of the above are examples of indirect intervention.

Question 15

The fall in the value of the domestic currency will sharply reduce the purchasing power of its people.

Accepted Answer

When the value of the domestic currency falls, it takes more of the domestic currency to purchase the same amount of goods and services. This means that the purchasing power of the people in that country decreases, as they can now buy fewer goods and services than before with the same amount of money.

Question 16

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

Accepted Answer

Technical analysis was developed as an alternative approach to predicting exchange rates due to the limitations of fundamental theories such as the purchasing power parity and interest rate parity.

Question 17

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

The spot exchange rate and its determinants, such as interest rates, inflation rates, political stability, economic growth, etc., are interrelated and affect each other. For example, a change in interest rates in one country can influence the demand for its currency and affect the exchange rate, which, in turn, can affect the country's inflation rate, economic growth, and political stability. Similarly, changes in these factors can impact the expectations and behavior of market participants, which can influence the exchange rate. Therefore, the spot exchange rate and its determinants are mutually determined and linked.

Question 18

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

Accepted Answer

If the foreign exchange market is efficient, then exchange rates will quickly adjust to new information and reflect all available information. This means that future exchange rate movements cannot be predicted based on past movements, leading to exchange rates following a random walk pattern.

Question 19

The Central Bank practice of the active buying and selling of the domestic currency against foreign currencies is the process of
A) direct intervention.
B) indirect intervention.
C) coordinated intervention.
D) capital controls.

Accepted Answer

The practice of active buying and selling of domestic currency against foreign currencies is a form of direct intervention by the central bank. This is because the central bank is directly involved in the foreign exchange market by actively buying and selling currencies to influence the value of the domestic currency. Indirect intervention, on the other hand, refers to policies or actions that affect exchange rates indirectly, such as changes in interest rates. Coordinated intervention involves multiple central banks working together to influence exchange rates, while capital controls are restrictions imposed by a government on the movement of capital across borders.

Question 20

The authors compromise as to the key factors for exchange rate determination. They conclude that ________ are 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 in the short run, exchange rates are determined by asset markets, interest rates, and expectations. However, in the long run, exchange rates are determined by PPP. Therefore, option B is the most appropriate choice.

Quiz 8: Foreign Exchange Rate Determination

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

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 country's Central Bank may have the policy to

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

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

The Chinese government announces that on December 31, 2006 the value of the Yuan will officially change from 6.40 Yuan/$ to 6.00 Yuan/$. This would be an official of the Chinese currency of .

If the Central Bank's goal was to decrease the value of its currency, or to fight an appreciation of its currency's value on the foreign exchange market, the bank could

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

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.

There is a long-standing saying that "what worries bankers is unemployment, but what worries elected officials is inflation."

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

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?

"Overshooting" exchange rate changes in response to an action of the Federal Reserve would be an example of

Indirect intervention is

The fall in the value of the domestic currency will sharply reduce the purchasing power of its people.

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

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

The Central Bank practice of the active buying and selling of the domestic currency against foreign currencies is the process of

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