Question 1

In the years between 1990 and 2001 when global gross domestic product rose 27%,what was the growth in global exports?
A)25%
B)75%
C)35%
D)50%

Accepted Answer

According to the text, the global gross domestic product rose 27% between 1990 and 2001. However, the text does not provide information about the growth in global exports during this same period. Without additional information, it is impossible to choose any of the given options with certainty.

Question 2

Under U.S.GAAP,what method is required to account for foreign currency transactions?
A)A one-transaction perspective must be used.
B)The two-transaction perspective must be used.
C)A sale is not recorded until payment is received and converted to U.S.dollars.
D)A sale is not recorded until payment is received in the foreign currency.

Accepted Answer

Under U.S.GAAP, the two-transaction perspective must be used to account for foreign currency transactions. This method recognizes that the transaction involves two distinct events: the initial transaction in the foreign currency, and the subsequent transaction to convert the foreign currency into U.S. dollars. The exchange rate used for each of these transactions may differ, so two separate entries are required to properly record the transaction in the accounting records.

Question 3

Under International Accounting Standards Board rules,what method is required to account for foreign currency transactions?
A)A one-transaction perspective must be used.
B)The two-transaction perspective must be used.
C)A sale is not recorded until payment is received and converted to U.S.dollars.
D)A sale is not recorded until payment is received in the foreign currency.

Accepted Answer

Under International Accounting Standards Board rules, the two-transaction perspective must be used to account for foreign currency transactions. This approach recognizes that there are two separate transactions involved: the initial exchange of currencies and the subsequent exchange of the foreign currency back to the domestic currency. The exchange rate used for each transaction must be based on the prevailing exchange rate at the time of the transaction.

Question 4

What has occurred when one company arranges to buy a foreign currency some time in the future,at an exchange rate quoted today?
A)The company has purchased a foreign currency option.
B)The company has entered a forward contract.
C)The currency has been devalued.
D)None of the above

Accepted Answer

When a company arranges to buy a foreign currency some time in the future at an exchange rate quoted today, it has entered into a forward contract. A forward contract is an agreement between two parties to buy or sell an asset at a predetermined price and time in the future. It allows the company to lock in an exchange rate today for the future date when it needs to make the purchase. This can help mitigate the risk of currency fluctuations and uncertainty in international trade. A foreign currency option, on the other hand, gives the holder the right but not the obligation to buy or sell a currency at a predetermined price on or before a specific date. Currency devaluation refers to a decrease in the value of a currency in relation to other currencies or goods and services, and is not directly related to a forward contract.

Question 5

What is a foreign currency transaction?
A)It is another name for an international transaction.
B)It is a transaction that involves payment at a date sometime in the future.
C)It is a business deal denominated in a currency other than a company's domestic currency.
D)It is an economic event measured in a currency other than U.S.dollars.

Accepted Answer

A foreign currency transaction refers to a business deal that is denominated in a currency other than a company's domestic currency. This can include transactions such as buying goods or services from a foreign supplier and paying them in their local currency.

Question 6

What is foreign exchange risk exposure?
A)the possibility of a loss because of changes in the value of a foreign currency
B)losses caused by paying for purchased goods in a foreign currency
C)losses caused by receiving payment in a foreign currency for goods sold
D)All of the above

Accepted Answer

The answer of What is foreign exchange risk exposure?
A)the possibility...

Question 7

Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?
A)This was a period when the world economy was very stable.
B)There was very little growth in the world economy between 1945 and 1973.
C)Countries linked their currency to the U.S.dollar,which was backed by gold reserves.
D)Most currencies were pegged to the British pound,which could be converted to sterling silver.

Accepted Answer

During the period of 1945-1973, many countries linked their currencies to the US dollar which was backed by gold reserves. This meant that the exchange rates were fixed and stable. The Bretton Woods system established in 1944 ensured that the US dollar was used as a reserve currency and was convertible to gold at a fixed rate of $35 per ounce. This system kept exchange rates relatively stable until it was dismantled in 1973.

Question 8

What term is used for an option with a positive intrinsic value?
A)put option
B)over the counter
C)in the money
D)call option

Accepted Answer

An option with a positive intrinsic value is said to be "in the money." This means that if the option were to expire immediately, the option holder would make a profit. A call option is the type of option that gives the holder the right to buy an underlying asset at a predetermined price, and a put option is the opposite, giving the holder the right to sell an underlying asset. "Over the counter" refers to trading that is done directly between two parties outside of an organized exchange. Therefore, the best choice is C.

Question 9

Which of the following statements is true about the Euro?
A)It is the currency used by all countries in the European Union.
B)It is pegged to the U.S.dollar.
C)It is the currency required to be used in financial reporting under international accounting standards.
D)None of the statements above is true.

Accepted Answer

A) Not all EU countries use the Euro; some have retained their own currencies. B) The Euro is not pegged to the U.S. dollar; it operates as a free-floating currency. C) International accounting standards do not require financial reporting in Euros; entities can report in various currencies.

Question 10

What is a "strike price?"
A)the exchange rate that is used to buy a foreign currency today
B)the price that will be paid for goods in a forward contract
C)the exchange rate that will be used if a foreign currency option is executed
D)the difference between the wholesale rate and the retail rate for foreign currency exchange

Accepted Answer

A strike price is the predetermined exchange rate that will be used if a foreign currency option is executed. This means that if the option is exercised, the exchange will occur at the strike price agreed upon in the option contract.

Question 11

The number of U.S.dollars ($)today to buy one U.K.pound (£)six months from now is called:
A)the spot rate
B)the exact rate
C)the forward rate
D)the prime rate

Accepted Answer

The number of U.S. dollars needed to buy one U.K. pound six months from now is a forward rate, as it is a rate agreed upon today for a transaction that will occur in the future. The spot rate refers to the exchange rate for immediate delivery, while the exact rate and prime rate are not commonly used terms in the context of foreign exchange.

Question 12

What is a "foreign exchange rate?"
A)the price to buy a foreign currency
B)the price to buy foreign goods
C)the difference between the price of goods in a foreign currency and the price in a domestic currency
D)the cost to hold all monetary assets in a single currency

Accepted Answer

A foreign exchange rate is the price at which one currency can be exchanged for another currency. It represents the value of one currency in terms of another currency. For example, if the foreign exchange rate between the US dollar and the euro is 1.2, it means that one US dollar can be exchanged for 1.2 euros.

Question 13

For an upcoming trip,Pat wants to buy Euros at the local bank when the current exchange rate quoted on HYPERLINK "http://www.OANDA.com" http://www.OANDA.com was $1.563 per €1. What should Pat plan to pay for €1,000?
A)exactly $1,563
B)more than $1,563
C)about $640
D)less than $640

Accepted Answer

Since the current exchange rate quoted on OANDA is $1.563 per €1, Pat will need to pay more than $1,563 for €1,000. To find out exactly how much, Pat should multiply €1,000 by the exchange rate: €1,000 x $1.563/€1 = $1,563. Therefore, Pat should plan to pay $1,563 for €1,000, which is more than the quoted exchange rate.

Question 14

When a currency is allowed to increase or decrease in value relative to other currencies,the currency is said to:
A)be pegged to another currency.
B)be less valuable.
C)float.
D)devalue.

Accepted Answer

When a currency is allowed to increase or decrease in value relative to other currencies, it is said to float. This means that its exchange rate is determined by market forces of supply and demand, rather than being fixed or pegged to another currency.

Question 15

According to the World Trade Organization,what was the size of international trade in 2008?
A)$7,000,000,000 (7 billion dollars)
B)$70,000,000,000 (70 billion dollars)
C)$37,000,000,000 (37 billion dollars)
D)$16,000,000,000,000 (16 trillion dollars)

Accepted Answer

According to the World Trade Organization, the size of international trade in 2008 was $16,000,000,000,000 (16 trillion dollars).

Question 16

The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y. What can we conclude about these two currencies?
A)Country X is using the Euro.
B)Country X has pegged its currency to the currency of Country Y.
C)Country X has an undesirable currency.
D)Country X allows its currency to float relative to the currency of Country Y.

Accepted Answer

The central bank of Country X is pegging its own currency to the currency of Country Y, which means that it is maintaining a fixed exchange rate between the two currencies. This suggests that Country X sees Country Y's currency as desirable and wants to ensure that its own currency remains stable in comparison.

Question 17

The number of Japanese yen (¥)required today to buy one U.S.dollar ($)today is called:
A)the spot rate.
B)the exact rate.
C)the forward rate.
D)the retail rate.

Accepted Answer

The spot rate refers to the current exchange rate at which one currency can be exchanged for another currency in the spot market, which is the market for immediate delivery of currencies. Therefore, the number of Japanese yen required today to buy one U.S. dollar today is the spot rate for USD/JPY currency pair.

Question 18

What has occurred when one company purchases the right to buy a foreign currency some time in the future at an exchange rate quoted today?
A)The company has acquired a call option.
B)The company has entered a forward contract.
C)The currency has appreciated relative to the dollar.
D)The company has acquired a put option.

Accepted Answer

The answer of What has occurred when one company purchases...

Question 19

Why must the two-transaction approach be used for recording foreign currency transactions under U.S.GAAP?
A)The two-transaction approach is required under IFRS.
B)U)S.GAAP requires conservatism in financial reporting.
C)All other methods are excessively complicated to use and therefore obscure the essence of the transaction.
D)Management made two decisions: one to sell and another to extend credit in a foreign currency.

Accepted Answer

The two-transaction approach is used because management makes two separate decisions: one to sell goods or services and another to extend credit in a foreign currency, which involves recognizing the transaction and then accounting for any foreign exchange gains or losses separately.

Question 20

What is the intrinsic value of a foreign currency option?
A)the difference between the spot rate and the strike price
B)the gain on the option if it was exercised immediately
C)the chance that a currency will rise over time to make the option in the money
D)the difference between a call option and a put option

Accepted Answer

The intrinsic value of a foreign currency option is the gain that would be realized if the option were exercised immediately, which is the difference between the current spot rate and the strike price, but only if this difference is positive for a call option or negative for a put option.

Quiz 7: Foreign Currency Transactions and Hedging Foreign Exchange Risk

In the years between 1990 and 2001 when global gross domestic product rose 27%,what was the growth in global exports?

Under U.S.GAAP,what method is required to account for foreign currency transactions?

Under International Accounting Standards Board rules,what method is required to account for foreign currency transactions?

What has occurred when one company arranges to buy a foreign currency some time in the future,at an exchange rate quoted today?

What is a foreign currency transaction?

What is foreign exchange risk exposure?

Why was there very little fluctuation in the foreign exchange rate in the period 1945-1973?

What term is used for an option with a positive intrinsic value?

Which of the following statements is true about the Euro?

What is a "strike price?"

The number of U.S.dollars ($) today to buy one U.K.pound (£) six months from now is called:

What is a "foreign exchange rate?"

For an upcoming trip,Pat wants to buy Euros at the local bank when the current exchange rate quoted on HYPERLINK "http://www.OANDA.com" http://www.OANDA.com was $1.563 per €1. What should Pat plan to pay for €1,000?

When a currency is allowed to increase or decrease in value relative to other currencies,the currency is said to:

According to the World Trade Organization,what was the size of international trade in 2008?

The central bank of Country X buys and sells its own currency to ensure that the currency is always exchanged in a ratio of 2:1 with the currency of Country Y. What can we conclude about these two currencies?

The number of Japanese yen (¥) required today to buy one U.S.dollar ($) today is called:

What has occurred when one company purchases the right to buy a foreign currency some time in the future at an exchange rate quoted today?

Why must the two-transaction approach be used for recording foreign currency transactions under U.S.GAAP?

What is the intrinsic value of a foreign currency option?