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

_____ is the impact of short-run currency exchange rates changes on the reported financial statements of a company.

Accepted Answer

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

Question 3

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 4

_____ are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Accepted Answer

A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. Swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Question 5

_____ 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 various 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 6

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

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Question 7

Explain the difference between fundamental analysis and technical analysis.

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Question 8

Discuss the two schools of thought on exchange rate forecasting.

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Question 9

When a country's currency is nonconvertible, a firm may turn to _____.

Accepted Answer

Countertrade refers to a range of barter-like agreements by which goods and services can be traded for other goods and services. When a country's currency is nonconvertible, a firm may turn to countertrade. The number of countertrade deals has been falling in recent years as more governments make their currencies freely convertible.

Question 10

_____ are reported on a real time basis on many financial Web sites and are continually changing-their value being determined by supply and demand for that currency relative to others.

Accepted Answer

The spot exchange rate is the rate at which a foreign exchange dealer converts one currency into another currency on a particular day. Spot exchange rates are reported on a real time basis on many financial Web sites. Spot rates are continually changing, their value being determined by supply and demand for that currency relative to others. A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Exchange rates governing such transactions are referred to as forward exchange rates. Most major currencies are quoted 30, 90, and 120 days into the future.

Question 11

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 12

Which of the following is one of the most important trading centers in the foreign exchange market?

Accepted Answer

The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. The most important trading centers are London, New York, Zurich, Tokyo, and Singapore.

Question 13

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

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 14

Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be:

Accepted Answer

PPP theory states that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country. So, if a basket of goods costs $200 in the U.S. and ×20,000 in Japan, PPP predicts that the dollar/yen exchange should be $200/×20,000 or $.01 per Japanese yen.

Question 15

What is the law of one price?

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Question 16

What is the concept that 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 17

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

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Question 18

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 19

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

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Question 20

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

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Quiz 10: The Foreign Exchange Market