Deck 11: Foreign Exchange

Question 1

Concerning the foreign exchange market,one can best say that:

A) There is a spot market for virtually every currency in the world
B) The market is highly centralized like the stock exchange
C) Most foreign exchange payments are made with bank notes
D) The values of the forward and spot rates are always in agreement

Answer 1

A

Question 2

A U.S.export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by:

A) Buying today 1 million pounds in the forward market for delivery in six months
B) Buying 1 million pounds in the spot market for delivery in six months
C) Selling 1 million pounds in the spot market for delivery in six months
D) Selling today 1 million pounds in the forward market for delivery in six months

Answer 2

D

Question 3

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days,you could remove the risk of loss due to the appreciation of the pound by:

A) Buying dollars in the forward market for delivery in 30 days
B) Selling dollars in the forward market for delivery in 30 days
C) Buying the pounds in the forward market for delivery in 30 days
D) Selling the pounds in the forward market for delivery in 30 days

Answer 3

C

Question 4

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:

A) Reduce the demand for dollars
B) Increase the demand for dollars
C) Reduce the supply of dollars
D) Increase the supply of dollars

Question 5

Over time,a depreciation in the value of a nation's currency in the foreign exchange market will result in:

A) Exports rising and imports falling
B) Imports rising and exports falling
C) Both imports and exports rising
D) Both imports and exports falling

Question 6

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S.dollar,they would:

A) Purchase Canadian dollars
B) Purchase U.S.dollars
C) Purchase Swiss francs
D) Sell Swiss francs

Question 7

Suppose the exchange rate between the Japanese yen and the U.S.dollar is 100 yen per dollar.A Japanese stereo with a price of 60,000 yen will cost:

A) $60
B) $600
C) $6000
D) None of the above

Question 8

Concerning the covering of exchange market risks--assuming that a depreciation of the domestic currency is anticipated,one can say that there is an incentive for:

A) Exporters to rush to cover their future needs
B) Importers to rush to cover their future needs
C) Both exporters and importers to rush to cover their future needs
D) Neither exporters nor importers to rush to cover their future needs

Question 9

Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice.This finding would likely result in a (an):

A) Increase in the demand for Swiss francs
B) Decrease in the demand for Swiss francs
C) Increase in the supply of Swiss francs
D) Decrease in the supply of Swiss francs

Question 10

The supply of foreign currency may be:

A) Upward-sloping
B) Backward-sloping
C) Vertical
D) None of the above

Question 11

An appreciation in the value of the U.S.dollar against the British pound would tend to:

A) Discourage the British from buying American goods
B) Discourage Americans from buying British goods
C) Increase the number of dollars that could be bought with a pound
D) Discourage U.S.tourists from traveling to Britain

Question 12

An increase in the dollar price of other currencies tends to cause:

A) U.S.goods to be cheaper than foreign goods
B) U.S.goods to be more expensive than foreign goods
C) Foreign goods to be more expensive to residents of foreign nations
D) Foreign goods to be cheaper to residents of the United States

Question 13

A depreciation of the dollar refers to:

A) A fall in the dollar price of foreign currency
B) An increase in the dollar price of foreign currency
C) A loss of foreign-exchange reserves for the U.S.
D) An intervention in the international money market

Question 14

A major difference between the spot market and the forward market is that the spot market deals with:

A) The immediate delivery of currencies
B) The merchandise trade account
C) Currencies traded for future delivery
D) Hedging of international currency risks

Question 15

Which of the following tends to cause the U.S.dollar to appreciate in value?

A) An increase in U.S.prices above foreign prices
B) Rapid economic growth in foreign countries
C) A fall in U.S.interest rates below foreign levels
D) An increase in the level of U.S.income

Question 16

Suppose that real incomes increase more rapidly in the United States than in Mexico.In the United States,this situation would likely result in a (an):

A) Increase in the demand for pesos
B) Decrease in the demand for pesos
C) Increase in the supply of pesos
D) Decrease in the supply of pesos

Question 17

When short-term interest rates become lower in Tokyo than in New York,interest arbitrage operations will most likely result in a(n):

A) Increase in the spot price of the yen
B) Increase in the forward price of the dollar
C) Sale of dollars in the forward market
D) Purchase of yen in the spot market

Question 18

Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days.You can remove the risk of loss due to a devaluation of the pound sterling by:

A) Selling sterling in the forward market for 60-day delivery
B) Buying sterling now and selling it at the end of 60 days
C) Selling the dollar equivalent in the forward market for 60-day delivery
D) Keeping the sterling in Britain after it is delivered to you

Question 19

Which of the following would not induce the U.S.demand curve for foreign exchange to shift backward to the left?

A) Worsening American tastes for goods produced overseas
B) Decreasing interest rates in the U.S.compared to those overseas
C) A fall in the level of U.S.income
D) A depreciation in the U.S.dollar against foreign currencies

Question 20

The exchange rate is kept the same in all parts of the market by:

A) Forward cover
B) Hedging
C) Exchange speculation
D) Exchange arbitrage

Question 21

In a supply-and-demand diagram for Japanese yen,with the exchange rate in dollars per yen on the vertical axis,the demand schedule for yen is drawn sloping:

A) Upward
B) Vertical
C) Downward
D) Horizontal

Question 22

Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price,within a few days to a couple of years?

A) Letter of credit
B) Foreign currency option
C) Cable transfer
D) Bill of exchange

Question 23

In the interbank market for foreign exchange,the ____ refers to the difference between the offer rate and the bid rate.

A) Cross rate
B) Option
C) Arbitrage
D) Spread

Question 24

Suppose there occurs an increase in the Canadian demand for Japanese computers.This results in:

A) An increase in the demand for yen
B) A decrease in the demand for yen
C) An increase in the supply of yen to Canada
D) A decrease in the supply of yen to Canada

Question 25

During the era of dollar appreciation,in the 1980s,a main reason why the dollar did not fall in value was:

A) Flows of foreign investment into the United States
B) Rising price inflation in the United States
C) A substantial decrease in U.S.imports
D) A substantial increase in U.S.exports

Question 26

Table 11.1.Foreign Exchange Quotations

Consider Table 11.1.Concerning the Tuesday quotations: compared to the cost of buying 100 pounds on the spot market,if 100 pounds were bought for future delivery in 180 days the dollar cost of the pounds would be:

A) $3.40 higher
B) $3.40 lower
C) $6.80 higher
D) $6.80 lower

Question 27

Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States.The exchange rate between the franc and the dollar is:

A) 2 francs per dollar
B) 1 franc per dollar
C) $2 per franc
D) $3 per franc

Question 28

Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future?

A) Forward transaction
B) Futures transaction
C) Spot transaction
D) Swap transaction

Question 29

Table 11.1.Foreign Exchange Quotations

Consider Table 11.1.If one were to sell dollars for immediate delivery,on Tuesday the pound cost of each dollar would be:

A) .7008 pounds per dollar
B) .7037 pounds per dollar
C) 1.4270 pounds per dollar
D) 1.4211 pounds per dollar

Question 30

Table 11.1.Foreign Exchange Quotations

Consider Table 11.1.Comparing Tuesday to the previous Monday,by Tuesday the dollar had:

A) Depreciated against the pound
B) Appreciated against the pound
C) Not changed against the pound
D) None of the above

Question 31

The most important (in terms of dollar value)type of foreign exchange transaction by U.S.banks is the:

A) Spot transaction
B) Forward transaction
C) Swap transaction
D) Option transaction

Question 32

In the interbank market for foreign exchange,the ____ refers to the price that a bank is willing to pay for a unit of foreign currency.

A) Offer rate
B) Bid rate
C) Spread rate
D) Transaction rate

Question 33

A corporation dealing in foreign exchange may desire to obtain an exchange quote between the pound and franc,whose values are both expressed relative to the dollar.____ are used to determine such a relationship.

A) Spot exchange rates
B) Forward exchange rates
C) Cross exchange rates
D) Option exchange rates

Question 34

Most foreign exchange trading occurs between banks and:

A) National governments
B) Other banks
C) Corporations
D) Household investors

Question 35

Given the foreign currency market for the Swiss franc,the supply of francs slopes upward,because as the dollar price of the franc rises:

A) America's demand for Swiss merchandise rises
B) America's demand for Swiss merchandise falls
C) Switzerland's demand for American merchandise rises
D) Switzerland's demand for American merchandise falls

Question 36

Under a system of floating exchange rates,the Swiss franc would depreciate in value if which of the following occurs?

A) Price inflation in France
B) An increase in U.S.real income
C) A decrease in the Swiss money supply
D) Falling interest rates in Switzerland

Question 37

In the early 1980s,the Federal Reserve pursued a tight monetary policy.All else being equal,the impact of that policy was to ____ interest rates in the United States relative to those in Europe and cause the dollar to ____ against European currencies.

A) Decrease,depreciate
B) Decrease,appreciate
C) Increase,depreciate
D) Increase,appreciate

Question 38

Table 11.1.Foreign Exchange Quotations

Consider Table 11.1.If one were to buy pounds for immediate delivery,on Tuesday the dollar cost of each pound would be:

A) $0.7008
B) $0.7037
C) $1.4211
D) $1.4270

Question 39

In the interbank market for foreign exchange,the ____ refers to the price for which a bank is willing to sell a unit of foreign currency.

A) Offer rate
B) Option rate
C) Futures rate
D) Bid rate

Question 40

A depreciation of the dollar will have its most pronounced impact on imports if the demand for imports is:

A) Constant
B) Inelastic
C) Elastic
D) Unitary elastic

Question 41

Refer to Table 11.4.On Wednesday,the 30-day forward franc was selling at a:

A) 1 percent premium per annum against the dollar
B) 2 percent premium per annum against the dollar
C) 1 percent discount per annum against the dollar
D) 2 percent discount per annum against the dollar

Question 42

A (An)____ is an arrangement by which two parties exchange one currency for another and agree that the exchange will be reversed at a stipulated date in the future:

A) Arbitrage
B) Swap
C) Option
D) Hedge

Question 43

Figure 11.1.Supply and Demand Schedules of Francs
Refer to Figure 11.1.Suppose the exchange rate is $.70 per franc.Free-market forces would lead to a (an)____ of the dollar against the franc and a (an)____ in U.S.international competitiveness.

A) Depreciation,improvement
B) Depreciation,worsening
C) Appreciation,improvement
D) Appreciation,worsening

Question 44

Refer to Table 11.4.On Wednesday,the 90-day forward franc was selling at a:

A) 0.8 percent premium per annum against the dollar
B) 1.6 percent premium per annum against the dollar
C) 0.8 percent discount per annum against the dollar
D) 1.6 percent discount per annum against the dollar

Question 45

Figure 11.2.Market for Francs
Refer to Figure 11.2.A shift in the demand for francs from D₀ to D₂,or a shift in the supply of francs from S₀ to S₁,would result in a (an):

A) Depreciation in the dollar against the franc
B) Appreciation in the dollar against the franc
C) No change in the dollar/franc exchange rate
D) None of the above

Question 46

Refer to Table 11.2.At the exchange rate of $1.80 per pound,there is an ____ for pounds.This imbalance causes ____ in the price of the pound,which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.

A) Excess supply,a decrease,a decrease,an increase
B) Excess supply,an increase,a decrease,an increase
C) Excess demand,an increase,an increase,a decrease
D) Excess demand,an increase,a decrease,an increase

Question 47

Referring to Table 11.3,the cross exchange rate between the euro and Swiss franc is approximately:

A) .68 euros per franc
B) .68 francs per euro
C) .64 euros per franc
D) .64 francs per euro

Question 48

Refer to Table 11.2.At the exchange rate of $1.40 per pound,there is an ____ for pounds.This imbalance causes ____ in the price of the pound,which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.

A) Excess supply,a decrease,an increase,a decrease
B) Excess supply,an increase,a decrease,an increase
C) Excess demand,an increase,an increase,a decrease
D) Excess demand,an increase,a decrease,an increase

Question 49

Suppose the exchange value of the British pound is $2 per pound while the exchange value of the Swiss franc is 50 cents per pound.The cross exchange rate between the pound and the franc is:

A) 1 franc per pound
B) 2 francs per pound
C) 3 francs per pound
D) 4 francs per pound

Question 50

Refer to Exhibit 11.1.By investing in U.K.treasury bills rather than U.S.treasury bills,and not covering exchange rate risk,U.S.investors earn an extra return of:

A) 4 percent per year,1 percent for the 6 months
B) 4 percent per year,2 percent for the 6 months
C) 2 percent per year,0.5 percent for the 6 months
D) 2 percent per year,1 percent for the 6 months

Question 51

Figure 11.1.Supply and Demand Schedules of Francs
Refer to Figure 11.1.Suppose the exchange rate is $.30 per franc.Free-market forces would lead to a (an)____ of the dollar against the franc and a (an)____ in U.S.international competitiveness:

A) Depreciation,improvement
B) Depreciation,worsening
C) Appreciation,improvement
D) Appreciation,worsening

Question 52

Figure 11.1.Supply and Demand Schedules of Francs
Refer to Figure 11.1.At the equilibrium exchange rate of ____ per franc,____ francs will be purchased at a total dollar cost of ____.

A) $.50,5 million,$2.5 million
B) $.50,5 million,$1.5 million
C) $.70,3 million,$2.1 million
D) $.70,7 million,$4.9 million

Question 53

Figure 11.2.Market for Francs
Refer to Figure 11.2.A shift in the demand for francs from D₀ to D₁ or a shift in the supply of francs from S₀ to S_2, would result in a (an):

A) Depreciation in the dollar against the franc
B) Appreciation in the dollar against the franc
C) Unchanged dollar/franc exchange rate
D) None of the above

Question 54

Figure 11.1.Supply and Demand Schedules of Francs
Refer to Figure 11.1.Suppose the exchange rate is $.70 per franc.At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc,a (an)____ in the quantity of francs supplied,and a (an)____ in the quantity of francs demanded.

A) Excess demand,rise,increase,decrease
B) Excess demand,rise,decrease,increase
C) Excess supply,fall,decrease,increase
D) Excess supply,fall,increase,decrease

Question 55

Assume that you are the Chase Manhattan Bank of the United States,and you have 1 million Swiss francs in your vault that you will need to use in 30 days.Moreover,you need 500,000 British pounds for the next 30 days.You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today,and reverse the transaction at the end of 30 days.You have just arranged a:

A) Forward contract
B) Futures contract
C) Spot contract
D) Currency swap

Question 56

Referring to Table 11.3,the yen cost of purchasing 100 British pounds is roughly:

A) 18,000 yen
B) 19,000 yen
C) 20,000 yen
D) 21,000 yen

Question 57

Refer to Exhibit 11.1.If the price of the 6-month forward pound were to ____,U.S.investors would no longer earn an extra return by shifting funds to the United Kingdom.

A) Rise to $1.52
B) Rise to $1.53
C) Fall to $1.48
D) Fall to $1.47

Question 58

Figure 11.1.Supply and Demand Schedules of Francs
Refer to Figure 11.1.Suppose the exchange rate is $.30 per franc.At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc,a (an)____ in the quantity of francs supplied,and a (an)____ in the quantity of francs demanded.

A) Excess demand,rise,increase,decrease
B) Excess demand,rise,decrease,increase
C) Excess supply,fall,decrease,increase
D) Excess supply,fall,increase,decrease

Question 59

Refer to Exhibit 11.1.If U.S.investors cover their exchange rate risk,the extra return for the 6 months on the U.K.treasury bills is:

A) 1.0 percent
B) 1.5 percent
C) 2.0 percent
D) 2.5 percent

Question 60

Refer to Table 11.2.The equilibrium exchange rate equals:

A) $1.20 per pound
B) $1.40 per pound
C) $1.60 per pound
D) $1.80 per pound

Question 61

Refer to Table 11.4.Comparing the franc's forward rates against the franc's spot rate,the exchange market's consensus is that over the period of a forward contract,the franc's spot rate will:

A) Depreciate against the dollar
B) Appreciate against the dollar
C) Remain constant against the dollar
D) None of the above

Question 62

Refer to Table 11.4.On Wednesday,the 180-day forward franc was selling at a:

A) 0.6 percent premium per annum against the dollar
B) 1.6 percent premium per annum against the dollar
C) 0.6 percent discount per annum against the dollar
D) 1.6 percent discount per annum against the dollar

Question 63

Most foreign exchange transactions are conducted between commercial banks and household customers.

Question 64

The bid rate refers to the price at which a bank is willing to sell a unit of foreign currency; the offer rate is the price at which a bank is willing to buy a unit of foreign currency.

Question 65

Figure 11.3 The Market for the Euro
Refer to Figure 11.3.If the supply curve is represented by S₀,the equilibrium exchange rate is

A) $1.20
B) $1.00
C) $0.80
D) $0.60

Question 66

If Citibank quoted bid and offer rates for the Swiss franc at $.4850/$.4854,the bank would be prepared to buy,say,1 million francs for $485,000 and sell them for $485,400.

Question 67

A commercial bank profits from foreign-exchange trading when its bid rate exceeds its offer rate.

Question 68

A person needing foreign exchange immediately would purchase it on the spot market.

Question 69

Most foreign exchange trading is carried out in the forward market.

Question 70

Swap transactions among commercial banks involve the conversion of one currency to another at one point with an agreement to reconvert it back into the original currency at some point in the future.

Question 71

When the dollar depreciates

A) U.S.exporters tend to sell more goods in foreign markets
B) U.S.consumers travel abroad more cheaply
C) More foreign tourists can afford to visit the United States
D) both a and c

Question 72

If a Citibank dealer expects the Swiss franc to appreciate against the U.S.dollar,she will attempt to lower both bid and offer rates for the franc,attempting to persuade other dealers to buy francs from Citibank and dissuade other dealers from selling francs to Citibank.

Question 73

The offer rate

A) Is the price at which the bank is willing to sell a unit of foreign currency
B) Is the price that the bank is willing to pay for a unit of foreign currency
C) Is synonymous with the spread rate
D) None of the above

Question 74

Similar to stock and commodity exchanges,the foreign exchange market is an organized structure with a central meeting place and formal licensing requirements.

Question 75

The "spread" is a bank's profit margin on foreign exchange trading and equals the difference between the bid rate and the offer rate.

Question 76

Figure 11.3 The Market for the Euro
Refer to Figure 11.3.If the supply curve shifts from S₂ to S₁

A) the dollar has depreciated relative to the Euro
B) the euro has appreciated relative to the dollar
C) the euro has depreciated relative to the dollar
D) both a and b

Question 77

If Chase Manhattan Bank quotes bid and offer rates for the Swiss franc at $.5250/$.5260,the bank would realize profits of $1,000 on the purchase and sale of 1 million francs.

Question 78

If a Citibank dealer expects the Swiss franc to depreciate in the future,he will lower bid and offer rates for the franc in order to discourage other dealers from selling francs to Citibank and persuade other dealers to buy francs from Citibank.

Question 79

Foreign-exchange brokers help commercial banks carry out foreign exchange trading and maintain desired balances of foreign exchange.

Question 80

When the dollar gets stronger

A) U.S.firms become more competitive in international market
B) Foreign tourists travel in the U.S.at a higher cost
C) U.S.inflation increases
D) U.S.consumers face higher prices on foreign goods