Deck 8: Currency of Payment (Managing Transaction Risks)

Question 1

Although the Bank for International Settlements originally limited its membership to European Central Banks,the United States Central Bank joined in 1974.

Answer 1

False

Question 2

The Ex-Im Bank provides loans to small exporters.

Answer 2

False

Question 3

In the long run,technical forecasting of exchange rates is very accurate.

Answer 3

False

Question 4

The type of exchange rate for a foreign currency for immediate delivery (roughly the price of a foreign currency to be delivered within 48 hours)is called the forward rate.

Question 5

In fundamental forecasting methods,the exchange rate of a specific currency is the dependent variable.

Question 6

Some currencies are traded in the futures' market as "commodities."

Question 7

Technical forecasting methods are essentially based upon time-series analysis.

Question 8

The stated goal of the European Union is to eventually transform the euro to be a challenger to the U.S.dollar in its role as a preferred third-country currency.

Question 9

If it is agreed that an international exchange will be in the currency of the exporter's country,then there is no exchange rate fluctuation risk for the importer.

Question 10

An options market hedge is,in effect,an insurance policy against unfavorable exchange rate fluctuations.

Question 11

A characteristic of options hedging is that options are commonly traded for many different currencies.

Question 12

Although there are many variables affecting the exchange rate of currencies,applications of fundamental forecasting using multiple regression and ANOVA readily overcome the problem of having all these variables.

Question 13

The International Fisher effect is the observation that exchange rates reflect the differences between nominal interest rates in different countries.

Question 14

If the exporter and the importer agree that a transaction will be in the currency of the exporter's country,the exporter then bears all the risks of exchange rate fluctuation.

Question 15

The Ex-Im Bank is the curator of the SDR.

Question 16

As a theory of exchange rate determination,Purchasing Power Parity is the observation that exchange rates reflect the differences between nominal interest rates in different countries.

Question 17

Documents transferred through SWIFT have the same value as original paper documents.

Question 18

The following mathematical representation represents the Fisher effect theory of exchange rate determination.
S(et)= (1+infD)?
S(e?)(1+infF)?

Question 19

The principle of Interest Rate Parity is that the forward exchange rate should be expressed as a premium if the foreign country is experiencing higher nominal rates than the domestic country.

Question 20

The Japanese government has been known to keep the value of the yen down in order to boost the Japanese economy through under-valued exports.

Question 21

In an options market hedge there is the option to sell or purchase certain currencies at a certain exchange rate either on or before a certain date.The agreed-upon exchange rate is called the

A) international leverage.
B) trade dimension.
C) leveraging currency.
D) transaction exposure.
E) None of the above

Question 22

In valuing a currency,the direct quote is

A) the traditional way of expressing the value of a currency like the Canadian dollar.
B) the value of the foreign currency expressed in units of the domestic currency.
C) the traditional way of expressing the value of a currency like the Japanese yen.
D) the value of the domestic currency expressed in units of foreign currency.
E) None of the above

Question 23

The following mathematical expression Ft ? ??et? = S(et ? ?)
Is of what theory of exchange rate determination?

A) Interest Rate Parity
B) Fisher effect
C) Purchasing Power Parity
D) Big Mac Index
E) None of the above

Question 24

Stable countries representing the greatest percentage of world trade all have _____ currencies.

A) pegged
B) volatile
C) floating
D) call
E) None of the above

Question 25

The risk resulting from possible fluctuations in currency exchange rates is called

A) hedging.
B) transaction exposure.
C) the direct quote.
D) floating.
E) None of the above

Question 26

Historical exchange rate data can easily be obtained from

A) the Friday Wall Street Journal.
B) the Bank of Canada.
C) the Sunday New York Times.
D) the January edition of Forbes.
E) None of the above

Question 27

In the United States,the Wall Street Journal publishes the forward rates for the currencies of _____ countries.

A) four
B) six
C) twelve
D) twenty
E) None of the above

Question 28

Importers generally prefer quotes that are written in the currency of the exporter's country.

Question 29

As a theory of exchange rate determination,the Fisher effect

A) holds that exchange rates should reflect the price differences of each and every product between countries.
B) reflects the Big Mac Index.
C) links the forward exchange rate of a foreign currency to its spot rate.
D) All of the above
E) None of the above

Question 30

SWIFT stands for

A) Swiss Worldwide International Funding Transactions.
B) Standard Worldwide International Futures Telecom.
C) Society for Worldwide Interbank Financial Telecommunications.
D) Southwestern International Fund Transferring.
E) None of the above

Question 31

The International Bank for Reconstruction

A) is called the Bretton Woods.
B) was developed to manage Germany's World War I reparations.
C) is also known as the World Bank.
D) All of the above
E) None of the above

Question 32

Market-based forecasting of exchange rates

A) is based on the premise that "the market knows best."
B) attempts to capture the collective knowledge of sophisticated speculators in the future spot rate of a currency.
C) does not take into account government interventions.
D) All of the above
E) None of the above

Question 33

SDRs of the International Monetary Fund can be used in exchanges

A) as an artificial currency.
B) as letters of credit.
C) instead of open accounts.
D) All of the above
E) None of the above

Question 34

In its absolute form,the exchange rate determination theory of Purchasing Power Parity

A) says that exchange rates should reflect the price differences of each and every product between countries.
B) says that the exchange rate should equalize price differences of similar products between countries.
C) is impossible to achieve.
D) All of the above
E) None of the above

Question 35

The mathematical representation (1 + real interest rate)x (1 + inflation rate)= 1 + nominal interest rate
Is of what theory of exchange rate determination?

A) Fisher effect
B) Interest Rate Parity
C) multiple regression
D) Purchasing Power Parity
E) None of the above

Question 36

For an exporter,there is a strategic advantage in quoting prices in the importer's currency and reducing the currency fluctuation risk with a forward market hedge or a money market hedge.

Question 37

A forward market hedge

A) allows a company to protect itself from currency fluctuations.
B) may involve selling forward a future receivable in a foreign currency.
C) may involve purchasing forward the currency necessary to cover a foreign payable.
D) All of the above
E) None of the above

Question 38

When a company is engaged in an international transaction and agrees to use a foreign currency to conduct the transaction

A) it will use an SDR.
B) it is exposed to a certain amount of risk.
C) it will use the services of the Ex-Im Bank.
D) All of the above
E) None of the above

Question 39

Of companies that will successfully and regularly retain the risk of currency fluctuation are those that

A) are very large traders, sophisticated in international finance.
B) are exporters or importers that have large exposure.
C) are ignorant of the risks.
D) cannot afford major currency fluctuations.
E) None of the above

Question 40

International exchange rates began to float

A) in 1971.
B) at the end of the gold standard.
C) and it changed the role of the International Monetary Fund.
D) All of the above
E) None of the above

Question 41

A money market hedge consists of using the ____________________ system of the country of the currency in which the receivable or the payable is going to be paid.

Question 42

SDR,an artificial currency,is designed to ____________________ the U.S.dollar in its role as the international currency.

Question 43

The European Monetary System (EMS),which gave rise to the euro,was designed so that the currencies of member countries would have to stay within a few points of each other's value.This is an example of a floating ____________________.

Question 44

Among the companies that are exposed to risks in currency fluctuation are

A) firms that do not evaluate international currency transaction risks clearly.
B) firms that do not follow a specific policy on currency exchange.
C) firms that have management that is not well-versed in the intricacies of international trade.
D) All of the above
E) None of the above

Question 45

The euro was first created as an artificial ____________________.

Question 46

If an exporter chooses to quote in his country's currency,or quotes in the importer's country currency and hedges with a money market hedge,it is to minimize his ____________________ risks.

Question 47

An exporter writing a quote for a customer located in a developed country can expect that several of his competitors will quote in the ____________________ currency.

Question 48

One strategy a company can follow to protect itself from currency fluctuations is use of

A) a letter of credit.
B) risk retention.
C) forward market hedges.
D) All of the above
E) None of the above

Question 49

The risk a company faces in a transaction that may have fluctuations in foreign currency exchange rates is called transaction ____________________.

Question 50

A problem with market-based forecasting is that the "wisdom" of the market may be skewed by ____________________ who may include people motivated by entirely different motives than the actual purchase and delivery of a currency.

Question 51

As the Wall Street Journal quotes it,the exchange rate is the ____________________ between the bid and ask rates for exchanges of a value greater than $1,000,000 between banks.

Question 52

Under the Interest Rate Parity theory of exchange rate determination,the forward exchange rate should be expressed as a ____________________ if the foreign country is experiencing higher nominal interest rates than the domestic country.

Question 53

In the United States,the Federal Reserve System technically fulfills the role of being a ____________________.

Question 54

One of the functions of a nation's central bank is that of a check ____________________.