Deck 8: Foreign Exchange Rate Determination

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

Answer 1

Technical analysts

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

Answer 2

asset market

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

Answer 3

fight inflation.

Question 4

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

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

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%

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

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

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

Question 10

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

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

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/£

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.

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

Question 15

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

Question 16

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

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.

Question 18

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

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.

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

Question 21

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

A) infrastructure weaknesses
B) speculation on the part of market participants
C) the sharp reduction of cross-border foreign direct investment
D) All of the above contributed to the emerging markets exchange rate collapse of the 1990s.

Question 22

When the Russian Ruble reached the limits of the bands about its managed float targets (Ru5.70/$ to Ru6.35/$) in 1997, the Russian government would intervene in the markets to stabilize the Ruble. If the exchange rate approached Ru5.70/$ the government would ________ Rubles using foreign exchange and gold, or if the exchange rate approached Ru6.35/$ they would ________ Rubles.

A) buy; sell
B) sell; buy
C) buy; buy
D) sell; sell

Question 23

It is safe to say that the Russian transition from a communist economy to a capitalist economy has been smooth for the Russian people.

Question 24

Corporate socialism in the Asian markets could be contributed in part

A) to the relatively short and stable post-WWII history of capitalism in their markets.
B) a belief by the owners of Asian companies that their governments would not allow them to fail.
C) the practice of lifetime employment at many corporations.
D) all of the above.

Question 25

In the years immediately preceding 1998 the Russian Ruble operated under a ________ type of exchange rate regime.

A) fixed
B) free floating (market determined)
C) managed floating
D) pegged (to the U.S. dollar)

Question 26

The "tequila effect" is a slang term used to describe a form of financial panic called

A) run on the market.
B) speculation.
C) contrary investing.
D) contagion.

Question 27

A currency board is

A) a structure, rather than a mere commitment, to limiting the growth of the money supply in the economy.
B) a recipe for conservative and prudent financial management.
C) designed to eliminate the power of politicians to exercise judgment by relying on an automatic and unbendable rule.
D) all of the above.

Question 28

Prior to July 2, 1997, the Thai government

A) allowed the Thai Bhat to float against major currencies.
B) fixed the Bhat's value against the Korean won only.
C) fixed the Bhat's value against major currencies especially the U.S. dollar.
D) None of the above.

Question 29

The Asian economic Crisis was

A) direct result of hedge fund speculators.
B) routed in structural deficiencies of the fast growing Asian economies.
C) began when Thai government imposed capital controls.
D) typical for transitions of net importer to net exporter countries.

Question 30

The authors did not identify which of the following as a root of the Asian currency crisis?

A) the collapse of some Asian currencies.
B) the rate of inflation in the United States.
C) corporate socialism.
D) banking stability and management.

Question 31

The Asian Currency crisis appeared to begin in

A) South Korea.
B) Taiwan.
C) Thailand.
D) Japan.

Question 32

The stability of the Russian Ruble in the 1990s (until the Russian debt crisis) was considered an observable success of the Yeltsin administration.

Question 33

________ is the alteration of economic or financial fundamentals which are thought to be drivers of capital to flow in and out of specific currencies.

A) Proportional intervention
B) Direct intervention
C) Indirect intervention
D) Hopeless intervention

Question 34

________ is the official Chinese currency.

A) Baht
B) Won
C) Ringgit
D) Renminbi

Question 35

When country Central banks work together to intervene and push a particular currency's value in
a desired direction, this is known as coordinated intervention.

Question 36

After the Russian government (in August 1998) allowed the Ruble to move outside its official trading range of between Ru5.70/$-Ru6.35/$, the value of the Ruble eventually ________ to around ________ by May 1999.

A) increased; Ru13/$
B) increased; Ru4.50/$
C) decreased; Ru13/$
D) decreased; Ru25/$

Question 37

Which of the following was NOT an international currency crisis in the 1990s and early 2000s?

A) the Asian Crisis
B) the Russian Crisis
C) the Argentine Crisis
D) All of the above were currency crises in the 1990s and 2000s.

Question 38

The Russian crisis of 1998

A) occurred because of the inability of the Russian Government to lower the taxes.
B) ended when President Yeltsin announced there will be no devaluation.
C) was a culmination of continuing deterioration of economic conditions.
D) was a result of a sharp price increase of Russian export commodities.

Question 39

The authors refer to the practice of many Asian firms being largely controlled by families of groups related to the governing body of the country as

A) illegal.
B) insider trading.
C) cronyism.
D) not in my backyard.

Question 40

The principle focus of the IMF bailout efforts during the Asian financial crisis was

A) banking liquidity.
B) shareholder's wealth.
C) reestablishing fixed currency exchange rates in Asia.
D) dollarization of Asian currencies.

Question 41

In the long run, exchange rates will never follow a fundamental equilibrium path as suggested by the fundamental theories of exchange rate determination.

Question 42

Which of the following is a driver in the determination of foreign exchange rates under the Asset Market Approach to forecasting?

A) relative inflation rates
B) relative real interest rates
C) forward exchange rates
D) the current account balance

Question 43

The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

Question 44

The asset market approach to exchange rate determination

A) suggests that investors will hold monetary claims if the rates are low.
B) suggests that investors will hold monetary claims if they feel optimistic about country's outlook for growth and profitability.
C) states that equilibrium exchange rate is found when the net inflow (outflow) from current account matches the net outflow (inflow) from financial account.
D) discards the importance of corporate governance to cross-border portfolio investors.

Question 45

The ________ is the Argentine currency unit.

A) peso
B) dollar
C) real
D) peseta

Question 46

Assume your country has a balance of payments surplus. How would the government and markets react to "correct" this imbalance under a fixed exchange rate regime? Under a floating exchange rate regime?

Question 47

During the 1990s Argentina's exports became some of the least expensive in all of South America thanks in part to the pegging of the Argentine peso to the U.S. dollar.

Question 48

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

Question 49

Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security) prices in general?

Question 50

Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.

Question 51

The Russian Ruble crisis of 1998 was a complex combination of speculative pressures best explained by ________ to exchange rate determination.

A) parity conditions approach
B) asset approach
C) balance of payments approach
D) PPP approach

Question 52

The Asian currency crisis was primarily a

A) parity conditions problem.
B) an asset markets problem.
C) balance of payments problem.
D) PPP problem.

Question 53

The authors claim that the theories of international currency values hold better for less liquid and poorly capitalized markets.

Question 54

Argentina's economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.

A) high; high
B) low; low
C) low; high
D) high; low

Question 55

Describe the Russian ruble collapse through August of 1998.

Question 56

The more INEFFICIENT the market is, the more likely it is that exchange rates are "random walks," with past price behavior providing no clues to the future.

Question 57

In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.

Question 58

Short-term forecasts are typically motivated by a desire to hedge a receivable, payable, or dividend for perhaps a period of three months.