Question 1

A(n) ________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Accepted Answer

A forward exchange occurs when two parties agree to exchange currency and execute the deal at a specific date in the future.

Question 2

The U.S. dollar is selling at a discount on the 30-day forward market when what is taking place?

Accepted Answer

The U.S. dollar is selling at a discount in the forward market when the forward rate is less than the current spot rate. In option C, the forward rate ($1 = ¥110) is less than the current spot rate ($1 = ¥120), indicating a discount.

Question 3

Countertrade is a logical choice when a country's currency is freely convertible.

Accepted Answer

Countertrade is often used when a country's currency is not freely convertible, as it allows countries to trade goods and services directly without needing to exchange currencies.

Question 4

How are spot exchange rates determined?

Accepted Answer

Spot exchange rates are determined by the current demand and supply dynamics of a currency relative to other currencies in the foreign exchange market.

Question 5

Rhonda tells Kevin that he will receive 0.86 euro for every U.S. dollar he wants to convert. Rhonda is referring to

Accepted Answer

Rhonda is referring to the exchange rate, which is the rate at which one currency can be exchanged for another. In this case, 0.86 euro per U.S. dollar is the exchange rate.

Question 6

World Auto Group, based in California, buys component parts from Indonesia. The Indonesian company must be paid in rupiah. World Auto Group will rely on ________ to convert dollars to rupiah.

Accepted Answer

The foreign exchange market is used to convert one currency into another, allowing World Auto Group to exchange dollars for rupiah to pay the Indonesian company.

Question 7

Currency speculation takes place when

Accepted Answer

Currency speculation involves the short-term movement of funds between currencies to profit from changes in exchange rates.

Question 8

When Lila was planning her visit to Japan, she learned that the 30-day forward exchange rate was $1 = ¥130, which meant that $1 would buy more yen with a forward exchange than a spot exchange. In other words, the dollar was selling at a ________ on the 30-day forward market.

Accepted Answer

The dollar is selling at a premium on the 30-day forward market because it can buy more yen in the future than it can at the current spot rate.

Question 9

Jasper Corp. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. What is the outcome of this transaction?

Accepted Answer

The answer of Jasper Corp. converts $1,000,000 into euros when...

Question 10

One function of the foreign exchange market is to

Accepted Answer

The foreign exchange market provides instruments like forward contracts and options that help businesses hedge against the risk of adverse movements in exchange rates, thus providing some insurance against foreign exchange risk.

Question 11

Assume that the interest rate on borrowings in Japan is 3 percent while the interest rate on bank deposits in a U.S. bank is 5 percent. Laura, an active currency trader, borrows in Japanese yen, converts the money into U.S. dollars and deposits it in a U.S. bank. Laura is engaging in

Accepted Answer

Laura is engaging in a carry trade, which involves borrowing in a currency with a low interest rate (Japanese yen) and investing in a currency with a higher interest rate (U.S. dollars) to profit from the interest rate differential.

Question 12

FutureForm, a U.S. company, imports microprocessors from Japan. The company must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the company must pay the Japanese supplier ¥150,000 for each microprocessor at the current dollar/yen spot exchange rate of $1 = ¥110. FutureForm intends to resell the microprocessors the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until these have been sold. What will happen if the exchange rate after 30 days is $1 = ¥90?

Accepted Answer

The answer of FutureForm, a U.S. company, imports microprocessors from...

Question 13

When only non-residents of a country may convert currency into a foreign currency without any limitations it is called freely convertible.

Accepted Answer

Freely convertible currency means that both residents and non-residents can convert the currency into a foreign currency without any limitations.

Question 14

Jin-Lo is investing money for his company. He notices that the interest rate on borrowing in Jakarta is 2 percent and the interest rate on bank deposits in Warsaw is 7.5 percent. In this situation, a carry trade would occur when Jin-Lo

Accepted Answer

A carry trade involves borrowing in a currency with a low interest rate (Jakarta) and converting it into a currency with a higher interest rate (Warsaw) to deposit and earn the higher interest.

Question 15

Last week, Saturn Tide a U.S.-based energy firm, entered into an agreement with another party to exchange currency and execute the deal in eighteen months. What is Saturn Tide using to insure itself against foreign exchange risk?

Accepted Answer

Saturn Tide is using hedging to protect itself against foreign exchange risk by entering into an agreement to exchange currency at a future date, thus locking in the exchange rate and minimizing potential losses due to currency fluctuations.

Question 16

Steven converted $1,000 to ¥105,000 for a trip to Japan. However, he spent only ¥50,000. During this period, the value of the dollar weakened against the yen. Using a current exchange rate of $1 = ¥100, how many dollars does Steven have left?

Accepted Answer

Steven has ¥55,000 left (¥105,000 - ¥50,000). At the current exchange rate of $1 = ¥100, ¥55,000 is equal to $550.

Question 17

Economic exposure is concerned with long-run effects on future prices, sales, and costs caused by changes in exchange rates.

Accepted Answer

Economic exposure refers to the impact of exchange rate fluctuations on a company's future cash flows, sales, and costs, affecting its long-term financial performance.

Question 18

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. What is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

Accepted Answer

If the dollar is selling at a premium in the forward market, it indicates that the market expects the dollar to appreciate against the euro over the next 30 days.

Question 19

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S. bank is 4 percent. Carlos, an active currency trader, borrows in Indian rupees, converts the money into U.S. dollars and deposits it in a U.S. bank. What is the speculative element of this carry trade?

Accepted Answer

Carlos is speculating that there will be no adverse movement in exchange rates or interest rates, allowing him to profit from the interest rate differential.

Question 20

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Accepted Answer

Leading and lagging strategies are used in international finance to manage currency risk by adjusting the timing of payments and receipts based on expected currency movements.

Quiz 10: The Foreign Exchange Market