Question 1

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

Accepted Answer

Purchasing power parity (PPP) theory suggests that the exchange rate between two countries will adjust to reflect changes in the price levels of the two countries, which is essentially the inflation differential. This means that if one country has a higher inflation rate than another, its currency is expected to depreciate in comparison to the currency of the lower inflation country to maintain purchasing power parity.

Question 2

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

Accepted Answer

The price at which banks buy a currency (bid price) is always lower than the price at which they sell it (ask price). This difference is how banks make a profit on currency transactions.

Question 3

In reality, exchange rates do not always change as suggested by purchasing power parity.

Accepted Answer

Exchange rates are influenced by a variety of factors including interest rates, economic policies, political stability, and market speculation, not just by purchasing power parity (PPP), which suggests currencies should adjust to equalize the price of a basket of goods between two countries.

Question 4

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

Accepted Answer

A dirty float, also known as a managed float, is a system where exchange rates are determined by the market forces of supply and demand, but the government or central bank may intervene to stabilize the currency's value or to achieve economic objectives.

Question 5

Which of the following are most likely to provide currency forward contracts to their customers? ​

Accepted Answer

Commercial banks are the most likely to provide currency forward contracts as they are heavily involved in foreign exchange markets and offer various financial services, including hedging instruments like forward contracts, to their clients.

Question 6

A(n)____ in the supply of euros for sale will cause the euro to ____.

Accepted Answer

An increase in the supply of euros for sale means there are more euros available than before. This increase in supply, with demand remaining constant, will cause the value of the euro to decrease or depreciate.

Question 7

If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies and would place ____ pressure on the values of foreign currencies (with respect to the dollar). ​

Accepted Answer

Trade restrictions on U.S. imports would limit the U.S. demand for foreign currencies because fewer imports mean less need to exchange dollars for foreign currencies. This would place downward pressure on the values of foreign currencies as the demand for them decreases.

Question 8

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars. ​

Accepted Answer

If a bank expects the euro to appreciate against the dollar, it would take a long position in euros to benefit from the appreciation, and a short position in dollars to benefit from the depreciation of the dollar relative to the euro.

Question 9

If the demand for British pounds ____, the pound will ____, other things being equal.

Accepted Answer

When the demand for a currency, such as the British pound, increases, its value relative to other currencies will appreciate, assuming all other factors remain constant. This is because higher demand for the pound increases its price in the foreign exchange market.

Question 10

The Bretton Woods era was the era

Accepted Answer

The Bretton Woods era was characterized by fixed exchange rates, where governments agreed to maintain their currency values within 1 percent of a specified rate, allowing for minor adjustments. This system was designed to provide stability in international financial transactions.

Question 11

____ forecasting involves the use of historical exchange rate data to predict future values. ​

Accepted Answer

Technical forecasting relies on historical exchange rate data and trends to predict future movements in exchange rates. This method assumes that past market behavior and price patterns can indicate future movements.

Question 12

Direct intervention is always extremely effective.

Accepted Answer

The effectiveness of direct intervention varies depending on the context, the nature of the problem being addressed, and how the intervention is implemented.

Question 13

Generally, a ____ home currency can ____ domestic economic growth.

Accepted Answer

A strong home currency can make exports more expensive and imports cheaper, potentially reducing domestic economic growth by decreasing export competitiveness and increasing import consumption.

Question 14

Which of the following statements is  NOT correct?

Accepted Answer

Direct intervention by a central bank typically involves buying or selling its own currency in the foreign exchange market to influence its value directly, rather than influencing the factors that determine its value.

Question 15

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of ​

Accepted Answer

Indirect intervention occurs when a government uses economic policies, like adjusting inflation rates, interest rates, or income levels, to influence the value of its currency indirectly, rather than directly buying or selling the currency in the foreign exchange market.

Question 16

A country that pegs its currency is still able to maintain complete control over its local interest rates.

Accepted Answer

When a country pegs its currency to another, it must align its interest rates with those of the currency to which it is pegged to maintain the peg, thus losing control over its own interest rates.

Question 17

If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

Accepted Answer

If the forward rate is below the existing spot rate, the forward rate will exhibit a discount.

Question 18

If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant. ​

Accepted Answer

Higher U.S. interest rates compared to European rates would make U.S. investments more attractive, decreasing the demand for euros as investors would prefer holding assets in dollars. Conversely, Europeans would find U.S. assets more attractive, increasing the supply of euros to be exchanged for dollars to invest in the U.S.

Question 19

Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.

Accepted Answer

Fundamental forecasting, while useful, is not consistently superior to other forecasting techniques such as technical analysis or quantitative methods. The effectiveness of a forecasting method can vary depending on the market conditions, the asset being forecasted, and the time horizon.

Question 20

Which of the following is NOT a method of forecasting exchange rates?

Accepted Answer

Using the volatility of future exchange rate movements is not a method of forecasting exchange rates. Forecasting typically involves analyzing patterns, economic variables, or market expectations rather than relying on the concept of volatility alone, which is more about measuring the degree of variation in exchange rate movements over time without providing a specific directional prediction.

Quiz 16: Foreign Exchange Derivative Markets

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

In reality, exchange rates do not always change as suggested by purchasing power parity.

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

Which of the following are most likely to provide currency forward contracts to their customers?

A(n) in the supply of euros for sale will cause the euro to .

If the U.S. government imposed trade restrictions on U.S. imports, this would the U.S. demand for foreign currencies and would place pressure on the values of foreign currencies (with respect to the dollar) .

If a commercial bank expects the euro to appreciate against the dollar, it may take a position in euros and a position in dollars.

If the demand for British pounds , the pound will , other things being equal.

The Bretton Woods era was the era

____ forecasting involves the use of historical exchange rate data to predict future values.

Direct intervention is always extremely effective.

Generally, a home currency can domestic economic growth.

Which of the following statements is NOT correct?

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

A country that pegs its currency is still able to maintain complete control over its local interest rates.

If the forward rate of a foreign currency the existing spot rate, the forward rate will exhibit a .

If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States) , the U.S. demand for euros would , and the supply of euros to be exchanged for dollars would , other factors held constant.

Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.

Which of the following is NOT a method of forecasting exchange rates?

Quiz 16: Foreign Exchange Derivative Markets

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

In reality, exchange rates do not always change as suggested by purchasing power parity.

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

Which of the following are most likely to provide currency forward contracts to their customers? ​

A(n) ____ in the supply of euros for sale will cause the euro to ____.

If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies and would place ____ pressure on the values of foreign currencies (with respect to the dollar) . ​

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars. ​

If the demand for British pounds ____, the pound will ____, other things being equal.

The Bretton Woods era was the era

____ forecasting involves the use of historical exchange rate data to predict future values. ​

Direct intervention is always extremely effective.

Generally, a ____ home currency can ____ domestic economic growth.

Which of the following statements is NOT correct?

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of ​

A country that pegs its currency is still able to maintain complete control over its local interest rates.

If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States) , the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant. ​

Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.

Which of the following is NOT a method of forecasting exchange rates?

Which of the following are most likely to provide currency forward contracts to their customers?

A(n) in the supply of euros for sale will cause the euro to .

If the U.S. government imposed trade restrictions on U.S. imports, this would the U.S. demand for foreign currencies and would place pressure on the values of foreign currencies (with respect to the dollar) .

If a commercial bank expects the euro to appreciate against the dollar, it may take a position in euros and a position in dollars.

If the demand for British pounds , the pound will , other things being equal.

____ forecasting involves the use of historical exchange rate data to predict future values.

Generally, a home currency can domestic economic growth.

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

If the forward rate of a foreign currency the existing spot rate, the forward rate will exhibit a .

If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States) , the U.S. demand for euros would , and the supply of euros to be exchanged for dollars would , other factors held constant.