Question 1

A U.S. firm expecting a future cash inflow denominated in a foreign currency could hedge in the forward exchange market by buying that currency for future delivery.

Accepted Answer

A U.S. firm expecting a future cash inflow in a foreign currency would hedge by selling that currency forward, locking in the exchange rate to protect against depreciation.

Question 2

Spot rates imply delivery of the foreign currency immediately or "on the spot." In reality, however, it usually takes about three hours for delivery.

Accepted Answer

The statement is incorrect. Spot rates imply delivery of the foreign currency immediately or "on the spot," which means that the delivery should happen instantly, not in three hours.

Question 3

The less a foreign currency costs in U.S. dollars, the less expensive that nation's products are when imported and offered to U.S. buyers regardless of their cost in the country of origin.

Accepted Answer

When a foreign currency costs less in U.S. dollars, it means that the U.S. dollar is stronger compared to that currency. This makes the products from that country cheaper when imported and offered to U.S. buyers. Even if the cost of goods remains the same in the country of origin, the exchange rate makes them more affordable for U.S. consumers.

Question 4

If the direct quote shows Mexican pesos at $.1005, the indirect quote will show that approximately ten U.S. dollars can be purchased with one peso.

Accepted Answer

The indirect quote would show that approximately one U.S. dollar can be purchased with ten pesos, since the direct quote is stating the value of one peso in U.S. dollars (which is about $0.1005).

Question 5

There is no constant relationship between the spot and the forward exchange rate for a currency.

Accepted Answer

The spot and forward exchange rates for a currency are determined by different factors and can vary independently of each other. Therefore, there is no constant relationship between them.

Question 6

A strong U.S. dollar has a double benefit. It enables Americans to consume imported goods at lower prices while making our products attractive overseas. The latter increases export demand and leads to more jobs.

Accepted Answer

A strong U.S. dollar makes imported goods cheaper for Americans, but it actually makes U.S. products more expensive overseas, potentially reducing export demand and negatively impacting jobs related to exports.

Question 7

The purpose of hedging in forward exchange markets is to limit losses resulting from unexpected future changes in spot exchange rates.

Accepted Answer

Hedging in forward exchange markets involves entering into a contract to buy or sell currency at a fixed price and date in the future, thus reducing the risk of losses due to unpredictable changes in spot exchange rates.

Question 8

Both fluctuating exchange rates and deferred payment terms are necessary for foreign exchange risk to exist.

Accepted Answer

Fluctuating exchange rates create uncertainty in the value of payments made or received in a foreign currency, and deferred payment terms delay the actual transfer of funds, allowing the exchange rate to change before the transaction is completed, increasing the risk of loss due to currency fluctuations. Therefore, both factors are necessary for foreign exchange risk to exist.

Question 9

The date of delivery of a currency has no impact on the exchange rate for that currency.

Accepted Answer

The date of delivery, often referred to as the settlement date in forex markets, can impact the exchange rate due to factors like interest rate differentials between the two currencies involved, market expectations, and liquidity conditions for future dates.

Question 10

International transactions handled on a cash basis are subject to a high degree of exchange rate risk.

Accepted Answer

The answer of International transactions handled on a cash basis...

Question 11

Exchange rate risk is the possibility of a gain or loss in a business transaction from exchange rate movement aside from the business deal itself.

Accepted Answer

Exchange rate risk refers to the potential for a business transaction to be impacted by fluctuations in exchange rates, resulting in either a gain or loss in addition to the primary transaction itself.

Question 12

When a foreign currency is expected to become more valuable in the future, the forward currency is said to be selling at a premium over the spot rate.

Accepted Answer

When a foreign currency is expected to become more valuable in the future, the demand for that currency increases, causing the forward currency to be priced at a premium over the spot rate.

Question 13

The direct quote states the price of a unit of foreign currency in US dollars.

Accepted Answer

A direct quote expresses the value of a foreign currency in terms of the domestic currency. In other words, it states how many units of the foreign currency can be purchased with one unit of the domestic currency.

Question 14

Exchange rate risk can be eliminated with a bank contract for delivery of the foreign currency when needed at a fixed exchange rate. The process is called pledging because the bank pledges to accept the exchange rate risk for a fee.

Accepted Answer

The process is called hedging, not pledging. Hedging involves using financial instruments or market strategies to offset the risk of any adverse price movements.

Question 15

The indirect quote states the price of a unit of foreign currency in US dollars.

Accepted Answer

The indirect quote states the price of a unit of domestic currency in terms of foreign currency.

Question 16

Foreign exchange rates are quoted in terms of U.S. dollars. Therefore, when converting one non US currency into another, it is necessary to convert to US dollars first.

Accepted Answer

Foreign exchange rates can be directly quoted between any two currencies, not necessarily involving the U.S. dollar, through a process known as cross currency calculation.

Question 17

The fact that exchange rates are continually changing gives rise to the possibility that money may be made or lost on an international transaction because of rate movements outside the business deal. This exposure is generally referred to as the risk of international trade.

Accepted Answer

The answer of The fact that exchange rates are continually...

Question 18

The more a foreign currency costs in U.S. dollars, the more expensive that nation's products are to American consumers regardless of their cost in the country of origin.

Accepted Answer

This is true because when the foreign currency costs more in U.S. dollars, American consumers have to pay more dollars for the same amount of the foreign currency needed to purchase products from that nation. This makes the products more expensive for American consumers.

Question 19

The spot rate for the Canadian dollar is $.60 and the forward rate is $.58. The currency, therefore is selling in the forward market at a discount.

Accepted Answer

The forward rate being lower than the spot rate means that the currency is selling at a discount in the forward market, indicating a bearish outlook on the currency. In this case, the Canadian dollar is selling at a discount, so the answer is A.

Question 20

If the direct quote shows the Canadian dollar at $.7376, prices stated in American dollars will be higher than the prices for the same goods stated in Canadian dollars.

Accepted Answer

The answer of If the direct quote shows the Canadian...

Quiz 18: International Finance