Question 1

In order to capture the gains from currency translation,managers prefer exchange rates that are volatile and unpredictable.

Accepted Answer

Managers generally prefer stable and predictable exchange rates to minimize risks and uncertainties in financial planning and operations. Volatile and unpredictable exchange rates can lead to potential losses and increased costs.

Question 2

Which of the following is the intentional lowering of a currency's value by its government?

Accepted Answer

Devaluation is the intentional lowering of a currency's value by its government. Revaluation, on the other hand, is the intentional raising of a currency's value by its government. Currency hedging refers to strategies used to mitigate currency risk, while currency arbitrage involves taking advantage of price discrepancies between different currency markets.

Question 3

The French government buying its own securities on the open market is part of the ________ of France.

Accepted Answer

The purchase of government securities on the open market is a tool of monetary policy, typically used by central banks to influence the money supply and interest rates.

Question 4

Devaluation lowers the price of a country's exports in the global market and increases the price of its imports.

Accepted Answer

Devaluation makes a country's currency cheaper, which makes its exports less expensive in the global market, and its imports more expensive domestically. This can help a country increase its export competitiveness and reduce its trade deficits.

Question 5

Currency devaluation increases consumers' buying power.

Accepted Answer

Currency devaluation decreases consumers' buying power as it reduces the value of the currency, making imported goods and services more expensive.

Question 6

The lowering of taxes in the U.S.by its government is an example of the ________.

Accepted Answer

The lowering of taxes is an example of fiscal policy, which involves decisions made by the government regarding taxation and government spending to influence the economy. Monetary policy, on the other hand, involves decisions made by the Federal Reserve regarding interest rates and the money supply. Social policy focuses on issues such as healthcare and education, while foreign affairs policy deals with international relations and diplomacy.

Question 7

________ is an activity under the monetary policy of a nation.

Accepted Answer

Selling government securities is an activity under the monetary policy of a nation.

Question 8

Sam Dearing,Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.Sam is hoping to be offered a full-time position at the firm after he graduates from college,and therefore,Sam knows that he must demonstrate a strong understanding of how exchange rates work.
-Sam already knows that the ________ tells us how much of one currency we must pay to receive a certain amount of another.

Accepted Answer

The exchange rate is the rate at which one currency can be exchanged for another. It tells us how much of one currency is required to purchase a certain amount of another currency. Therefore, option A is the correct answer. Par value is a term used to denote the face value of a currency rather than its exchange rate. The law of one price and purchasing power parity theory are related concepts but not directly relevant to the definition of exchange rate.

Question 9

Which of the following forecasting techniques employs statistical models based on key economic indicators to forecast exchange rates?

Accepted Answer

Fundamental analysis employs statistical models based on key economic indicators, such as inflation rates, GDP, and interest rates, to forecast exchange rates. Financial analysis involves examining financial statements and economic conditions of a company to make investment decisions. Probability bounds analysis is a method used to estimate the probability of different scenarios occurring, while technical analysis involves analyzing historical market data and trends to make predictions about future prices.

Question 10

A company can improve its profits by selling in a country with a strong currency and sourcing from a country with a weak currency.

Accepted Answer

Selling in a country with a strong currency means that the company can receive more money for their goods or services, while sourcing from a country with a weak currency means that the company can pay less for the materials or labor needed to produce those goods or services. This difference in buying power can result in higher profits for the company.

Question 11

The inefficient market view holds that prices of financial instruments ________.

Accepted Answer

The inefficient market view suggests that prices of financial instruments do not reflect all publicly available information, meaning that there is an opportunity for investors to uncover mispricings and generate abnormal returns. This stands in contrast to the efficient market view, which suggests that prices do reflect all publicly available information, leaving little room for investors to generate abnormal returns.

Question 12

To cool off an inflationary economy,a government might ________.

Accepted Answer

To cool off an inflationary economy, a government might raise interest rates. This would make borrowing more expensive, and people would slow down on their spending, thus slowing down the inflation.

Question 13

Which of the following forecasting techniques employs charts of past trends in currency prices and other factors to forecast exchange rates?

Accepted Answer

Technical analysis employs charts of past trends in currency prices and other factors, such as moving averages and trading volumes, to forecast exchange rates. Financial analysis involves analyzing financial statements and economic indicators, while fundamental analysis involves examining the underlying factors affecting the value of a currency. Value chain analysis analyzes the activities within a company and its industry to identify competitive advantages.

Question 14

Sam Dearing,Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.Sam is hoping to be offered a full-time position at the firm after he graduates from college,and therefore,Sam knows that he must demonstrate a strong understanding of how exchange rates work.
-Sam's mentor at the firm told him that the ________ stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

Accepted Answer

The law of one price stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency. This concept is important in understanding exchange rates and is relevant to Sam's work in the arbitrage department. The other options (A, C, and D) are not directly related to the concept of the law of one price.

Question 15

The intentional lowering of the value of a currency by a nation's government is called revaluation.

Accepted Answer

The intentional lowering of the value of a currency by a nation's government is actually called devaluation. Revaluation refers to the intentional raising of the value of a currency by a nation's government.

Question 16

The exchange rate at the beginning of a year between the Indian Rupee (R)and the U.S.dollar is R43.125/$.The annual inflation rates in India and in the United States are 19 percent and 3 percent respectively.What would be the new exchange rate at the end of the year?

Accepted Answer

To calculate the new exchange rate, we need to consider the changes in purchasing power caused by inflation in both countries.

In India, prices are expected to increase by 19% over the year. This means that with the same amount of rupees, we can buy only 1/1.19 times the original amount of goods. In other words, 1 rupee at the beginning of the year is equivalent to 1/1.19 rupees at the end of the year.

In the United States, prices are expected to increase by 3% over the year. This means that with the same amount of dollars, we can buy only 1/1.03 times the original amount of goods. In other words, 1 dollar at the beginning of the year is equivalent to 1/1.03 dollars at the end of the year.

To find the new exchange rate, we need to combine these factors. Here's the calculation:

New exchange rate = (old exchange rate) x (change in Indian purchasing power) / (change in US purchasing power)

New exchange rate = 43.125 x (1/1.19) / (1/1.03)

New exchange rate = 43.125 x 1.03 / 1.19

New exchange rate = 37.327

Therefore, the answer is (A) R49.8224/$.

Question 17

A company selling in a country with a strong currency while sourcing from a country with a weak currency ________.

Accepted Answer

When a company sells in a country with a strong currency while sourcing from a country with a weak currency, it can benefit from the exchange rate difference by paying less for the goods it sources and earning more revenue from the sales it makes. This can ultimately improve its profits.

Question 18

Translating subsidiary earnings from a strong host currency into a weak home currency increases stated earnings in the home currency.

Accepted Answer

When a subsidiary's earnings are translated from a strong host currency (such as the US dollar) into a weak home currency (such as the Indian rupee), the earnings are multiplied by a higher exchange rate, which results in a higher equivalent amount in the weak home currency. Therefore, this increases the stated earnings in the home currency.

Question 19

Which of the following is true of inflation?

Accepted Answer

Inflation is primarily caused by an increase in the supply of money in relation to the demand for goods and services, leading to an increase in prices. This increase in supply and demand for the currency can lead to inflation. Therefore, option B is the correct statement about inflation. Option A is incorrect as inflation can occur even if there is no increase in output. Option C is incorrect as inflation decreases people's purchasing power by increasing the cost of goods and services. Option D is incorrect as unemployment can affect inflation due to its impact on the level of demand in the economy.

Question 20

When a country's currency is weak,the price of its ________.

Accepted Answer

When a country's currency is weak, its exports become cheaper in the world market, which could lead to an increase in demand for its goods, resulting in an increase in exports. On the other hand, the price of imports becomes expensive, resulting in a decline in imports. Therefore, the best choice is C.

Quiz 10: International Monetary System