Question 1

Discuss the two schools of thought on exchange rate forecasting.

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Question 2

What are the main uses of foreign exchange markets for international business?

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Question 3

What is the law of one price?

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Question 4

What is a currency swap?

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Question 5

Explain PPP. Use an example to show how PPP can help explain exchange rates.

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Question 6

What is countertrade? Why would a firm engage in countertrade?

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Question 7

Discuss the nature of the foreign exchange market. How fast has it been growing? Where are the most important trading centers?

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Question 8

The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as:

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The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as transaction exposure. Economic exposure refers to the impact on a company's overall cash flows and value from changes in exchange rates, financial exposure refers to the exposure of a company's financial structure, and translation exposure refers to the impact of currency fluctuations on a company's financial statements when they are converted from one currency to another.

Question 9

_____ is the impact of short-run currency exchange rates changes on the reported financial statements of a company.

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Translation exposure refers to the impact of currency exchange rate changes on a company's financial statements when they are translated into the reporting currency. This is particularly relevant for multinational companies that have subsidiaries operating in different countries with different currencies. Short-term fluctuations in exchange rates can affect the value of assets and liabilities denominated in foreign currencies, which in turn impact the overall financial performance of the company.

Question 10

Where is the foreign exchange market located? What is the nature of the market? Is the market growing or shrinking on a global basis?

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Question 11

Consider the role of investor psychology and bandwagon effects on how well PPP and the International Fisher Effect explain short-term movements in exchange rates.

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Question 12

Explain the difference between fundamental analysis and technical analysis.

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Question 13

Compare and contrast currencies that are freely convertible, externally convertible, and nonconvertible.

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Question 14

What is meant by the phrases 'the dollar is selling at a discount' on the 30-day forward market and 'the dollar is selling at a premium' on the 30-day forward market?

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Question 15

What is the concept that is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs?

Accepted Answer

Economic exposure is the concept that is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs. Translation exposure deals with the accounting impact of changes in exchange rates on the financial statements of a company, while transaction exposure deals with the short-term impact of changes in exchange rates on specific transactions. Risk exposure is a general term that encompasses various types of risk, including exchange rate risk.

Question 16

Discuss the failure of PPP theory to predict exchange rates accurately. What is the purchasing power puzzle?

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Question 17

A(n) _____ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

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The described strategy is known as a lead strategy, where a company attempts to collect receivables early and pay payables early in anticipation of currency fluctuations. This allows them to minimize potential losses due to currency depreciation or take advantage of currency appreciation.

Question 18

Compare and contrast the Fisher Effect and the International Fisher Effect.

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Question 19

With the help of an example, explain how a tourist participates in the foreign exchange market.

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Question 20

What is the difference between a spot exchange rate and a forward exchange rate?

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Quiz 10: The Foreign Exchange Market