Question 1

An attempt to collect foreign currency receivables early when a foreign currency is expected to depreciate and to pay foreign currency payables before they are due when a currency is expected to appreciate is called:

Accepted Answer

A lead strategy involves collecting foreign currency receivables early and paying foreign currency payables before they are due, based on the expectation of currency depreciation or appreciation. This helps to minimize the impact of currency fluctuations on cash flows and profits.

Question 2

The world's four major trading currencies - the British pound,the euro,the Japanese yen and the US dollar - all free float against each other.

Accepted Answer

The four major trading currencies - the British pound, the euro, the Japanese yen, and the US dollar - all float freely against each other. There are no fixed exchange rates or other government interventions in determining their value in relation to one another.

Question 3

The floating exchange rate regimes of Australia and New Zealand have been supported by all of the following influences except:

Accepted Answer

Foreign exchange controls are not part of the factors that supported the floating exchange rate regimes of Australia and New Zealand. In fact, both countries have moved away from foreign exchange controls in recent years to encourage free-flowing international trade and capital flows. The other options listed (an open financial system, no controls over the cross-border of funds, and no controls over financial market prices other than the case rate) are all factors that have supported the floating exchange rate regimes of these countries.

Question 4

When traders follow the actions of others to force down the value of their holdings,this is called the bandwagon effect.

Accepted Answer

The bandwagon effect refers to the phenomenon of individuals following the actions of others, often leading to an increase in demand or adoption of a particular trend or asset. In the context of trading, this can lead to traders selling off their holdings en masse, thereby forcing down the value of those assets.

Question 5

The latest trend in the foreign exchange market is to trade the spiralling euro and leverage with contracts for difference (CFD)opportunities.

Accepted Answer

The answer of The latest trend in the foreign exchange...

Question 6

The Fisher Effect states that a country's nominal interest rate (i)is the sum of the required real rate of interest (r)and the expected rate of inflation (I)over the period for which the funds are to be lent.

Accepted Answer

This is the correct definition of the Fisher Effect. It suggests that nominal interest rates in a country will increase to offset any expected inflation, to ensure lenders are receiving a consistent real rate of return on their investments.

Question 7

When managing foreign exchange risk many companies seem to focus on reducing their transaction and translation exposure and pay scant (little)attention to______isk.

Accepted Answer

Economic risk refers to the long-term impact of exchange rate changes on a company's market value, which is often overlooked compared to transaction and translation exposures.

Question 8

One key assumption concerning the principles of currency convertibility is that:

Accepted Answer

The key assumption concerning the principles of currency convertibility is that currencies are freely convertible, meaning they can be exchanged without restrictions or limitations. This assumption allows for easier international trade and investment, as well as greater fluidity and stability in the global financial system.

Question 9

A system under which a country's currency is nominally allowed to float freely against other countries,but in which the government will intervene if it believes the currency has deviated too far from its fair value is called a ____________t system.

Accepted Answer

The description matches the definition of a "managed" exchange rate system, also sometimes referred to as a "dirty float" or "managed float" system. In this system, the government may intervene in the foreign exchange market by buying or selling currencies to influence the value of their own currency. This is in contrast to a fixed exchange rate system (such as a currency peg) or a completely floating exchange rate system with no government intervention.

Question 10

A concern with floating exchange rates is volatility.

Accepted Answer

Floating exchange rates are determined by market forces and are subject to fluctuations based on various economic factors such as inflation, interest rates, and geopolitical events. This can result in volatility in currency values, which can be a concern for businesses and investors who need to plan for future transactions and investments.

Question 11

Nominal interest rates reflect expectations about inflation,deflation and stagflation.

Accepted Answer

The answer of Nominal interest rates reflect expectations about inflation,deflation...

Question 12

The law of one price and purchasing power parity (PPP)theory predict that the exchange rate will change if relative prices change.

Accepted Answer

The law of one price and PPP theory suggest that if there is a change in relative prices, then the exchange rate will also change. The law of one price asserts that identical goods should have the same price in all markets, while PPP theory proposes that in the long run, exchange rates should adjust so that the same basket of goods and services has the same cost in different countries. As a result, if there is a change in the price of goods and services in one country relative to another, the exchange rate will need to adjust to maintain these principles.

Question 13

The extent to which an international business adjusts prices in a foreign market as the result of an exchange rate change is called price rate adjustment.

Accepted Answer

The correct term for this concept is "exchange rate pass-through," not "price rate adjustment."

Question 14

With London,New York and Tokyo the most important trading centres for the foreign exchange market,the next most important trading centres are:

Accepted Answer

Zurich, Frankfurt and Hong Kong are all major financial centers and important trading centers for the foreign exchange market, making them the most likely options after London, New York and Tokyo. The other options, such as São Paulo or Moscow, are important financial centers but are not as significant in the foreign exchange market compared to the options listed in choice D.

Question 15

The US dollar is regarded as a ________ currency,as it is regarded as one of the most traded currencies in the world.

Accepted Answer

The term "vehicle currency" refers to a currency that is widely used as a medium of exchange for international transactions, and the US dollar is one of the most commonly used currencies for global trade.

Question 16

The theory that nominal interest rates (i)in each country equal the required rate of interest (r)and expected rate of inflation (I)over the period for which the funds are to be lent is referred to as:

Accepted Answer

The theory described in the question is known as the Fisher Effect, which states that nominal interest rates in a country are equal to the required rate of interest and expected inflation rate. The Law of One Price refers to the idea that the same product should have the same price in different countries, the Purchasing Power Parity conundrum relates to the difficulty in achieving this, and the Big Mac Index is a method for comparing the purchasing power of currencies.

Question 17

The purchase of securities in one market for immediate resale in another market to profit from a price discrepancy is known as:

Accepted Answer

This is the exact definition of arbitrage, which involves taking advantage of price differences in different markets for the same security.

Question 18

Domestic political realities often mean that domestic policy goals will get preference over the goal of international monetary stability.

Accepted Answer

Domestic political leaders are primarily accountable to their own voters and constituencies, which means that they will prioritize policies that are popular at home over policies that may be necessary for international monetary stability. This can lead to conflicts between domestic and global economic interests.

Question 19

Fluctuating exchange rates expose an international business to three types of foreign exchange risk: transaction,translation and economic.

Accepted Answer

Fluctuating exchange rates do expose an international business to three types of foreign exchange risk: transaction, translation, and economic.

Question 20

Two main functions of the foreign exchange market are ______and ______ against foreign exchange risk.

Accepted Answer

The answer of Two main functions of the foreign exchange...

Quiz 4: Foreign Exchange and the International Monetary System