Question 1

Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and delaying inflows from strong-currency to weak-currency countries.

Accepted Answer

This statement is true. Leading and lagging strategies are used in international trade to manage currency exchange risks. Leading involves accelerating payments from a weak-currency country to a strong-currency country, while lagging involves delaying receipts from a strong-currency country to a weak-currency country.

Question 2

Economic exposure,a category of foreign exchange risk,is distinct from transaction exposure,which is concerned with the effect of exchange rate changes on individual transactions,most of which are short-term affairs that will be executed within a few weeks or months.

Accepted Answer

Economic exposure is a long-term risk related to the overall operations and competitiveness of a company, while transaction exposure is focused on the impact of exchange rate fluctuations on individual transactions in the short term.

Question 3

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S.bank is 6 percent.John,an active currency trader borrows in Japanese yen,converts the money into U.S.dollars and deposits it in a U.S.bank.The speculative element of John's carry trade is that its success is based upon his belief that

Accepted Answer

The success of John's carry trade depends on his belief that there will be no adverse movement in exchange rates or interest rates. If the exchange rate of yen to dollars decreases, John will have to pay back more yen than he borrowed, and if the interest rate in the U.S. decreases, his return on deposit will also decrease. Therefore, John needs stability in both exchange rates and interest rates.

Question 4

Technical analysis,an approach to foreign exchange forecasting,does not rely on a consideration of economic fundamentals.

Accepted Answer

Technical analysis involves analyzing charts and past market data to determine future price movements, and does not rely on economic or fundamental factors such as GDP or interest rates.

Question 5

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

Accepted Answer

The decline in the dollar/yen carry trade during 2008-2009 was caused by a decrease in interest rate differentials as the U.S. rates came down. This reduced the attractiveness of the carry trade as the gap between borrowing yen at a low interest rate and investing in U.S. assets with higher interest rates narrowed.

Question 6

Steven converted $1,000 to ×105,000 for a trip to Japan.However,he spent only ×50,000.During this period,the value of the dollar weakened against the yen.Considering a current exchange rate of $1 = ×100,how many dollars did Steven spend on the trip?

Accepted Answer

The answer of Steven converted $1,000 to ×105,000 for a...

Question 7

When residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency,the phenomenon is generally referred to as capital flight.

Accepted Answer

Capital flight refers to the sudden and massive outflow of assets and capital from a country caused by economic or political reasons, resulting in the conversion of domestic currency into a foreign currency.

Question 8

An American company imports laptop computers from Japan.The company knows that after a shipment arrives,it must pay in yen to the Japanese supplier within 30 days.In a particular exchange,the American company must pay the Japanese supplier ×150,000 for each computer at the current dollar/yen spot exchange rate of $1 = ×110.The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold.Which of the following will happen if the exchange rate after 30 days is $1 = ×90?

Accepted Answer

The answer of An American company imports laptop computers from...

Question 9

Assume that the interest rate on borrowings in India is 1 percent while the interest rate on bank deposits in a U.S.bank is 6 percent.John,an active currency trader borrows in Japanese yen,converts the money into U.S.dollars and deposits it in a U.S.bank.John is engaging in

Accepted Answer

John is engaging in carry trade, which involves borrowing in a currency with a low interest rate (Japanese yen) and investing in a currency with a higher interest rate (U.S. dollars) to profit from the interest rate differential.

Question 10

Robben Inc.converts $1,000,000 into euros when the exchange rate is $1 = €0.75.After three months,the company converts this back into dollars when the exchange rate is $1 = €0.80.Which of the following is the outcome of this transaction?

Accepted Answer

The answer of Robben Inc.converts $1,000,000 into euros when the...

Question 11

Which of the following refers to currency speculation?

Accepted Answer

Currency speculation refers to the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

Question 12

How are spot exchange rates determined?

Accepted Answer

Spot exchange rates are determined by the interaction between demand and supply of a currency relative to other currencies in the foreign exchange market. The market forces of demand and supply determine the price of a currency in terms of another currency. Other factors such as economic indicators, geopolitical events, and investor sentiment also influence the determination of spot exchange rates.

Question 13

A French company wants to invest 20 million euros for three months.The company found that investing in a Thai money market account would give it a higher interest rate than domestic investments.Which of the following is true about this investment?

Accepted Answer

Foreign currency movements can significantly affect the profitability of the investment. Therefore, the investment is not entirely risk-free.

Question 14

Which of the following enables organizations to conduct international trade without having to resort to barter?

Accepted Answer

The foreign exchange market allows organizations to conduct international trade by converting one currency into another, enabling them to pay for goods and services without resorting to barter. The other options (Caribbean Single Market and Economy, auction market, countertrade, and balance-of-trade equilibrium) do not directly address the issue of currency exchange in international trade.

Question 15

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent.In this scenario,a carry trade would be to

Accepted Answer

With a higher interest rate on bank deposits in Maritia than the interest rate on borrowing in Rhodia, one can take advantage of the difference by borrowing money in Rhodian currency, converting it into Maritian currency, and depositing it in a Maritian bank. This will earn a higher interest rate on the deposited amount and the interest earned will be greater than the borrowing cost in Rhodia.

Question 16

The currency of the country of Venadia falls sharply in value against the currency of Lutetia,a neighboring country.Which of the following is a consequence of this exchange rate movement?

Accepted Answer

When the currency of one country falls in value against another country's currency, the first country's goods become cheaper in the second country. This means that Venadia's exports to Lutetia will become cheaper, leading to an increase in demand for Venadian goods. Therefore, option B is the correct answer. Option A is incorrect because Lutetia's products will become more expensive in Venadia, which makes them less competitive. Option C is incorrect because Venadia's products will become cheaper in Lutetia. Option D is incorrect because there will be a change in the volume and direction of trade due to the change in the exchange rate. Option E is incorrect because Lutetia's exports to Venadia will become more expensive.

Question 17

Omega,Inc.,a U.S.-based firm entered into an agreement with another party to exchange currency and execute the deal at a specific date in the future.What is Omega,Inc.engaging in when it insures itself against foreign exchange risk?

Accepted Answer

Omega, Inc. is engaging in hedging when it insures itself against foreign exchange risk. Hedging involves taking a position to offset potential losses in another position. In this case, Omega is using a currency exchange agreement to protect itself against any potential losses from fluctuations in exchange rates.

Question 18

A U.S.company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a Japanese supplier when a shipment arrives.The company will pay the Japanese supplier ×150,000 for each computer,and the current dollar/yen spot exchange rate is $1 = ×110.The importer can sell the computers the day they arrive for $1,600 each.However,the importer will not have the funds to pay the Japanese supplier until the computers have been sold.The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ×105.Which of the following will happen if the exchange rate after 30 days is $1 = ×90?

Accepted Answer

The answer of A U.S.company that imports laptop computers from...

Question 19

Which of the following is a function of the foreign exchange market?

Accepted Answer

The foreign exchange market provides some insurance against foreign exchange risk by allowing companies to purchase or sell currencies in advance to lock in a favorable rate and reduce the risk of currency fluctuations.

Answer: B
 The foreign exchange market also helps protect short-term cash flow from adverse changes in exchange rates by allowing companies to quickly buy or sell currencies to meet payment obligations.

Answer: D
 By allowing companies to buy or sell currencies as needed, the foreign exchange market can help reduce the economic exposure of a firm to currency fluctuations.

Answer: E is incorrect as the foreign exchange market does not enable companies to engage in capital flight when countertrade is not possible.

Answer: C is incorrect as the foreign exchange market does not eliminate volatile changes in exchange rates, but rather reflects them as they occur.

Question 20

Transaction exposure,a category of foreign exchange risk,refers to the impact of currency exchange rate changes on the reported financial statements of a company.

Accepted Answer

Transaction exposure refers to the risk of exchange rate changes affecting the value of a company's future cash flows from foreign currency transactions, not directly on the financial statements.

Quiz 10: The Foreign Exchange Market