Question 1

Foreign travel is recorded in the current account of the balance of payments.

Accepted Answer

Foreign travel involves spending money in foreign countries and is considered a component of the current account of the balance of payments. The current account includes all transactions related to goods, services, income, and current transfers between residents of a country and foreign entities.

Question 2

If a speculator expects the value of the pound to fall,then that individual may establish a long position in pounds or a short position in dollars.

Accepted Answer

If a speculator expects the value of the pound to fall, they would establish a short position in pounds or a long position in dollars. This is because they would want to profit from the depreciation of the pound and the appreciation of the dollar.

Question 3

If a nation exports more goods than it imports,it has a surplus in the current account.

Accepted Answer

A surplus in the current account occurs when a nation exports more goods and services than it imports, resulting in a positive balance of trade. This means that the nation is earning more foreign currency than it is spending, giving it a surplus in the current account.

Question 4

An increase in the demand for dollars will tend to reduce the return on foreign investments.

Accepted Answer

An increase in the demand for dollars will lead to a higher value of the dollar relative to other currencies, thus reducing the return on foreign investments. This is because the return on foreign investments includes both the return on the investment itself and any gains or losses from fluctuations in exchange rates. A stronger dollar means that gains from the investment are worth less when converted back into dollars, reducing the overall return.

Question 5

If the American dollar is devalued,American goods are cheaper to individuals holding dollars.

Accepted Answer

When the American dollar is devalued, it means the value of the dollar has decreased relative to other currencies. This makes American goods cheaper to foreign buyers who are paying with their stronger currencies, but not to individuals holding dollars, as their purchasing power in dollars has not changed.

Question 6

If the demand for a currency exceeds the supply,the currency will be devalued under a system of freely fluctuating exchange rates.

Accepted Answer

If the demand for a currency exceeds the supply, the currency will be appreciated, not devalued, under a system of freely fluctuating exchange rates. When a currency appreciates, it becomes more expensive relative to other currencies, and its purchasing power increases.

Question 7

The devaluation (depreciation)of one currency implies the revaluation (appreciation)of other currencies.

Accepted Answer

When the value of one currency decreases, it means that it takes more of that currency to purchase goods or services, and therefore other currencies will be relatively stronger by comparison. This results in the revaluation or appreciation of those other currencies.

Question 8

Returns on investments in foreign securities are unaffected by fluctuations in the value of foreign currencies.

Accepted Answer

Returns on investments in foreign securities are affected by fluctuations in the value of foreign currencies. When the value of the foreign currency depreciates, the return on the investment may decrease. Conversely, when the value of the foreign currency appreciates, the return on the investment may increase. This is known as currency risk.

Question 9

Foreign currencies are bought and sold in the foreign exchange market.

Accepted Answer

This is true. The foreign exchange market is a global decentralized market for the trading of currencies. It is the largest and most liquid market in the world, with an average daily trading volume of $5 trillion. Trading in the forex market is done through currency pairs, where one currency is bought or sold against another currency based on their exchange rate.

Question 10

If Americans buy British securities,they may hedge the foreign exchange risk by entering into futures contracts to sell pounds at a specified price.

Accepted Answer

Hedging foreign exchange risk by entering into futures contracts to sell pounds at a specified price is a commonly used strategy by investors buying British securities. This enables them to mitigate the risk of currency fluctuations impacting their returns.

Question 11

Under a system of fluctuating exchange rates,a currency will depreciate if supply exceeds the demand for the currency.

Accepted Answer

In a system of fluctuating exchange rates, the value of a currency is determined by supply and demand. If there is an excess supply of a currency, relative to its demand, it will result in a decrease in its value or depreciation.

Question 12

The risk associated with fluctuations in exchange rates is increased through hedging with foreign currencies futures.

Accepted Answer

Hedging with foreign currencies futures actually decreases the risk associated with fluctuations in exchange rates. By using futures contracts, the parties involved can lock in a future exchange rate, reducing uncertainty and volatility in their transactions.

Question 13

Fluctuations in exchange rates are one source of risk that investors in domestic securities avoid.

Accepted Answer

Fluctuations in exchange rates can significantly affect the return on investment for foreign securities. Investors in domestic securities typically avoid this risk by investing in securities denominated in their home currency.

Question 14

If a country's currency is devalued,its price relative to other currencies is reduced.

Accepted Answer

When a country's currency is devalued, it means that its value has decreased relative to other currencies. This makes its price lower in comparison to other currencies, hence reducing its price relative to other currencies.

Question 15

If speculators anticipate the value of the Euro to rise,they enter into futures contracts requiring they deliver Euros in the future.

Accepted Answer

If speculators anticipate the value of the Euro to rise, they would typically enter into futures contracts buying Euros in the future, not selling them. This would allow them to profit from the expected increase in value.

Question 16

If American investors buy German stocks,they may sustain losses if the Euro is devalued.

Accepted Answer

The value of the German stock in Euro will decrease if the Euro is devalued, resulting in a loss for American investors who invested in those stocks.

Question 17

American investors who own foreign securities may have dividend payments taxed by the local country.

Accepted Answer

Many countries tax dividends from foreign companies, therefore American investors who own foreign securities may have their dividend payments taxed by the local country where the company is incorporated. The U.S. tax code may also have provisions for foreign tax credits or exemptions to avoid double taxation.

Question 18

If a country exports more goods than it imports,it has a surplus in its balance of payments.

Accepted Answer

A surplus in the balance of payments refers to the overall balance, including the current account, capital account, and financial account, not just the trade balance of goods.

Question 19

If you own British pounds and the American dollar is devalued,that implies American goods will be cheaper.

Accepted Answer

If the American dollar is devalued, it means that it will take more American dollars to buy the same amount of goods or services. This makes American goods cheaper relative to the British pound, so if you own British pounds, you would be able to buy more American goods with them than you would have before.

Question 20

American investors seeking foreign investments are limited to foreign securities traded on the New York and American stock exchanges.

Accepted Answer

American investors seeking foreign investments can also invest in foreign securities traded on foreign exchanges, through exchange-traded funds (ETFs), mutual funds or global depository receipts (GDRs).

Quiz 22: Investing in Foreign Securities