Question 1

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

Accepted Answer

If a bank expects the euro to appreciate against the dollar, it will take a long position in euros to profit from the expected increase in value. As a hedge, the bank will take a short position in dollars to mitigate the risk of the dollar's depreciation. Therefore, the best choice is option B, which is a long position in euros and a short position in dollars.

Question 2

Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

Accepted Answer

Purchasing Power Parity suggests that exchange rates will change in response to inflation differentials between two countries. This means that if one country has higher inflation than another, its currency will likely depreciate relative to the other country's currency in order to maintain an equal purchasing power.

Question 3

The ____ allowed for the devaluation of the dollar in 1971.

Accepted Answer

The Smithsonian Agreement, signed in 1971, allowed for the devaluation of the dollar and the increase of the value of other currencies in relation to the dollar. The Bretton Woods Agreement and the Louvre Accord were both international monetary agreements, but did not directly involve the devaluation of the dollar in 1971.

Question 4

The Bretton Woods Era was the era

Accepted Answer

The Bretton Woods Era was characterized by a fixed exchange rate system in which governments maintained their exchange rates within 1 percent of a specified rate (usually the US dollar). This system was in place from 1944 to 1971.

Question 5

Generally, a ____ home currency can ____ domestic economic growth.

Accepted Answer

The answer of Generally, a ____ home currency can ____...

Question 6

Which of the following is most likely to provide currency forward contracts to their customers?

Accepted Answer

Commercial banks are the most likely to provide currency forward contracts to their customers as they often have a foreign exchange desk to facilitate transactions for clients engaging in international trade or investment. International mutual funds, brokerage firms, and insurance companies may also use currency forward contracts, but they are not typically providers of these contracts to their customers.

Question 7

Beginning with an equilibrium situation, if European inflation suddenly ____ than U.S.inflation, this forced ____ pressure on the value of the euro.

Accepted Answer

The answer of Beginning with an equilibrium situation, if European...

Question 8

Direct intervention is always extremely effective.

Accepted Answer

Direct intervention may not always be the most effective approach and can sometimes lead to unintended consequences. Other factors such as timing, resources, and approach can also impact the effectiveness of an intervention.

Question 9

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

Accepted Answer

Banks make a profit by buying currencies at a lower rate and selling them at a higher rate. Therefore, the price at which they buy a currency (also known as the bid price) is always lower than the price at which they sell it (also known as the ask price).

Question 10

If the U.S.government imposed trade restrictions on U.S.imports, this would ____ the U.S.demand for foreign currencies, and would place ____ pressure on the values of foreign currencies (with respect to the dollar).

Accepted Answer

Imposing trade restrictions on imports limits the demand for foreign currency as fewer imports mean fewer foreign currency purchases. This places downward pressure on the values of foreign currencies with respect to the dollar.

Question 11

In reality, exchange rates do not always change as suggested by purchasing power parity.

Accepted Answer

While purchasing power parity suggests that exchange rates should adjust to reflect differences in relative inflation rates between countries, in reality there are many factors that can influence exchange rates, including political events, central bank policies, and market speculation. Therefore, exchange rates may not always change as suggested by PPP.

Question 12

If the demand for British pounds ____, the pound will ____, other things being equal.

Accepted Answer

According to the law of demand, if the demand for a currency increases, its value will appreciate as people are willing to pay more for it. Therefore, if the demand for British pounds increases, the pound will appreciate, other things being equal.

Question 13

A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a

Accepted Answer

A pegged system is one where the exchange rate of a currency is fixed to another currency or unit of account within specified boundaries. This means that the exchange rate will not fluctuate beyond a certain range and is maintained through central bank intervention.

Question 14

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

Accepted Answer

A dirty float system allows for market determination of exchange rates, but also allows for government intervention to manipulate the rates as needed. This is in contrast to a free float system, where the exchange rates are fully determined by the market without government intervention. The gold standard and the Bretton Woods era are historical fixed exchange rate systems, not floating exchange rate systems.

Question 15

If U.S.interest rates suddenly become much higher than European interest rates, the U.S.demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.

Accepted Answer

If the U.S. interest rates become much higher than European interest rates, investors would demand U.S. dollars instead of euros because they can earn higher returns with the dollars. This would lead to a decreased demand for euros and an increased supply of euros to be exchanged for dollars. Therefore, the correct choice is (C) decrease; increase.

Question 16

A country that pegs its currency is still able to maintain complete control over its local interest rates.

Accepted Answer

When a country pegs its currency to another, it must align its interest rates with those of the currency to which it is pegged to maintain the peg, thus losing control over its own interest rates.

Question 17

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

Accepted Answer

Indirect intervention involves the government influencing factors that indirectly affect the currency's value, such as manipulating interest rates or inflation. Direct intervention, on the other hand, involves buying or selling the currency directly in the market. A freely floating system is where the currency's value is determined by market forces, without any government interventions. A pegged system is where the currency's value is fixed to another currency or commodity, and the government intervenes to maintain that fixed exchange rate.

Question 18

A(n) ____ in the supply of euros for sale will cause the euro to ____.

Accepted Answer

The answer of A(n) ____ in the supply of euros...

Question 19

Which of the following statements is incorrect?

Accepted Answer

The answer of Which of the following statements is incorrect?
...

Question 20

Assume interest rate parity exists.If the spot rate on the British pound is $2 and the 1-year British interest rate is 7 percent, and the 1-year U.S.interest rate is 11 percent, what is the pound's forward discount or premium?

Accepted Answer

The answer of Assume interest rate parity exists.If the spot...

Quiz 16: Foreign Exchange Derivative Markets

If a commercial bank expects the euro to appreciate against the dollar, it may take a position in euros and a position in dollars.

Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

The ____ allowed for the devaluation of the dollar in 1971.

The Bretton Woods Era was the era

Generally, a home currency can domestic economic growth.

Which of the following is most likely to provide currency forward contracts to their customers?

Beginning with an equilibrium situation, if European inflation suddenly than U.S.inflation, this forced pressure on the value of the euro.

Direct intervention is always extremely effective.

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

If the U.S.government imposed trade restrictions on U.S.imports, this would the U.S.demand for foreign currencies, and would place pressure on the values of foreign currencies (with respect to the dollar) .

In reality, exchange rates do not always change as suggested by purchasing power parity.

If the demand for British pounds , the pound will , other things being equal.

A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

If U.S.interest rates suddenly become much higher than European interest rates, the U.S.demand for euros would , and the supply of euros to be exchanged for dollars would , other factors held constant.

A country that pegs its currency is still able to maintain complete control over its local interest rates.

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

A(n) in the supply of euros for sale will cause the euro to .

Which of the following statements is incorrect?

Assume interest rate parity exists.If the spot rate on the British pound is $2 and the 1-year British interest rate is 7 percent, and the 1-year U.S.interest rate is 11 percent, what is the pound's forward discount or premium?

Quiz 16: Foreign Exchange Derivative Markets

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

The ____ allowed for the devaluation of the dollar in 1971.

The Bretton Woods Era was the era

Generally, a ____ home currency can ____ domestic economic growth.

Which of the following is most likely to provide currency forward contracts to their customers?

Beginning with an equilibrium situation, if European inflation suddenly ____ than U.S.inflation, this forced ____ pressure on the value of the euro.

Direct intervention is always extremely effective.

At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

If the U.S.government imposed trade restrictions on U.S.imports, this would ____ the U.S.demand for foreign currencies, and would place ____ pressure on the values of foreign currencies (with respect to the dollar) .

In reality, exchange rates do not always change as suggested by purchasing power parity.

If the demand for British pounds ____, the pound will ____, other things being equal.

A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a

A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

If U.S.interest rates suddenly become much higher than European interest rates, the U.S.demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.

A country that pegs its currency is still able to maintain complete control over its local interest rates.

When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

A(n) ____ in the supply of euros for sale will cause the euro to ____.

Which of the following statements is incorrect?

Assume interest rate parity exists.If the spot rate on the British pound is $2 and the 1-year British interest rate is 7 percent, and the 1-year U.S.interest rate is 11 percent, what is the pound's forward discount or premium?

If a commercial bank expects the euro to appreciate against the dollar, it may take a position in euros and a position in dollars.

Generally, a home currency can domestic economic growth.

Beginning with an equilibrium situation, if European inflation suddenly than U.S.inflation, this forced pressure on the value of the euro.

If the U.S.government imposed trade restrictions on U.S.imports, this would the U.S.demand for foreign currencies, and would place pressure on the values of foreign currencies (with respect to the dollar) .

If the demand for British pounds , the pound will , other things being equal.

If U.S.interest rates suddenly become much higher than European interest rates, the U.S.demand for euros would , and the supply of euros to be exchanged for dollars would , other factors held constant.

A(n) in the supply of euros for sale will cause the euro to .