Question 1

Concerning the foreign exchange market,one can best say that:
A) There is a spot market for virtually every currency in the world
B) The market is highly centralized like the stock exchange
C) Most foreign exchange payments are made with bank notes
D) The values of the forward and spot rates are always in agreement

Accepted Answer

The statement "There is a spot market for virtually every currency in the world" is true. Spot markets exist for nearly all currencies, where currencies are bought and sold for immediate delivery. Option B is incorrect as the foreign exchange market is decentralized, with trading occurring over the counter and electronically. Most foreign exchange payments are not made with bank notes, making option C incorrect. Option D is also incorrect as the values of forward and spot rates can differ.

Question 2

A U.S.export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by:
A) Buying today 1 million pounds in the forward market for delivery in six months
B) Buying 1 million pounds in the spot market for delivery in six months
C) Selling 1 million pounds in the spot market for delivery in six months
D) Selling today 1 million pounds in the forward market for delivery in six months

Accepted Answer

D

Question 3

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days,you could remove the risk of loss due to the appreciation of the pound by:
A) Buying dollars in the forward market for delivery in 30 days
B) Selling dollars in the forward market for delivery in 30 days
C) Buying the pounds in the forward market for delivery in 30 days
D) Selling the pounds in the forward market for delivery in 30 days

Accepted Answer

Buying the pounds in the forward market for delivery in 30 days would ensure that you have the pounds necessary to fulfill your commitment, regardless of any appreciation or volatility in the currency. This locks in the exchange rate and eliminates the risk of loss due to currency fluctuation. Buying dollars in the forward market would not provide any protection for the pound appreciation, as it would leave you exposed to the currency change. Selling dollars or selling pounds in the forward market would provide protection only if you have the opposite currency available to fulfill your commitment, which is not specified in the question.

Question 4

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:
A) Reduce the demand for dollars
B) Increase the demand for dollars
C) Reduce the supply of dollars
D) Increase the supply of dollars

Accepted Answer

If there is an increase in demand for American grain due to shortages in other countries, this will lead to an increase in demand for dollars since the grain is priced in dollars. As a result, more countries will need to purchase dollars to pay for the increased demand for American grain.

Question 5

Over time,a depreciation in the value of a nation's currency in the foreign exchange market will result in:
A) Exports rising and imports falling
B) Imports rising and exports falling
C) Both imports and exports rising
D) Both imports and exports falling

Accepted Answer

The answer of Over time,a depreciation in the value of...

Question 6

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S.dollar,they would:
A) Purchase Canadian dollars
B) Purchase U.S.dollars
C) Purchase Swiss francs
D) Sell Swiss francs

Accepted Answer

If Canadian speculators believe that the Swiss franc is going to appreciate against the U.S. dollar, they would purchase Swiss francs in order to profit from the expected increase in value.

Question 7

Suppose the exchange rate between the Japanese yen and the U.S.dollar is 100 yen per dollar.A Japanese stereo with a price of 60,000 yen will cost:
A) $60
B) $600
C) $6000
D) None of the above

Accepted Answer

To convert yen to dollars, we divide by the exchange rate. Therefore, 60,000 yen divided by 100 yen per dollar equals $600.

Question 8

Concerning the covering of exchange market risks--assuming that a depreciation of the domestic currency is anticipated,one can say that there is an incentive for:
A) Exporters to rush to cover their future needs
B) Importers to rush to cover their future needs
C) Both exporters and importers to rush to cover their future needs
D) Neither exporters nor importers to rush to cover their future needs

Accepted Answer

When a depreciation of the domestic currency is anticipated, importers rush to cover their future needs by buying foreign currency now to avoid paying more in the future when the domestic currency is worth less. Exporters, on the other hand, may wait before covering their future needs since a weaker domestic currency can make their products cheaper and more competitive on the international market.

Question 9

Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice.This finding would likely result in a (an):
A) Increase in the demand for Swiss francs
B) Decrease in the demand for Swiss francs
C) Increase in the supply of Swiss francs
D) Decrease in the supply of Swiss francs

Accepted Answer

If Swiss beer is found to cause cancer in British mice, it is likely that the demand for Swiss beer would decrease, ultimately decreasing the demand for Swiss francs, as fewer people would be interested in purchasing Swiss beer or other Swiss products.

Question 10

The supply of foreign currency may be:
A) Upward-sloping
B) Backward-sloping
C) Vertical
D) None of the above

Accepted Answer

The supply of foreign currency does not depend on its price, but on the willingness of foreign holders of the currency to exchange it for the domestic currency. Therefore, it is not upward-sloping, backward-sloping, or vertical.

Question 11

An appreciation in the value of the U.S.dollar against the British pound would tend to:
A) Discourage the British from buying American goods
B) Discourage Americans from buying British goods
C) Increase the number of dollars that could be bought with a pound
D) Discourage U.S.tourists from traveling to Britain

Accepted Answer

The answer of An appreciation in the value of the...

Question 12

An increase in the dollar price of other currencies tends to cause:
A) U.S.goods to be cheaper than foreign goods
B) U.S.goods to be more expensive than foreign goods
C) Foreign goods to be more expensive to residents of foreign nations
D) Foreign goods to be cheaper to residents of the United States

Accepted Answer

The answer of An increase in the dollar price of...

Question 13

A depreciation of the dollar refers to:
A) A fall in the dollar price of foreign currency
B) An increase in the dollar price of foreign currency
C) A loss of foreign-exchange reserves for the U.S.
D) An intervention in the international money market

Accepted Answer

The answer of A depreciation of the dollar refers to:
A)...

Question 14

A major difference between the spot market and the forward market is that the spot market deals with:
A) The immediate delivery of currencies
B) The merchandise trade account
C) Currencies traded for future delivery
D) Hedging of international currency risks

Accepted Answer

The spot market involves the immediate exchange of currencies at the current exchange rate, whereas the forward market involves a contract between two parties to exchange currencies at a future date and at an agreed upon exchange rate. Therefore, the correct answer is A) The immediate delivery of currencies.

Question 15

Which of the following tends to cause the U.S.dollar to appreciate in value?
A) An increase in U.S.prices above foreign prices
B) Rapid economic growth in foreign countries
C) A fall in U.S.interest rates below foreign levels
D) An increase in the level of U.S.income

Accepted Answer

The answer of Which of the following tends to cause...

Question 16

Suppose that real incomes increase more rapidly in the United States than in Mexico.In the United States,this situation would likely result in a (an):
A) Increase in the demand for pesos
B) Decrease in the demand for pesos
C) Increase in the supply of pesos
D) Decrease in the supply of pesos

Accepted Answer

The answer of Suppose that real incomes increase more rapidly...

Question 17

When short-term interest rates become lower in Tokyo than in New York,interest arbitrage operations will most likely result in a(n):
A) Increase in the spot price of the yen
B) Increase in the forward price of the dollar
C) Sale of dollars in the forward market
D) Purchase of yen in the spot market

Accepted Answer

The answer of When short-term interest rates become lower in...

Question 18

Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days.You can remove the risk of loss due to a devaluation of the pound sterling by:
A) Selling sterling in the forward market for 60-day delivery
B) Buying sterling now and selling it at the end of 60 days
C) Selling the dollar equivalent in the forward market for 60-day delivery
D) Keeping the sterling in Britain after it is delivered to you

Accepted Answer

Selling sterling in the forward market for 60-day delivery is the best choice as it eliminates the risk of loss due to a devaluation of the pound sterling. This allows the exporter to lock in the exchange rate for the future and avoid potential fluctuations in the value of the currency. Buying sterling now and selling it at the end of 60 days would expose the exporter to potential losses if the pound devalues during the holding period. Selling the dollar equivalent in the forward market for 60-day delivery would not guarantee a consistent rate of exchange and keeping the sterling in Britain after it is delivered would not remove the risk of loss due to a devaluation.

Question 19

Which of the following would not induce the U.S.demand curve for foreign exchange to shift backward to the left?
A) Worsening American tastes for goods produced overseas
B) Decreasing interest rates in the U.S.compared to those overseas
C) A fall in the level of U.S.income
D) A depreciation in the U.S.dollar against foreign currencies

Accepted Answer

The answer of Which of the following would not induce...

Question 20

The exchange rate is kept the same in all parts of the market by:
A) Forward cover
B) Hedging
C) Exchange speculation
D) Exchange arbitrage

Accepted Answer

The answer of The exchange rate is kept the same...

Quiz 11: Foreign Exchange

Concerning the foreign exchange market,one can best say that:

A U.S.export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by:

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days,you could remove the risk of loss due to the appreciation of the pound by:

Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:

Over time,a depreciation in the value of a nation's currency in the foreign exchange market will result in:

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S.dollar,they would:

Suppose the exchange rate between the Japanese yen and the U.S.dollar is 100 yen per dollar.A Japanese stereo with a price of 60,000 yen will cost:

Concerning the covering of exchange market risks--assuming that a depreciation of the domestic currency is anticipated,one can say that there is an incentive for:

Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice.This finding would likely result in a (an) :

The supply of foreign currency may be:

An appreciation in the value of the U.S.dollar against the British pound would tend to:

An increase in the dollar price of other currencies tends to cause:

A depreciation of the dollar refers to:

A major difference between the spot market and the forward market is that the spot market deals with:

Which of the following tends to cause the U.S.dollar to appreciate in value?

Suppose that real incomes increase more rapidly in the United States than in Mexico.In the United States,this situation would likely result in a (an) :

When short-term interest rates become lower in Tokyo than in New York,interest arbitrage operations will most likely result in a(n) :

Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days.You can remove the risk of loss due to a devaluation of the pound sterling by:

Which of the following would not induce the U.S.demand curve for foreign exchange to shift backward to the left?

The exchange rate is kept the same in all parts of the market by: