Question 1

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?
A)$1.365
B)$1.235
C)$1.330
D)$1.30

Accepted Answer

$1.3× (1- .05) = $1.235

Question 2

British investors frequently invest in the U.S. or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.
A) increase; downward
B) decrease; upward
C) increase; upward
D) decrease; downward

Accepted Answer

The answer of British investors frequently invest in the U.S....

Question 3

If a currency's spot market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.
A) liquid; highly sensitive
B) illiquid; insensitive
C) liquid; insensitive
D) none of the above

Accepted Answer

In a liquid market, there are many buyers and sellers, so a single large transaction is less likely to significantly affect the exchange rate.

Question 4

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.

Accepted Answer

Forecasting currency values is complex and involves various factors, making it difficult to predict how they will change and interact in the future.

Question 5

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:
A) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
B) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.
C) U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a surplus of francs in the foreign exchange market.
D) U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a surplus of Swiss francs in the foreign exchange market.

Accepted Answer

At an exchange rate of $0.83, which is below the equilibrium rate of $0.90, the demand for Swiss francs would exceed the supply, leading to a shortage in the foreign exchange market.

Question 6

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.

Accepted Answer

Financial flow foreign exchange transactions involve buying and selling of financial assets, which are influenced by news and information, including changes in economic policies, interest rates, and geopolitical events. In contrast, trade-related transactions involve actual goods and services and are relatively less impacted by news and information.

Question 7

If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed's action is called ____ intervention.
A) appreciate; direct
B) depreciate; direct
C) appreciate; indirect
D) depreciate; indirect

Accepted Answer

When the Fed decreases U.S. interest rates, it typically leads to a depreciation of the U.S. dollar, causing the euro to appreciate against it. This is an indirect intervention as it influences the currency value through interest rate changes rather than direct market actions.

Question 8

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.
A) increase; increase; increase
B) decrease; increase; decrease
C) remain unchanged; increase; decrease
D) remain unchanged; increase; increase

Accepted Answer

The answer of Assume that the British government eliminates all...

Question 9

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

Accepted Answer

Financial flow transactions, such as investments and speculative trades, are generally more responsive to news because they are driven by market sentiment and expectations, whereas trade-related transactions are based on longer-term business needs and contracts.

Question 10

If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar.
A) appreciate
B) depreciate
C) remain unchanged
D) cannot be determined from the information provided.

Accepted Answer

The answer of If U.S. experiences a sudden surge in...

Question 11

The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.

Accepted Answer

When a market has a smaller amount of foreign exchange trading for speculative purposes, the trade flows hold greater significance on the market. Trade flows are determined by economic conditions and policies of the countries involved, and they tend to have a more consistent pattern. When speculation dominates the market, the trades are based on predictions and assumptions, which can introduce volatility. Therefore, a lower amount of speculative trading is likely to create a more stable market.

Question 12

Movements of foreign currencies tend to be more volatile for shorter time horizons.

Accepted Answer

The answer of Movements of foreign currencies tend to be...

Question 13

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

Accepted Answer

The answer of The standard deviation should be applied to...

Question 14

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

Accepted Answer

Signals regarding future actions of market participants in the foreign exchange market can often lead to overreactions as traders and investors try to anticipate and position themselves accordingly. This can lead to price movements that may not actually reflect the true value of the currency, as emotions and speculation can drive short-term fluctuations.

Question 15

Assume that the income levels in U.K. start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of British pound. Also, assume that U.S. interest rates rise, while the British pound remains unchanged. This will place ____ pressure on the value of British pound.
A) downward; downward
B) upward; downward
C) upward; upward
D) downward; upward

Accepted Answer

The answer of Assume that the income levels in U.K....

Question 16

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the U.S. and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.
A) yen; dollars
B) yen; yen
C) dollars; yen
D) dollars; dollars

Accepted Answer

Banks would borrow dollars and invest in yen to benefit from the expected appreciation of the yen against the dollar, potentially earning a profit when converting back to dollars later.

Question 17

If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

Accepted Answer

The exchange rates between currencies depend on various factors such as economic conditions, political events, and market sentiment. Therefore, a change in one currency's exchange rate against the dollar does not necessarily cause the same change in all other currencies. Each currency's exchange rate will depend on its own unique set of factors.

Question 18

Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.
A) downward; more
B) upward; more
C) downward; less
D) upward; less

Accepted Answer

An increase in inflation and interest rate will put downward pressure on the value of Mexican peso. However, since the total value of investment transactions between U.S. and Mexico is minimal, the impact of these factors on the value of Mexican peso may be less significant. Moreover, the inflation effect should be more pronounced than the interest rate effect as it will reduce the purchasing power of the currency and make its exports more expensive.

Question 19

Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

Accepted Answer

If a currency has high liquidity, it means that there is a high demand for it and it can be easily bought and sold in the market. This can make it more difficult for speculation to have a significant impact on the currency's value, as there are enough buyers and sellers to balance out any potential price movements. On the other hand, a currency with low liquidity may be more susceptible to speculative attacks, as there may not be enough market participants to counteract large buy or sell orders.

Question 20

Government controls can only affect the supply of a given currency for sale and not the demand.

Accepted Answer

Government controls can affect both the supply and demand for a currency. For example, if a government increases interest rates, it can raise demand for its currency by making it more attractive to investors, while simultaneously reducing the supply of currency in circulation by limiting borrowing and lending. Additionally, government policies and regulations can impact the demand for a currency through factors such as trade agreements, geopolitical events, and economic stability.

Quiz 4: Exchange Rate Determination

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?

If a currency's spot market is , its exchange rate is likely to be to a single large purchase or sale transaction.

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.

If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will against the value of U.S. dollar. The Fed's action is called intervention.

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would , the supply of pounds for sale would , and the equilibrium value of the pound would .