Question 1

One problem that investors in foreign countries face is the possibility of a decline in the value of that foreign country's currency.Which of the following would be an effective way to offset this problem?

Accepted Answer

Hedging through currency swaps involves exchanging currencies with another party in order to lock in a certain exchange rate, thus mitigating the risk of currency fluctuations. This can help offset the problem of a decline in the value of the foreign country's currency. Options A and B do not provide a strategic solution to the problem, while option D may not be feasible for all investors or investments.

Question 2

When the supply and demand of currencies in the foreign exchange market determines their relative values,this is known as

Accepted Answer

Flexible exchange rates are determined by the supply and demand of currencies in the foreign exchange market. As demand for a currency increases, its value relative to other currencies also increases, leading to appreciation. Conversely, if demand decreases, the currency's value decreases, leading to depreciation. Fixed exchange rates, on the other hand, are set by government policy and do not fluctuate based on market forces.

Question 3

Foreign exchange risk is

Accepted Answer

Foreign exchange risk refers to the possibility that changes in the value of a nation's currency will result in variations in the market value of assets. This risk can be managed through financial strategies such as hedging, which involves taking positions that offset the potential losses that may arise from currency fluctuations. Option A describes a potential solution, but does not accurately define foreign exchange risk. Option B refers to a specific exchange rate arrangement, not foreign exchange risk. Option D refers to government intervention in exchange rates, but does not accurately define foreign exchange risk.

Question 4

If a country wants to keep the value of its currency fixed,then its central bank should

Accepted Answer

The answer of If a country wants to keep the...

Question 5

If a central bank wants to keep the value of its home currency fixed in the foreign exchange market,then an increase in the demand for its home currency will lead the central bank to

Accepted Answer

The answer of If a central bank wants to keep...

Question 6

A financial strategy that reduces the chance of suffering losses arising from foreign exchange risk is referred to as

Accepted Answer

Hedging is a financial strategy used to reduce the risk of losses arising from foreign exchange fluctuations. It involves taking a position in a financial instrument that offsets the risk of another position in order to limit potential losses. The aim is to reduce uncertainty and protect assets through the use of financial instruments such as currency futures, options, and forwards. Foreign exchange leverage refers to the use of borrowed funds to speculate on currency movements and is not an effective strategy for reducing foreign exchange risk. Conversion depletion and transaction mitigation are not commonly used financial concepts related to foreign exchange risk.

Question 7

The possibility that changes in the value of a nation's currency will result in variations in the market value of a business's assets is referred to as

Accepted Answer

Foreign exchange risk refers to the possibility that changes in the value of a nation's currency will result in variations in the market value of a business's assets. This risk is most relevant for companies that have assets or liabilities denominated in foreign currencies or engage in international trade. Hedge risk, conversion risk, and transaction risk are all related to foreign exchange risk but refer to specific types of risks within this broader category.

Question 8

If a country moves from fixed to flexible exchange rates,its macroeconomic policy

Accepted Answer

When a country moves from fixed to flexible exchange rates, it gains more autonomy over its macroeconomic policy, including the ability to use both fiscal and monetary policy tools more freely, without the need to maintain a fixed exchange rate.

Question 9

Suppose the currency price of the U.S.dollar in terms of the Japanese yen starts to fall.To prevent that from occurring,the U.S.central bank should

Accepted Answer

To prevent the U.S. dollar from falling in value against the Japanese yen, the U.S. central bank should use its yen reserves to buy U.S. dollars in the foreign exchange market. This action increases the demand for U.S. dollars relative to the yen, thereby supporting or potentially increasing the value of the U.S. dollar against the yen.

Question 10

The foreign exchange system that has the highest foreign exchange risk is

Accepted Answer

The answer of The foreign exchange system that has the...

Question 11

Assume the U.S.government wants to hold the value of the dollar at $1.00 U.S.equals 100 Japanese yen,but it finds that the value of yen is appreciating against the U.S.dollar.What would be an appropriate policy to reverse this trend?

Accepted Answer

The answer of Assume the U.S.government wants to hold the...

Question 12

If an exporter wants to limit the effect of possible changes in the exchange rate on the value of her exports,then she can adopt a strategy known as

Accepted Answer

The strategy of hedging involves taking measures to protect against potential losses due to fluctuations in exchange rates. By hedging, the exporter can limit the negative impact of currency fluctuations on the value of her exports. Floating refers to a currency exchange rate that is not fixed and is determined by the market. Speculating involves taking risks to profit from exchange rate movements. Appreciating refers to an increase in the value of a currency.

Question 13

A hedge is

Accepted Answer

A hedge is a financial strategy that involves taking an offsetting position to reduce the risk of losses from price movements in an asset. In the context of foreign exchange risk, a company may use a hedge to protect against adverse movements in exchange rates by taking a position in the foreign currency that offsets the potential loss in the value of their assets denominated in that currency.

Question 14

If a country wants to keep its exchange rate fixed,it must

Accepted Answer

To keep its exchange rate fixed, a country must vary the amount of its national currency supplied at any given exchange rate in foreign exchange markets when necessary. This means that the country must intervene in foreign exchange markets by buying or selling its currency to maintain the fixed exchange rate. The amount of currency supplied may need to be adjusted depending on market conditions and demand for the country's currency. A fixed exchange rate regime requires active management by the country's central bank, rather than allowing the currency value to vary freely with market supply and demand. Membership in the IMF is not required to fix the exchange rate, and eliminating foreign exchange reserves would make it difficult to intervene in foreign exchange markets if necessary.

Question 15

Which of the following best describes exchanges rates that are determined by the demand and supply foreign exchange in the absence of official intervention?

Accepted Answer

Floating exchange rates are determined by the demand for and supply of foreign exchange in the market without any official intervention. The value of a currency is based on market forces, such as trade flows and capital flows, and therefore fluctuates freely.

Question 16

A currency swap can

Accepted Answer

Currency swaps are financial agreements between two parties to exchange a specific amount of one currency for another currency, often for the purpose of reducing foreign exchange risk. By swapping currencies, both parties can mitigate the risks and costs associated with fluctuations in exchange rates. This makes choice C the correct answer as a currency swap reduces foreign exchange risk. The other options are incorrect as they have the opposite effect of what a currency swap aims to achieve.

Question 17

Which of the following is an advantage of fixing exchange rates?

Accepted Answer

Fixing exchange rates limits foreign exchange risk for both traders and investors. It allows them to plan their transactions and investments without worrying about changes in exchange rates.

Question 18

Suppose the Chinese central bank wants to keep the exchange rate of its currency value constant over time.An increase in the demand for Chinese goods by American residents will lead the Chinese central bank to

Accepted Answer

An increase in the demand for Chinese goods by American residents will increase the demand for Chinese currency, leading to an appreciation of the Chinese currency. In order to keep the exchange rate constant, the Chinese central bank will then need to sell Chinese currency in exchange for U.S. dollars in the foreign exchange market, thereby increasing the supply of Chinese currency and maintaining the exchange rate.

Question 19

Assume the U.S.government wants to hold the value of the dollar at $1.00 U.S.equals 10 Chinese yuan,but it finds that the value of yuan is depreciating against the U.S.dollar.What would be an appropriate policy to reverse this trend?

Accepted Answer

The answer of Assume the U.S.government wants to hold the...

Question 20

Suppose the Canadian central bank wants to keep the exchange rate of the Canadian dollar with the U.S.dollar constant over time.An increase in the demand for Canadian goods by American residents will lead the Canadian central bank to

Accepted Answer

To keep the exchange rate constant in the face of increased demand for Canadian goods (and thus Canadian dollars), the Canadian central bank would increase the supply of Canadian dollars in the foreign exchange market. This action counteracts the upward pressure on the Canadian dollar's value by making more Canadian dollars available to meet the increased demand.

Quiz 33: Exchange Rates and the Balance of Payments

One problem that investors in foreign countries face is the possibility of a decline in the value of that foreign country's currency.Which of the following would be an effective way to offset this problem?

When the supply and demand of currencies in the foreign exchange market determines their relative values,this is known as

Foreign exchange risk is

If a country wants to keep the value of its currency fixed,then its central bank should

If a central bank wants to keep the value of its home currency fixed in the foreign exchange market,then an increase in the demand for its home currency will lead the central bank to

A financial strategy that reduces the chance of suffering losses arising from foreign exchange risk is referred to as

The possibility that changes in the value of a nation's currency will result in variations in the market value of a business's assets is referred to as

If a country moves from fixed to flexible exchange rates,its macroeconomic policy

Suppose the currency price of the U.S.dollar in terms of the Japanese yen starts to fall.To prevent that from occurring,the U.S.central bank should

The foreign exchange system that has the highest foreign exchange risk is

Assume the U.S.government wants to hold the value of the dollar at $1.00 U.S.equals 100 Japanese yen,but it finds that the value of yen is appreciating against the U.S.dollar.What would be an appropriate policy to reverse this trend?

If an exporter wants to limit the effect of possible changes in the exchange rate on the value of her exports,then she can adopt a strategy known as

A hedge is

If a country wants to keep its exchange rate fixed,it must

Which of the following best describes exchanges rates that are determined by the demand and supply foreign exchange in the absence of official intervention?

A currency swap can

Which of the following is an advantage of fixing exchange rates?

Suppose the Chinese central bank wants to keep the exchange rate of its currency value constant over time.An increase in the demand for Chinese goods by American residents will lead the Chinese central bank to

Assume the U.S.government wants to hold the value of the dollar at $1.00 U.S.equals 10 Chinese yuan,but it finds that the value of yuan is depreciating against the U.S.dollar.What would be an appropriate policy to reverse this trend?

Suppose the Canadian central bank wants to keep the exchange rate of the Canadian dollar with the U.S.dollar constant over time.An increase in the demand for Canadian goods by American residents will lead the Canadian central bank to