Question 1

Which of the following premises is technical analysis,an approach to exchange rate forecasting,based on?

Accepted Answer

A)  Price and volume data cannot be used to determine past trends.
B)  Econometric models drawn from economic theory are best suited to predict exchange rate movements.
C)  The foreign exchange market is efficient and forward exchange rates are the best predictors of future spot exchange rates.
D)  Previous market trends and waves can be used to predict future market trends and waves.
E)  Since forward exchange rates are the best predictors of future spot rates,it makes no sense to invest in forecasting.F) A) and D)
G) C) and E)

Question 2

What happens in the foreign exchange market does not directly impact the sales,profits,and strategy of a multinational enterprise.

Accepted Answer

A) True 
 B)False

Question 3

Robben Inc.converts $1,000,000 into euros when the exchange rate is $1 = €0.75.After three months,the company converts this back into dollars when the exchange rate is $1 = €0.80.Which of the following is the outcome of this transaction?

Accepted Answer

A)  loss of $62,500
B)  loss of $66,667
C)  gain of $50,000
D)  gain of $62,500
E)  loss of $50,000F) All of the above
G) A) and C)

Question 4

Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis?

Accepted Answer

A)  relative strength indicator
B)  moving average
C)  inflation rate
D)  business cycles
E)  regressionF) B) and E)
G) All of the above

Question 5

Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

Accepted Answer

Empirical evidence suggests that neither...

Question 6

How are spot exchange rates determined?

Accepted Answer

A)  using historical average prices of different currencies
B)  the interaction between demand and supply of a currency relative to other currencies
C)  taking the average of a basket of currencies
D)  government decree
E)  predicting future currency movements in nonmember countriesF) All of the above
G) A) and D)

Question 7

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

Accepted Answer

A)  increase in risk appetite making the carry trade less attractive
B)  decrease in interest rate differentials as the U.S.rates came down
C)  increase in interest rate differentials as Japanese interest rates came down
D)  decrease in interest rate differentials as the U.S.interest rates went up
E)  decrease in interest rate differentials as the Japanese rates went upF) A) and B)
G) A) and C)

Question 8

Which of the following is a drawback of the purchasing power parity theory?

Accepted Answer

A)  It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years.
B)  It does not explain change in exchange rates in terms of change in relative prices.
C)  It cannot explain when the demand of a particular currency would exceed its supply and vice versa.
D)  It does not address inflation in situations where governments control the rate of growth in money supply.
E)  It cannot predict exchange rate changes for countries with high rates of inflation and underdeveloped capital markets.F) B) and D)
G) D) and E)

Question 9

In terms of foreign exchange,which of the following observations is true of leading and lagging strategies?

Accepted Answer

A)  They are easy to implement.
B)  They primarily protect long-term cash flows from adverse changes in exchange rates.
C)  Firms need minimal bargaining power to implement them.
D)  They can put pressure on a weak currency.
E)  They accelerate payments from strong-currency to weak-currency countries.F) B) and E)
G) B) and D)

Question 10

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?

Accepted Answer

A)  government intervention in cross-border trade
B)  relationship between money supply and price inflation
C)  impact of increase in currency on relative demand and supply conditions of currencies
D)  excessive growth in money supply
E)  insignificant impact of transportation costs on international tradeF) A) and B)
G) A) and E)

Question 11

Economic exposure,a category of foreign exchange risk,is distinct from transaction exposure,which is concerned with the effect of exchange rate changes on individual transactions,most of which are short-term affairs that will be executed within a few weeks or months.

Accepted Answer

A) True 
 B)False

Question 12

Relative monetary growth,relative inflation rates,and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates.

Accepted Answer

A) True 
 B)False

Question 13

Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is a function of the foreign exchange market?

Accepted Answer

A)  provide some insurance against foreign exchange risk
B)  protect short-term cash flow from adverse changes in exchange rates
C)  eliminate volatile changes in exchange rates
D)  reduce the economic exposure of a firm
E)  enable companies to engage in capital flight when countertrade is not possibleF) A) and E)
G) B) and E)

Question 15

A base model Fitbit costs $100 in the United States and €125 in Europe.What would the purchasing power parity theory's prediction of the dollar/euro exchange rate be based on this example?

Accepted Answer

A)  $1 = €1.25
B)  $1 = €1
C)  $1 = €0.80
D)  $1 = €0.90
E)  $1 = €1.10F) A) and E)
G) None of the above

Question 16

Explain the concept of economic exposure.How is it different from transaction exposure?

Accepted Answer

Foreign exchange risk is usually divided...

Question 17

Which of the following is concerned with the effect of exchange rate changes on individual transactions,most of which are short-term affairs that will be executed within a few weeks or months?

Accepted Answer

A)  purchasing power parity
B)  transaction exposure
C)  economic exposure
D)  translation exposure
E)  currency speculationF) B) and E)
G) A) and C)

Question 18

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately?

Accepted Answer

A)  It assumes away transportation costs and trade barriers.
B)  It does not take into account the law of one price.
C)  It does not take into account the practice of arbitrage.
D)  It assumes that the markets are not efficient.
E)  It does not consider government influence on a nation's money supply.F) B) and E)
G) A) and D)

Question 19

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent.In this scenario,a carry trade would be to

Accepted Answer

A)  borrow money in Maritian currency,convert it into Rhodian currency,and deposit it in a Rhodian bank.
B)  borrow money in Rhodian currency and invest in stocks with good growth potential in Rhodia.
C)  borrow money in Rhodian currency,convert it into Maritian currency,and deposit it in a Maritian bank.
D)  invest in bank deposits of Maritia and reinvest the earnings in Rhodia.
E)  invest in bank deposits of Rhodia and reinvest the earnings in Maritia.F) B) and C)
G) A) and E)

Question 20

Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Accepted Answer

A)  Pricing its products identically despite huge differences in demand across different markets
B)  Differentiating otherwise identical products among nations along some line,such as design or packaging
C)  Adopting a pricing strategy that matches what competitors charge in each of the different national markets
D)  Limiting sales of its products to only a few nations
E)  Selling its products at higher prices than normal to break even by selling fewer unitsF) A) and B)
G) A) and C)

Exam 10: The Foreign Exchange Market

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent.In this scenario,a carry trade would be to

Correct AnswerverifiedShow Answer

Which of the following is a function of the foreign exchange market?

Correct AnswerverifiedShow Answer

Which of the following is a drawback of the purchasing power parity theory?

Correct AnswerverifiedShow Answer

Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates.

Correct AnswerverifiedShow Answer

Explain the concept of economic exposure.How is it different from transaction exposure?

Correct AnswerverifiedForeign exchange risk is usually divided...View AnswerShow Answer

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

Correct AnswerverifiedShow Answer

Explain how investor psychology and bandwagon effects impact the movement in exchange rates.

Correct AnswerverifiedEmpirical evidence suggests that neither...View AnswerShow Answer

How are spot exchange rates determined?

Correct AnswerverifiedShow Answer

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately?

Correct AnswerverifiedShow Answer

Relative monetary growth,relative inflation rates,and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates.

Correct AnswerverifiedShow Answer

What happens in the foreign exchange market does not directly impact the sales,profits,and strategy of a multinational enterprise.

Correct AnswerverifiedShow Answer

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?

Correct AnswerverifiedShow Answer

Which of the following premises is technical analysis,an approach to exchange rate forecasting,based on?

Correct AnswerverifiedShow Answer

Which of the following is concerned with the effect of exchange rate changes on individual transactions,most of which are short-term affairs that will be executed within a few weeks or months?

Correct AnswerverifiedShow Answer

Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

Correct AnswerverifiedShow Answer

Economic exposure,a category of foreign exchange risk,is distinct from transaction exposure,which is concerned with the effect of exchange rate changes on individual transactions,most of which are short-term affairs that will be executed within a few weeks or months.

Correct AnswerverifiedShow Answer

Robben Inc.converts $1,000,000 into euros when the exchange rate is $1 = €0.75.After three months,the company converts this back into dollars when the exchange rate is $1 = €0.80.Which of the following is the outcome of this transaction?

Correct AnswerverifiedShow Answer

In terms of foreign exchange,which of the following observations is true of leading and lagging strategies?

Correct AnswerverifiedShow Answer

Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis?

Correct AnswerverifiedShow Answer

A base model Fitbit costs $100 in the United States and €125 in Europe.What would the purchasing power parity theory's prediction of the dollar/euro exchange rate be based on this example?

Correct AnswerverifiedShow Answer

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Foreign exchange risk is usually divided...
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Empirical evidence suggests that neither...
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