chapter 9 the foreign exchange market - tex-cetera 4e tb09.pdfchapter 9 the foreign exchange market...
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Chapter 9 The Foreign Exchange Market1) A stronger Korean won, remembering that Kia cars sold in the United States are paid for in dollars,
means what for the Korean based Kia?A) a need to hedge Japanese yenB) a use for the Euro, a neutral currencyC) less profitD) a use for gold to protect against currency fluctuationsE) more profit
Answer: CDiff: 2
2) The ________ is a market for converting the currency of one country into that of another.A) foreign exchange marketB) cross-cultural interchangeC) financial barter marketD) monetary replacement marketE) international currency spot market
Answer: ADiff: 1
3) The rate at which one currency is converted into another is called the ________.A) replacement percentageB) resale rateC) exchange rateD) interchange ratioE) valuation rate
Answer: CDiff: 1
4) Without the ________ market, international trade and international investment on the scale that wesee today would be impossible.
A) foreign exchangeB) financial barterC) foreign resaleD) monetary replacementE) capital market
Answer: ADiff: 1
5) Although the ________ offers some insurance against foreign exchange risk, it cannot providecomplete insurance.
A) foreign exchange marketB) the EuroC) World BankD) foreign currency exchangeE) the CDC
Answer: ADiff: 1
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6) The ________ is the market that enables companies based in countries that use different currenciesto trade with each other.
A) World BankB) foreign currency exchangeC) foreign exchange marketD) foreign monetary martE) foreign exchange mechanism
Answer: CDiff: 1
7) The movement of foreign exchange ratesA) provide some insurance against foreign exchange risk.B) has significantly deteriorated the overall volume of foreign trade.C) sets interest rates charged to foreign investors.D) introduces many risks into international trade and investment.E) is a natural function of supply and demand among currency traders.
Answer: DDiff: 2
8) When a tourist exchanges one currency into another, she is participating in the:A) foreign barter marketB) foreign exchange marketC) foreign replacement marketD) foreign swap marketE) international trade exchange
Answer: BDiff: 1
9) The ________ is the rate at which the market converts one currency into another.A) international conversion factorB) world barter factorC) foreign exchange rateD) global replacement percentageE) discount rate
Answer: CDiff: 2
10) One function of the foreign exchange market is to provide some insurance against the risks thatarise from changes in exchange rates, commonly referred to as:
A) foreign market hazardB) global jeopardyC) foreign exchange riskD) commerce uncertaintyE) trade payment risk
Answer: CDiff: 2
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11) Which of the following statements is true?A) The existence of the foreign exchange market has removed all forms of foreign exchange
risk for business organizations.B) Despite the existence of the foreign exchange market, firms do suffer losses because of
unpredicted changes in exchange rates, although these occasions are rare.C) The foreign exchange market eliminates very little foreign exchange risk.D) The foreign exchange market is characterized by large numbers of speculators who increase
the foreign exchange risk for firmsE) Despite the existence of the foreign exchange market, it is not unusual for international
businesses to suffer losses because of unpredicted changes in exchange rates.Answer: EDiff: 3
12) The foreign exchange market serves two main functions. These are what?A) collect duties on imported products and convert the currency of one country into the
currency of another.B) insure companies against foreign exchange risk and set interest rates charged to foreign
investors.C) collect duties on imported products and set interest rates charged to foreign investors.D) convert the currency of one country into the currency of another and provide some insurance
against foreign exchange risk.E) reduce the trade imbalances between countries and convert the currency of one country into
another.Answer: DDiff: 2
13) The foreign exchange market converts the currency of one country into the currency of anotherand:
A) provides some insurance against foreign exchange riskB) collects duties on imported productsC) sets interest rates charged to foreign investorsD) arbitrates disputes between trade partnersE) reduces trade imbalances between countries
Answer: ADiff: 2
14) Tourists are minor participants in what?A) the currency conversion exchangeB) capital venturingC) foreign travelingD) FDIE) the foreign exchange market
Answer: EDiff: 2
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15) Canadian businesses will normally use the ________ in international transactions.A) German markB) EuroC) U.S. dollarD) Japanese yenE) British pound
Answer: CDiff: 2
16) Small Canadian businesses will be ________ than large Canadian businesses to be exposed tocurrency risk associated with the Canadian dollar.
A) less likelyB) unlikelyC) likelyD) probably likelyE) more likely
Answer: EDiff: 2
17) Which of the following is NOT one of the four main uses that international businesses have for theforeign exchange market?
A) International businesses use foreign exchange markets to convert money they earn in foreigncurrencies to their home currencies
B) International businesses use foreign exchange markets in determining domestic wage ratesC) International businesses use foreign exchange markets when they have spare cash that they
wish to invest for short terms in money marketsD) Currency speculationE) Short term money market investments
Answer: BDiff: 3
18) ________ typically involves the short-term movement of funds from one currency to another in thehopes of profiting from shifts in exchange rates.
A) Capital venturingB) Currency speculationC) Monetary risk takingD) Investment contemplationE) Currency conversion
Answer: BDiff: 1
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19) Barrick Gold used, until 2009, a(n) ________ strategy to protect itself against changes in the priceof gold.
A) Gold swapB) forward gold exchangeC) insuranceD) spot gold exchangeE) gold hedging
Answer: EDiff: 1
20) Currency speculation typically involves what?A) the short-term movement of funds from one currency to another in the hopes of profiting
from shifts in exchange ratesB) the permanent movement of funds from one currency to another in the hopes of profiting
from long-term investment in a particular countryC) the simultaneous purchase of currencies from several countries in hopes of profiting from
increasing economic prosperityD) the liquidation of currency in favour of precious metals as a hedge against inflationE) buying low and holding currency until it stabilizes, and then selling
Answer: ADiff: 2
21) What do many Canadian businesspeople NOT buy into with respect to the value of the Canadiandollar?
A) A stronger dollar will result in more outbound tourism.B) A weaker dollar is good for tourists coming to Canada.C) A stronger dollar means that Canadian resources are more in demand.D) A weaker dollar will make imports more expensive.E) A stronger dollar will reduce demand for Canada's exports.
Answer: EDiff: 3
22) When two parties agree to exchange currency and execute the deal immediately, the transaction isreferred to as a ________.
A) point-in-time exchangeB) temporal exchangeC) spot exchangeD) forward exchangeE) transaction
Answer: CDiff: 1
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23) When a U.S. tourist in Japan goes to a bank to convert her dollars into Japanese yen, the exchangerate is the
A) forward exchange rate.B) regulated exchange rate.C) sanctioned exchange rate.D) spot exchange rate.E) Japanese central bank rate.
Answer: DDiff: 2
24) It is necessary to use a ________ exchange rate to execute a transaction immediately.A) real timeB) spotC) statutoryD) sanctionedE) bank determined
Answer: BDiff: 2
25) ________ are reported on a real time basis on many financial Web sites.A) Real time ratesB) Spot exchange ratesC) Sanctioned ratesD) Statutory exchange ratesE) Hedging costs
Answer: BDiff: 2
26) The value of a currency is determined byA) the interaction between the demand and supply of that currency relative to the demand and
supply of other currencies.B) a consortium of international currency traders.C) the World Trade Organization.D) negotiations between the central banks of the leading five industrial powers of the world.E) currency speculators.
Answer: ADiff: 2
27) A ________ exchange occurs when two parties agree to exchange currency and execute the deal atsome specific date in the future.
A) reverseB) spotC) hedgeD) forwardE) futures
Answer: DDiff: 2
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28) ________ exchange rates represent market participants' collective predictions of likely spotexchange rates at specified future dates.
A) ReciprocalB) HedgeC) ReverseD) ForwardE) Future
Answer: DDiff: 2
29) A(n) ________ is purchase and sale of a given amount of foreign exchange for two different valuedates, at the same time.
A) currency swapB) FDIC) economic fundD) short sellingE) arbitrage group
Answer: ADiff: 1
30) ________ occurs when an investor purchases securities in one market for immediate resale inanother.
A) Hedge fundB) Foreign direct investmentC) Foreign exchange riskD) ArbitrageE) Financial gain
Answer: DDiff: 1
31) An importer enters into a 60 day forward exchange rate for converting dollars into yuan. The spotexchange rate is 5.28 yuan for 1 dollar. The forward exchange rate is 5.27 yuan for 1 dollar. Howmany yuan would the importer get for 50,000 dollars?
A) 264,000B) 364,000C) 364,500D) 353,500E) 263,500
Answer: EDiff: 3
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32) An importer enters into a 60 day forward exchange rate for converting dollars into yuan. The spotexchange rate is 5.28 yuan for 1 dollar. The forward exchange rate is 5.27 yuan for 1 dollar. Whatis the difference in the amount the importer receives using the forward exchange rate and the spotexchange rate.
A) 100,000B) 5,000C) 500D) 50E) 250
Answer: CDiff: 3
33) Rates for currency exchange quoted for 30, 90, or 180 days into the future are referred to as________.
A) forward exchange ratesB) foreign exchange quotesC) united trade ratesD) generic exchange quotesE) future exchange rates
Answer: ADiff: 1
34) Current estimates are that currencies worth approximately ________ trillion dollars (U.S.) weretraded every day.
A) 1B) 200C) 13D) 4.2E) 5.3
Answer: EDiff: 3
35) When the dollar buys more yen on the spot market than the 30-day forward market, we say thedollars is selling at a ________. Conversely, when the dollars buys fewer yen on the spot marketthan the 30-day forward market, we say the dollar is selling at a ________.
A) premium; discountB) handicap; bonusC) discount; premiumD) subsidy; handicapE) gain; loss
Answer: CDiff: 3
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36) The foreign exchange market:A) is not located in any one placeB) is located in New York CityC) has offices in the Capitols of the five most powerful industrialized nations in the worldD) is located in LondonE) is managed by the UN
Answer: ADiff: 2
37) The most important trading centers for the foreign exchange market are inA) New York, Singapore, Tokyo.B) San Paulo, New York, and Paris.C) San Francisco, Tokyo, and Singapore.D) New York, Hong Kong, and Paris.E) London, New York, and Tokyo.
Answer: EDiff: 3
38) One feature of the London exchange market is ________.A) Lower exchange feesB) Higher marginsC) New investment productsD) The ability to short the marketE) Its geography between the Tokyo and New York Markets
Answer: EDiff: 3
39) Which of the following is a feature of the foreign exchange market?A) The market never sleeps.B) The market has not yet created a global link.C) There are not yet significant differences in the exchange rates.D) High-speed computer linkages between trading centers have yet to be created.E) Prices for various currencies are primarily set in New York and London.
Answer: ADiff: 2
40) The largest trading center in the foreign exchange market is ________.A) Hong KongB) LondonC) San PauloD) ParisE) New York
Answer: BDiff: 3
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41) The process of buying a currency low and selling it high at the same time is calledA) forward exchange.B) skimming.C) profiteering.D) arbitrage.E) hedging.
Answer: DDiff: 1
42) If the prices differed in London and New York and a dealer spent $1 million to purchase 125million, then sold that 125 immediately for $1.046666 million, the trader would earn a profit of$46,666 on the transaction. This is accomplished through
A) arbitrage.B) skimming.C) FDI.D) pre exchange agreements.E) buying low and selling high.
Answer: ADiff: 2
43) Although a foreign exchange transaction can involve any two currencies, most transactions involveA) Japanese yen.B) British pounds.C) U.S. dollars.D) French francs.E) Euros.
Answer: CDiff: 2
44) At the most basic level, exchange rates are determined by the demand and supply of one currencyrelative to the
A) permanent value of another.B) 30-day average of another.C) 90-day average of another.D) demand and supply of another.E) market psychology.
Answer: DDiff: 2
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45) Most economic theories suggest that three import factors have an important impact on futureexchange rate movements in a country's currency. These factors are
A) the country's price inflation, its interest rate, and its market philosophy.B) the country's rate of GNP, its unemployment rate, and its economic policy.C) the country's participation in the World Trade Organization, its monetary policy, and its
market philosophy.D) the country's rate of economic growth, its participation in the World Trade Organization, and
its economy policy.E) the country's economic policy, its trade balance, and its national deficits.
Answer: ADiff: 3
46) The three factors that have the most important impact on future exchange rate movement includethe country's price inflation, its market philosophy, and its ________.
A) rate of economic growthB) unemployment rateC) interest rateD) participation in the World Trade OrganizationE) current account balance
Answer: CDiff: 2
47) The law of one price and purchasing power parity are two components ofA) market psychology.B) price and exchange rates.C) interest rate.D) prices inflation.E) economic theory.
Answer: BDiff: 2
48) The ________ states that in competitive markets free of transportation costs and barriers to trade,identical products sold in different countries must sell for the same price when their price isexpressed in terms of the same currency.
A) law of one priceB) principle of consistent pricingC) model of fair pricingD) principle of equitable pricingE) law of purchasing power equity
Answer: ADiff: 2
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49) According to the ________, identical products sold in different countries must sell for the sameprice when their price is expressed in the same currency in competitive markets free oftransportation costs and barriers to trade.
A) model of fair pricingB) law of purchasing power equityC) principle of equitable pricingD) principle of consistent pricingE) law of one price
Answer: EDiff: 2
50) The exchange rate between the British pound and the dollar is 1 = $1.50 and a jacket that retailsfor $75 in New York sells for 50 in London ($75/1.5 = 50). This reflects what?
A) model of fair pricingB) law of one priceC) principle of equitable pricingD) principle of consistent pricingE) purchasing power equity
Answer: BDiff: 2
51) The text gives Bolivia as an example of the impact of ________ on exchange rates.A) interest ratesB) trade imbalancesC) market psychologyD) bad economic managementE) money supply
Answer: EDiff: 2
52) PPP theory stands for what?A) productivity power premium theoryB) process productivity predictor theoryC) purchasing power parity theoryD) personal power predictor theoryE) production possibilities parameter theory
Answer: CDiff: 2
53) A(n) ________ has no impediments to the free flow of goods and services.A) classical marketB) efficient marketC) traditional marketD) inefficient marketE) free market
Answer: BDiff: 1
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54) A less extreme version of the PPP theory state that given ________ the price of a "basket ofgoods" should be roughly equivalent in each country.
A) tolerant marketsB) relatively efficient marketsC) classical marketsD) closed marketsE) free markets
Answer: BDiff: 1
55) If the law of one price were true for all goods and services, the ________ exchange rate could befound from any individual set of prices.
A) stability power similarity (SPS)B) purchasing ability adeptness (PAA)C) buying prowess equality (BPE)D) purchasing power parity (PPP)E) spot
Answer: DDiff: 3
56) A(n) ________ is a market in which few impediments to international trade and investment exist.A) relatively efficient marketB) consistently inefficient marketC) absolutely free marketD) absolutely closedE) free market
Answer: ADiff: 2
57) The ________ theory tells us that a country with a high inflation rate will see deprecation in itscurrency exchange rate.
A) law of one priceB) monetary systemC) PPPD) price inflationE) currency determinism
Answer: CDiff: 3
58) In essence, PPP theory predicts thatA) there is no relationship between changes in relative prices and changes in exchange rates.B) changes in relative prices will result in stability in exchange rates.C) stability in relative prices will result in a change in exchange rates.D) changes in relative prices will result in a change in exchange rates.E) changes in market barriers will result in changes in exchange rates
Answer: DDiff: 3
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59) A less extreme version of the PPP theory states that given ________, that is, markets in which fewimpediments to international trade and investment exist-the price of a "basket of goods" should beroughly equivalent in each country.
A) relatively efficient marketsB) statutory marketsC) stable marketsD) absolutely free marketsE) mixed economies
Answer: ADiff: 3
60) In essence, the ________ theory predicts that changes in relative prices will result in a change inexchange rates.
A) buying power equality (BPE)B) purchasing power parity (PPP)C) stability power similarity (SPS)D) buying prowess equality (BPE)E) price stabilization potential (PSP)
Answer: BDiff: 3
61) Theoretically, a country in which price inflation is running wild should expect to see its currencydepreciate against that of countries in which inflation rates are lower refers to
A) buying purchase power.B) purchasing power parity.C) power similarities.D) comparative advantage.E) national competitive disadvantage.
Answer: BDiff: 2
62) The Canadian money supply is growing more rapidly than Canadian output. Dollars will berelatively more plentiful than the currencies of countries where monetary growth is closer tooutput growth. This is an example of
A) buying purchase power.B) buying prowess equality.C) stability power similarities.D) purchasing power parity.E) inflationary pressures.
Answer: DDiff: 2
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63) Inflation is a(n) ________ phenomenon.A) legalB) politicalC) monetaryD) socialE) economic
Answer: CDiff: 2
64) According to our textbook, when the growth in a country's money supply is faster than the growthin its output, ________ is(are) fuelled.
A) economic growthB) unemploymentC) inflationD) per capita savingsE) wage increases
Answer: CDiff: 3
65) The PPP theory tells us that a country with a high inflation rate will see:A) a depreciation in its currency exchange rateB) an appreciation in its currency exchange rateC) no change in its currency exchange rate as a result of the inflation rateD) economic stability as a result of high inflationE) price rises to match neighbouring country prices
Answer: ADiff: 2
66) Economic theory tells us that ________ rates reflect expectations about likely future inflationrates.
A) currencyB) exchangeC) interestD) unemploymentE) forward
Answer: CDiff: 2
67) ________ determines whether the rate of growth in a country's money supply is greater than therate of growth in output.
A) The international monetary authorityB) Market mechanismsC) The private sectorD) Government policyE) Demand for money
Answer: DDiff: 3
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68) The inevitable result of excessive growth in money supply is calledA) interest rate.B) price inflation.C) economic growth.D) per capita savings.E) wage increases.
Answer: BDiff: 2
69) PPP theory predicts that changes in ________ will result in a change in exchange rates.A) relative pricesB) interest ratesC) unemployment ratesD) statutory pricesE) wholesale prices
Answer: ADiff: 2
70) According to the textbook, PPP theory does not seem to be a particularly good predictor ofexchange rate movements for time spans of
A) one year or less.B) three years or less.C) five years or less.D) ten years or less.E) twenty years or less.
Answer: CDiff: 3
71) The ________ is less useful for predicting exchange movements between the currencies ofadvanced industrialized nation that have relatively small differentials in inflation rates.
A) tolerant marketB) efficiency theoryC) PPP theoryD) closed marketE) supply and demand mechanism
Answer: CDiff: 3
72) The PPP theory seems to best predict exchange rate changes for countries with what?A) very low rates of inflation and developed capital markets.B) very low rates of inflation and underdeveloped capital markets.C) very high rates of inflation and underdeveloped capital markets.D) very high rates of inflation and developed capital markets.E) low rates of inflation and underdeveloped capital markets
Answer: CDiff: 3
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73) The ________ states that for any two countries, the spot exchange rate should change in an equalamount but in the opposite direction to the difference in the nominal interest rates between the twocountries.
A) Worldwide James EffectB) Universal Phillips EffectC) International Fisher EffectD) Global Miller EffectE) Law of One Price Effect
Answer: CDiff: 2
74) The International Fisher Effect states that for any two countries, the ________ exchange rateshould change in an equal amount but in the opposite direction to the difference in the nominalinterest rates between the two countries.
A) reciprocalB) spotC) forwardD) inwardE) future
Answer: BDiff: 2
75) According to the International Fisher Effect, if the real rate of interest in a country is 5 percent andthe annual inflation is expected to be 10 percent, the nominal interest rate will be
A) 5 percent.B) 10 percent.C) 12.5 percent.D) 15 percent.E) 20 percent.
Answer: DDiff: 3
76) Empirical evidence suggests that neither PPP theory nor the International Fisher Effect isparticularly good at explaining
A) long-term movements in exchange rates.B) interest rates.C) short-term movements in exchange rates.D) unemployment rates.E) short-term wage levels.
Answer: CDiff: 3
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77) Short run exchange rate movements may be explained by ________.A) the bandwagon effectB) investor expectationsC) psychological factorsD) nominal interest ratesE) the bandwagon effect, investor expectations, and psychological factors
Answer: EDiff: 3
78) Investor expectations about likely future exchange rates have a tendency to become ________.A) the PPPB) speculative exchange ratesC) self-fulfilling propheciesD) the IFEE) interest rates
Answer: CDiff: 2
79) The ________ market school argues that forward exchange rates do the best possible job offorecasting future spot exchange rates, so investing in exchange rate forecasting services would bea waste of time.
A) efficientB) closedC) inefficientD) freeE) open
Answer: ADiff: 2
80) The ________ market school argues that companies can improve the foreign exchange market'sestimate of future exchange rates by investing in forecasting services.
A) inefficientB) freeC) openD) closedE) efficient
Answer: EDiff: 3
81) A(n) ________ market is one in which prices do not reflect all available information.A) efficientB) inefficientC) freeD) closedE) regulated
Answer: BDiff: 2
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82) In an ________ market, forward exchange rates will NOT be the best possible predictors of futurespot exchange rates.
A) closedB) inefficientC) efficientD) reciprocalE) regulated
Answer: BDiff: 3
83) ________ draws on economic theory to construct sophisticated econometric models for predictingexchange rate movements.
A) Principal investigationB) Fundamental analysisC) Primary evaluationD) Technical analysisE) Economic analysis
Answer: BDiff: 2
84) The variables in fundamental analysis models can include what?A) priceB) volumeC) investor psychologyD) the bandwagon effectE) money supply
Answer: EDiff: 2
85) ________ uses price and volume data to determine past trends, which are expected to continue intothe future.
A) Principal investigationB) Primary evaluationC) Fundamental analysisD) Technical analysisE) Econometric analysis
Answer: DDiff: 2
86) The type of analysis that predicts exchange rate movements by using price and volume data todetermine past trends is called
A) fundamental analysis.B) primary evaluation.C) technical analysis.D) principal investigation.E) econometric analysis.
Answer: CDiff: 2
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87) ________ is based on the premise that analyzable market trends and waves can be used to predictfuture trends and waves.
A) Technical analysisB) Fundamental analysisC) Basic analysisD) Central analysisE) Econometric analysis
Answer: ADiff: 2
88) Because there is no theoretical rationale for assumptions of predictability, many economistscompare ________ to fortune telling.
A) technical analysisB) PPPC) exchange rate analysisD) inflation ratesE) currency speculation
Answer: ADiff: 2
89) A country's currency is said to be ________ when the country's government allows both residentsand non-residents to purchase unlimited amounts of foreign currency with it.
A) technically convertibleB) freely convertibleC) externally convertibleD) nonconvertibleE) internally convertible
Answer: BDiff: 1
90) ________ is most likely to occur when the value of the domestic currency is depreciating rapidlybecause of hyperinflation.
A) Counter tradeB) Separate tradeC) Reciprocal tradeD) Capital flightE) Run on banks
Answer: DDiff: 2
91) A currency is said to be ________ when only non-residents may convert it into a foreign currencywithout any limitations.
A) externally convertibleB) freely convertibleC) technically convertibleD) nonconvertibleE) internally convertible
Answer: ADiff: 2
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92) A currency is ________ when neither residents nor non-residents are allowed to convert it into aforeign currency.
A) freely convertibleB) nonconvertibleC) externally convertibleD) technically convertibleE) inconvertible
Answer: BDiff: 2
93) A government restricts the convertibility of its currency to protect the country's ________ and tohalt any capital flight.
A) membership in the World Trade OrganizationB) foreign exchange reservesC) political statureD) national sovereigntyE) economic stability
Answer: BDiff: 3
94) ________ refers to a range of barter-like agreements by which goods and services can be tradedfor other goods and services.
A) Separate tradeB) Reciprocal tradeC) CountertradeD) Alternative tradeE) Cashless trade
Answer: CDiff: 1
95) If an Canadian grain company exported corn to Russia, and instead of receiving nonconvertibleRussian currency in exchange for the corn received Russian crude oil, that would be an example of________.
A) countertradeB) synergistic tradeC) separate tradeD) reciprocal tradeE) barter trade
Answer: ADiff: 2
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96) Currency exchange fluctuations are important for a business to understand because they can________.
A) affect profitability in an international transactionB) affect pricing in a country marketC) affect the competitive advantage of a companyD) increase costs for imported goodsE) All of these answers are correct.
Answer: EDiff: 1
97) A stronger Korean won means that Kia cars sold in Canada for dollars are recorded at a highervalue when translated back into won in Korea.Answer: FALSEDiff: 2
98) The international reserve market is a market for converting the currency of one country into that ofanother country.Answer: FALSEDiff: 1
99) Without the foreign market exchange, international trade and international investment on the scalethat we see today would be impossible.Answer: TRUEDiff: 1
100) In addition to altering the value of trade deals and foreign investments, currency movements canalso open or close export opportunities and alter the attractiveness of imports.Answer: TRUEDiff: 1
101) An exchange rate is simply the rate at which one currency is converted into another.Answer: TRUEDiff: 1
102) In international trade, the risk of not getting paid for a product that is exported from one country toanother is referred to foreign exchange risk.Answer: FALSEDiff: 2
103) The market through which an individual or institution exchanges one currency into another iscalled the foreign exchange market.Answer: TRUEDiff: 2
104) When a tourist changes one currency into another, she is participating in currency speculation.Answer: FALSEDiff: 2
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105) Tourists play a major role in the foreign exchange market.Answer: FALSEDiff: 3
106) Currency speculation typically involves the short-term movement of funds from one currency toanother in the hopes of profiting from shifts in exchange rates.Answer: TRUEDiff: 2
107) When a Canadian tourist in England goes to a bank to convert her dollars in pounds, the exchangerate is the forward exchange rate.Answer: FALSEDiff: 2
108) Spot exchange rates change daily as determined by the relative demand and supply for differencecurrencies.Answer: TRUEDiff: 2
109) A forward exchange occurs when two parties agree to exchange currency and execute the deal atsome specific date in the future.Answer: TRUEDiff: 1
110) A forward exchange is an investment fund that not only buys financial assets but also sells themshort.Answer: FALSEDiff: 2
111) A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange fortwo different value dates.Answer: TRUEDiff: 1
112) Arbitrage is the process of buying a currency high and selling it low.Answer: FALSEDiff: 2
113) At the basic level, exchange rates are determined by the demand and supply of one currencyrelative to the demand and supply for another.Answer: TRUEDiff: 1
114) The law of one price states that identical products sold in different countries must sell for the sameprice when their price is expressed in the same currency in competitive markets free oftransportation costs and barriers to trade.Answer: TRUEDiff: 2
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115) According to the International Fisher Effect, for any two countries, the spot exchange rate shouldchange in an equal amount but in the opposite direction to the difference in the nominal interestrates between the two countries.Answer: TRUEDiff: 3
116) An efficient market has significant impediments to the free flow of goods and services.Answer: FALSEDiff: 1
117) An efficient market is one in which prices reflect all available public information.Answer: TRUEDiff: 3
118) Fundamental analysis uses price and volume data to determine past trends, which are expected tocontinue into the future.Answer: FALSEDiff: 2
119) Technical analysis draws on economic theory to construct sophisticated econometric models forpredicting exchange rate movements.Answer: FALSEDiff: 2
120) A currency is said to be externally convertible when only non-residents may convert it into foreigncurrency without limitations.Answer: TRUEDiff: 2
121) A country's currency is said to be freely convertible when neither residents nor non-residents areallowed to convert it into a foreign currency.Answer: FALSEDiff: 2
122) The majority of the countries in the world have currency that is freely convertible.Answer: FALSEDiff: 2
123) You are the manager of a company that operates internationally providing agricultural equipmentthat has been manufactured and assembled in Canada. You have sold your products in the UnitedStates for many years and are now looking to enter other markets.For a firm like yours that deals in international markets, what does "foreign exchange risk" mean?How could foreign exchange risk affect the profitability of your firm exporting tractors to aGerman buyer?Answer: FALSEDiff: 2
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124) You are the manager of a company that operates internationally providing agricultural equipmentthat has been manufactured and assembled in Canada. You have sold your products in the UnitedStates for many years and are now looking to enter other markets.For a firm like yours that deals in international markets, what does "foreign exchange risk" mean?How could foreign exchange risk affect the profitability of your firm exporting tractors to aGerman buyer?Answer: FALSEDiff: 2
125) You are the manager of a company that operates internationally providing agricultural equipmentthat has been manufactured and assembled in Canada. You have sold your products in the UnitedStates for many years and are now looking to enter other markets.The Canadian dollar has been falling against the US dollar, but has held steady against othercurrencies. You have been asked by the CEO of your firm to prepare a marketing plan for enteringEU countries. One of the key elements of your marketing plan is to price your product in Euros.What are the pros and cons of this currency strategy?Answer: The student may answer that the movement in the exchange rate will be the biggest
unknown. The Euro has been appreciating against the Canadian dollar in the past and thiscould lead to two different scenarios. The first is that the profitability of your sales willincrease. The second is that you may have to make adjustments to your price because ofchanges that competitors have made to reflect the higher exchange rate. However, there alsomay be the scenario where the Euro will decrease in value. What goes up can come down.This would suggest to the student that a forward exchange rate or hedging strategy shouldbe considered.
Diff: 3
126) You are the manager of a company that operates internationally providing agricultural equipmentthat has been manufactured and assembled in Canada. You have sold your products in the UnitedStates for many years and are now looking to enter other markets.Your company has decided to enter the Argentinean market. You have decided to use twowholesalers, who will distribute to the retail market. The potential size of the market is$10,000,000 USD per year. However, both of your wholesalers will not assume the risk ofinvoices charging USD and they want at least 60 days before paying. They argue that they willhave to give their retailers 60 days to pay and their retailers will only pay them in pesos. Argentinahas just come out of a currency crisis and your Canadian bank has warned you of possible severecurrency fluctuations. What payment and currency strategy will you suggest to your seniormanagement? Explain your answer.Answer: If you agree to the payment strategy then it is important to establish the exchange rate that
will be used. For example if a 60-day forward exchange rate is used to protect the companyagainst currency fluctuations, then the exchange rate that the 60-day exchange rate is basedupon should be the exchange rate listed in the contract.
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127) You are the manager of a company that operates internationally providing agricultural equipmentthat has been manufactured and assembled in Canada. You have sold your products in the UnitedStates for many years and are now looking to enter other markets.What factors will have an impact on the value of the Canadian dollar in six months' time? Make aprediction for your company as to whether the dollar will rise or fall against other currencies suchas the U.S. dollar and the Euro. Justify your answer.Answer: This answer requires some knowledge of current events and in particular what are the
trends with respect to the U.S. trade deficit and the national deficit. This also requires thestudents to understand that the Canadian dollar, at least when so much of our trade iscarried on with the Americans and our economy is tied to the health of the Americaneconomy, is heavily influenced by the rises and falls of the U.S. currency against otherworld currencies. This also requires some speculation as to the state of the commoditiesmarket and whether demand for commodities will remain high or not. Finally the studentmust think about inflation rates in Canada and whether the Bank of Canada is consideringraising or lowering interest rates because of either the danger of the economy overheatingor the danger of a slowdown.
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128) What are the functions of the foreign exchange market? Would international commerce be possiblewithout its existence?Answer: The foreign exchange market is a market for converting the currency of one country into
that of another. For example, a Canadian exporter that gets paid by a German importer inEuros can convert the Euros to dollars on the foreign exchange market. The two mainfunctions of the foreign exchange market are currency conversion and insuring againstforeign exchange risk. In terms of currency conversion, the market has four primaryfunctions for international businesses: (1) converting payments a company receives inforeign currencies into the currency of its home country; (2) converting the currency of acompany's home country into another currency when they must pay a foreign company forits products and services in their currency; (3) international businesses may use foreignexchange markets when they have spare cash that they wish to invest for short terms inmoney markets (of another country); and (4) currency speculation. The second function ofthe foreign exchange market is to provide insurance to protect against the possible adverseconsequences of unpredictable changes in exchange rates. This can be accomplishedthrough the use of a forward exchange.It is difficult to image how international commerce would work without the existence of theforeign exchange market. Without it, international trade would have to be completed on thebasis of barter, rather than currency exchange. As suggested by the author of the textbook,the foreign exchange markets is the lubricant that enables companies based in countries thatuse different currencies to trade with each other.
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129) Explain the difference between spot exchange rates and forward exchange rates. Briefly explainhow the forward exchange market works.Answer: The spot exchange rate is the rate at which a foreign exchange dealer converts one currency
into another currency on a particular day. Thus, when a Japanese tourist in Vancouver goesto a bank to convert yen into dollars, the exchange rate is the spot rate for that day. Spotexchange rates change daily, based on the relative supply and demand for differentcurrencies.Forward exchange rates are rates for currencies quoted for 30, 90, or 180 days into thefuture (in some cases, it is possible to get forward exchange rates for several years into thefuture). Forward exchange rates are available because of the volatile and problematic natureof the spot exchange market. Suppose a Canadian importer agreed to pay a Japaneseexporter $100 a piece for a large quantity of cameras. The day of the agreement, theexchange rate for dollars and yen was 1:1 (1 dollar for 1 yen). The Canadian importerplanned to sell the cameras for $125, guaranteeing him a profit of $25 per camera. Furthersuppose that the payment is not due to the Japanese exporter for 30 days, and during the 30day waiting period, the dollar unexpectedly depreciates against the yen, forcing theexchange rate to one dollar for every .75 yen. Per the original agreement, the Canadianimporter still has to pay the Japanese importer 100 yen per camera, but now the exchangerate is not 1 dollar per yen, but is 1 dollar per .75 yen. As a result, the Canadian importerhas to pay $1.33 to buy the equivalent of 1 yen. Now, instead of making $25 per camera($125 selling price - $100 purchase price), the Canadian importer will lose $8 per camera($125 selling price - $133 purchase price influenced by currency fluctuations). To avoid thispotential problem, the Canadian importer could have entered into a 30-day forwardexchange transaction with a foreign exchange dealer at, say, 1 dollar for every .95 yen (theforward rate will typically be somewhat lower than the spot rate). By doing this, theimporter is guaranteed that he or she will not have to pay more than 1.05 dollars for every 1yen, which would still guarantee the importer a $20 per profit on the cameras.
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130) Where is the foreign exchange market located? What is the nature of the market? Is the marketgrowing or shrinking on a global basis?Answer: The foreign exchange market is not located in any one place. It is a global network of
banks, brokers, and foreign exchange dealers connected by electronic communicationssystems. When companies wish to convert currencies, they typically go through their ownbanks rather than entering the market directly. The foreign exchange market has beengrowing at a rapid pace, reflecting a general growth in the volume of cross-border trade andinvestment.
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131) What is the International Fisher Effect? (note: you do not need to provide the mathematicalformula provided in the book)Answer: The International Fisher Effect states that for any two countries, the spot exchange rate
should change in an equal amount but in the opposite direction to the difference in nominalinterest rates between the two countries.
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132) Explain how the psychology of investors and bandwagon effects can have an impact on themovement in exchange rates. Do you believe that bandwagon effects really happen? Explain youranswer.Answer: As noted by the author of the textbook, empirical evidence suggests that empirical
explanations are not particular good at explaining short-term movements in exchange rates.One reason for this may be the impact of investor psychology on short-run exchange ratemovements. Investors, because they are human beings, do not always make decisions basedon a rational analysis of the facts. Sometimes investors imitate the actions of someone thatis very influential, even if there is no logical reason to do so. Investors also trade based on"hunches" or speculation, which is more psychological in nature than rational. Abandwagon effect in when investors in increasing numbers start following the lead ofsomeone who may be pushing the value of a currency up or down due to psychologicalreasons. As a bandwagon effect builds up, the expectations of investors become aself-fulfilling prophecy, and the market moves in the way the investors expected.Ask your students if they believe bandwagon effects actually happen in practice. Moststudents will say that they do, and have vivid examples to support their conclusions.
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133) In the context of forecasting exchange rate movements, describe the difference betweenfundamental analysis and technical analysis. Which approach is preferred by economists? Why?Answer: Fundamental analysis draws on economic theory to construct sophisticated econometric
models for predicting exchange rate movements. The variables contained in these modelstypically include relative money supply growth rates, inflation rates, and interest rates. Inaddition, they may include variables related to a country's balance-of-payments positions.In contrast, technical analysis uses price and volume data to determine past trends, whichare expected to continue into the future. This approach does not rely on a consideration ofeconomic fundamentals. Technical analysis is based on the premise that there areanalyzable market trends and waves and that previous trends and waves can be used topredict future trends and waves.Since there is no theoretical rationale for the assumption of predictability that underliestechnical analysis, most economists compare technical analysis to fortune-telling, andprefer fundamental analysis. However, despite this scepticism, technical analysis has gainedfavour in recent years.
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134) Explain the concept of countertrade. When does countertrade make sense? How does countertradehelp solve the no convertibility problem?Answer: Counter trade refers to a range of barter-like agreements by which goods and services can
be traded for other goods and services. Counter trade makes sense when a country'scurrency is nonconvertible. For example, when the Russian rouble was nonconvertible (pre2006), what that meant is that if a Canadian exporter sold grain to a Russian importer andwas paid in roubles, the Canadian exporter could not take the roubles to a bank and havethem converted into Canadian dollars. The roubles are only of value in Russia. To getaround this limitation, the Canadian exporter and the Russian importer might enter into acountertrade agreement, in which the Canadian exporter accepts some type of goods orservices in exchange for the grain rather than Russian roubles. For instance, the Russianimporter could use roubles to buy Russian crude oil, and exchange the crude oil for thegrain. The Canadian exporter could then sell the crude oil for American dollars, and benefitfrom the transaction.
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135) Why do companies prefer not to use countertrade if it can be avoided?Answer: Countertrade requires a company to set up a sales department to sell the goods that it
receives in exchange for the goods it is selling. Most companies are expert in their ownareas of specialization but are not expert in determining the price of goods outside of theirspecialization. Another reason may be how does one determine what is a fair valuation forthe bartered goods.
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136) The Canadian dollar has risen against the U.S. dollar. Many manufacturers are complaining thatthis rise may affect their U.S. export market. Explain.Answer: The student should answer that increases in the value of the dollar can have two effects. The
first is to increase the cost of Canadian goods, if you are charging in Canadian dollars. Thesecond effect is to decrease your revenues and profits if as many Canadian manufacturersdo, you charge in U.S. dollars. In either case this means less revenue or fewer sales, whichin turn affects the strength of the Canadian company.
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