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Exam 10: The Foreign Exchange Market

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Question 61

True/False

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When residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency,the phenomenon is generally referred to as capital flight.

A) True
B) False

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Question 62

Multiple Choice

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Which of the following refers to the bandwagon effect?

A) When securities are purchased in one market for immediate resale in another
B) When dominant enterprises exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions
C) When traders move like a herd, all in the same direction and at the same time, in response to each others' perceived actions
D) When governments routinely intervene in international trade, creating tariff and nontariff barriers to cross-border trade
E) When the output of goods and services grows at a lesser rate than that of the money supply

F) C) and E)
G) None of the above

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Question 63

Multiple Choice

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In terms of foreign exchange transactions,the _____ has replaced the German mark as the world's second most important vehicle currency.

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

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

Spot exchange rates and the 30-day forward rates are the same.

Which of the following is true of a country that is running a deficit on a balance-of-payments current account?

For most major currencies,forward exchange rates are quoted for 30 days,90 days,and 180 days into the future.

Briefly describe the schools of thought regarding exchange rate forecasting.

Currency swaps are transacted between international businesses and their banks,between banks,and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Steven converted $1,000 to ¥105,000 for a trip to Japan.However,he spent only ¥50,000.During this period,the value of the dollar weakened against the yen.Considering a current exchange rate of $1=¥100,how many dollars did Steven spend on the trip?

What is meant by a currency swap?

If a basket of goods costs $100 in the United States and €120 in Europe,purchasing power parity theory predicts that the dollar/euro exchange rate should be _____.

Which of the following is illustrated by the Big Mac Index published by The Economist?

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as countertrade.

Explain the concepts of transaction exposure and translation exposure.

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?

The euro/dollar exchange rate is €1 = $1.20.If a trader buys a camera that retails for $300 in New York and sells it for €200 in Berlin (ignoring transaction costs,transportation costs,or trade barriers) ,this represents a potential profit (arbitrage) of _____.

Differentiate between a lead strategy and a lag strategy.

The speculative element of the carry trade is that its success is based upon a belief that: