Washburn University

BU 355

Chapter 10

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

2. Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

3. Which of the following is true of the differences in relative demand and supply of currencies?

4. 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?

5. Which of the following is a step taken to manage foreign exchange risk?

6. Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days?

7. 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?

8. How are spot exchange rates determined?

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

10. Which of the following observations is true of technical analysis, an approach to exchange rate forecasting?

11. If a country's government does not control the rate of growth in money supply:

12. 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?

13. The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how much would a camera that retails for $300 in New York sell for in Germany?

14. Which of the following is true of the efficient market school of thought toward exchange rate forecasting?

15. The phenomenon of capital flight is most likely to occur when:

16. An American company imports laptop computers from Japan. The company knows that after a shipment arrives, it must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the American company must pay the Japanese supplier ×150,000 for each computer at the current dollar/yen spot exchange rate of $1 = ×110. The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold. Which of the following will happen if the exchange rate after 30 days is $1 = ×90?

17. The currency of the country of Venadia falls sharply in value against the currency of Lutetia, a neighboring country. Which of the following is a consequence of this exchange rate movement?

18. A French company wants to invest 20 million euros for three months. The company found that investing in a Thai money market account would give it a higher interest rate than domestic investments. Which of the following is true about this investment?

19. The government of Beryllia tightly controls the ability of its residents to convert its currency into other currencies. However, all foreign businesses with deposits in banks of Beryllia may, at any time, convert all their currency into foreign currency and take them out of the country. Beryllia's currency is said to be:

20. What is meant by economic exposure?

21. Which of the following is a reason for London's dominance in the foreign exchange market?

22. According to the Fisher effect, if the "real" rate of interest in a country is 4 percent and the expected annual inflation is 9 percent, what would the "nominal" interest rate be?

23. 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?

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

25. Which of the following occurs when a government increases the money supply?

26. The Fisher effect states that:

27. Which of the following refers to carry trade?

28. What is meant by arbitrage?

29. Which of the following is true when a government is strongly committed to controlling the rate of growth in money?

30. Which of the following is true of the determination of exchange rates?

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

32. Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting?

33. Which of the following is a key feature of the foreign exchange market?

34. The yen/dollar exchange rate is ×120 = $1 in London and ×123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ×123,000,000 in New York and engages in arbitrage by selling it in London?

35. Which of the following is true of the purchasing power parity (PPP) theory?

36. During inflation, an increase in the amount of currency available leads to:

37. Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market?

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