Q&A Hero

Q: Differentiate between spot exchange rates and forward exchange rates.

Q: What is meant by carry trade? Why is it risky?Explain with an example.

Q: How do foreign exchange markets benefit international businesses?

Q: Which of the following is a step taken to manage foreign exchange risk? A.Firms should focus solely on managing transaction and translation exposures. B.Forecasting future exchange rate movements should be avoided as it is speculative. C.Firms need to develop strategies for dealing with economic exposure. D.Firms should avoid central control of exposure. E.Firms should not distinguish between transaction and translation exposure and economic exposure.

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

Q: In terms of foreign exchange, which of the following is true of leading and lagging strategies? A.They primarily protect long-term cash flows from adverse changes in exchange rates. B.They are used to minimize economic exposure of companies. C.They can help firms minimize their transaction and translation exposure. D.They involve accelerating payments from strong-currency to weak-currency countries. E.They are limited by governments because they create pressure on strong currencies.

Q: A lag strategy involves: A.delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate. B.delaying the collection of foreign currency receivables when a foreign currency is expected to depreciate. C.attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate. D.paying foreign currency payables (to suppliers) before they are due when a currency is expected to appreciate. E.paying foreign currency payables (to suppliers) before they are due when a currency is expected to depreciate.

Q: A lead strategy involves: A.delaying foreign currency payables when a currency is expected to appreciate. B.delaying foreign currency payables when a currency is expected to depreciate. C.attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate. D.attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate. E.delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.

Q: 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? A.Purchasing power parity B.Transaction exposure C.Economic exposure D.Translation exposure E.Currency speculation

Q: What is meant by economic exposure? A.The extent to which a firm's future international earning power is affected by changes in exchange rates B.The impact of currency exchange rate changes on the reported financial statements of a company C.The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values D.The extent to which the quantity of money in circulation rises faster than the stock of goods and services E.The extent of disparity in prices, when expressed in the same currency, of similar products in different countries

Q: Which of the following refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values? A.Economic exposure B.Transaction exposure C.Translation exposure D.Countertrade E.Carry trade

Q: Which of the following is concerned with the present measurement of past events? A.Economic exposure B.Transaction exposure C.Arbitrage D.Translation exposure E.Currency speculation

Q: What is meant by translation exposure? A.The long-run effect of changes in exchange rates on future prices, sales, and costs B.The impact of currency exchange rate changes on the reported financial statements of a company C.The extent to which a firm's future international earning power is affected by changes in exchange rates D.The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values E.The obligations for the purchase or sale of goods and services at previously agreed prices

Q: Which of the following is an example of transaction exposure? A.Obligations for the purchase of goods at previously agreed prices B.Borrowing of funds in domestic currency C.Impact of currency exchange rate changes on the reported financial statements of a company D.Long-term effect of changes in exchange rates E.The effect of changing exchange rates on future prices, sales, and costs

Q: Which of the following refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values? A.Translation exposure B.Economic exposure C.Purchasing power parity D.Transaction exposure E.Forward exchange rate

Q: Which of the following refers to countertrade? A.A short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates B.The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day C.Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates D.The purchase of securities in one market for immediate resale in another to profit from a price discrepancy E.A range of barter-like agreements by which goods and services can be exchanged for other goods and services

Q: Companies can deal with the problem of nonconvertibility of currency by engaging in: A.price discrimination. B.countertrade. C.arbitrage. D.price skimming. E.currency speculation.

Q: The phenomenon of capital flight is most likely to occur when: A.the recovery phase post an economic depression nears its end. B.the value of the domestic currency depreciates rapidly because of hyperinflation. C.a country's economic prospects are stable and indicate growth. D.interest rates are low for a prolonged period of time. E.governments lift convertibility restrictions on their currency.

Q: Which of the following occurs when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency? A.Deflation B.Arbitrage C.Liquidity rush D.Capital flight E.Currency swap

Q: Which of the following is a reason why governments limit convertibility of their currency? A.To encourage foreign investments B.To control currency appreciation C.To encourage capital flight D.To preserve their foreign exchange reserves E.To promote neo-mercantilism

Q: 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: A.leading. B.nonconvertible. C.externally convertible. D.freely convertible. E.lagging.

Q: How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations? A.Externally convertible B.Nonconvertible C.Leading D.Freely convertible E.Lagging

Q: How is a country's currency referred to when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it? A.Externally convertible B.Nonconvertible C.Leading D.Freely convertible E.Lagging

Q: Which of the following observations is true of technical analysis, an approach to exchange rate forecasting? A.It draws on economic theory to construct models for predicting exchange rate movements. B.The variables contained in this model typically include relative money supply growth rates, inflation rates, and interest rates. C.There is a sound theoretical rationale for the assumption of predictability underlying this approach. D.Owing to its drawbacks, this approach has declined in importance over the last few years, giving way to fundamental analysis. E.It does not rely on a consideration of economic fundamentals.

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

Q: Which of the following approaches to forecasting exchange rate movements uses price and volume data to determine past trends? A.Technical analysis B.Behavioral equilibrium model C.Interest rate parity equation model D.Fundamental analysis E.Portfolio balance model

Q: Which of the following is true of a country that is running a deficit on a balance-of-payments current account? A.It is importing fewer goods and services than it is exporting. B.It may result in depreciation of the country's currency on the foreign exchange market. C.It will lead to very low interest rates in the country. D.It will lead to a shortage of the country's currency in the foreign exchange market. E.It is engaging in neo-mercantilism.

Q: Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis? A.Relative strength indicator B.Moving average C.Inflation rate D.Business cycles E.Regression

Q: In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements? A.Technical analysis B.Fractional integration models C.Markov switching models D.Fundamental analysis E.Chart analysis

Q: Which of the following is true of the efficient market school of thought toward exchange rate forecasting? A.Forward rates are not unbiased predictors of future spot rates. B.Accurate predictions of future spot rates can be calculated from publicly available information. C.Prices do not reflect all available information about the market. D.Inaccuracies in predictions will not be consistently above or below future spot rates; they will be random. E.Forecasts might provide better predictions of future spot rates than forward exchange rates do.

Q: Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting? A.Forward exchange rates are the best possible predictors of future spot exchange rates. B.Forward exchange rates represent market participants' collective predictions of likely spot exchange rates. C.Companies cannot beat the markets because forward rates reflect all available information about likely future changes in exchange rates. D.Investing in forecasting services can improve the foreign exchange market's estimate of future exchange rates. E.The foreign exchange market is efficient at setting forward rates, which are unbiased predictors of future spot rates.

Q: 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? A.The impact of investor psychology on short-run exchange rate movements B.The strong relationship between inflation rates and interest rates C.The impact of interest rates and short-term exchange rate movements D.The strong relationship between interest rate differentials and subsequent changes in spot exchange rates E.Government intervention in cross-border trade that violates the assumption of efficient markets

Q: Which of the following refers to the bandwagon effect? A.Securities are purchased in one market for immediate resale in another. B.Dominant enterprises exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions. C.Traders move like a herd, all in the same direction and at the same time, in response to each other's perceived actions. D.Governments routinely intervene in international trade, creating tariff and nontariff barriers to cross-border trade. E.The output of goods and services grows at a lesser rate than that of the money supply.

Q: The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should: A.appreciate by 3 percent against the Japanese yen. B.depreciate by 3 percent against the Japanese yen. C.appreciate by 1.5 percent against the Japanese yen. D.depreciate by 1.5 percent against the Japanese yen. E.appreciate by 15 percent against the Japanese yen.

Q: Which of the following 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 nominal interest rates between the two countries? A.Bandwagon effect B.Law of one price C.International Fisher effect D.Helms-Burton Act E.Purchasing power parity (PPP) theory

Q: 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? A.5 percent B.13 percent C.9 percent D.36 percent E.2.25 percent

Q: The Fisher effect states that: A.a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). B.by comparing the prices of identical products in different currencies, it is possible to determine the "real" or purchasing power parity exchange rate that would exist if markets were efficient. C.a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. D.when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled. E.in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price.

Q: In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the: A.PPP theory puzzle. B.lead strategy. C.Fisher effect. D.bandwagon effect. E.international Fisher effect.

Q: 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? 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 units

Q: When dominant enterprises in an industry exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions, it is referred to as: A.price discrimination. B.premium pricing. C.psychological pricing. D.price skimming. E.price leadership.

Q: 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? A.Government intervention in cross-border trade B.The relationship between money supply and price inflation C.The impact of increase in currency on relative demand and supply conditions of currencies D.Excessive growth in money supply E.The insignificant impact of transportation costs on international trade

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

Q: The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the: A.currency crisis. B.banking crisis. C.purchasing power parity puzzle. D.bandwagon effect. E.foreign exchange risk.

Q: The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with: A.appreciating currencies. B.stable currencies. C.underdeveloped capital markets. D.small differentials in inflation rates. E.industrialized economies.

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

Q: If a country's government does not control the rate of growth in money supply: A.its future inflation rate will be low. B.its taxes will decrease in the future. C.it will see reduced spending on public infrastructure projects. D.its currency could depreciate in the future. E.its output of goods and services will exceed money supply, thereby fueling deflation.

Q: Which of the following is true when a government is strongly committed to controlling the rate of growth in money? A.The country's future inflation rate may be low. B.The country's currency will steadily depreciate significantly and instantly in the foreign exchange market. C.The country's economy will be marked by an abundance of liquidity. D.The country will see a good number of populist measures not funded by taxation. E.The country will struggle to match money supply with adequate supply of goods and services.

Q: During inflation, an increase in the amount of currency available leads to: A.overheating of the economy thereby reducing the production levels in the economy. B.changes in the relative demand-and-supply conditions in the foreign exchange market. C.a reduction in the rate of inflation thus leading to an appreciation of the currency. D.decreased lending by banks thereby resulting in more savings. E.a decrease in the demand for goods and services, which drives currency value higher.

Q: The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see: A.appreciation in its currency exchange rate. B.a decrease in interest rates. C.the collapse of the gold standard. D.depreciation in its currency exchange rate. E.a decrease in its money supply.

Q: Which of the following occurs when a government increases the money supply? A.It results in an overall decrease in credit. B.It makes it difficult for individuals and companies to borrow from banks. C.It makes it easier for banks to borrow from the government. D.It causes a decrease in demand for goods and services. E.It causes price deflation as the money supply exceeds goods and services output.

Q: Which of the following is true of inflation? A.It occurs when the demand for a particular currency is more than the supply. B.It occurs when securities are purchased in one market for immediate resale in another. C.It occurs when two parties agree to exchange currency and execute a deal at a specific date in the future. D.It occurs when the quantity of money in circulation rises faster than the stock of goods and services. E.It occurs when output increases faster than the money supply.

Q: Which of the following is illustrated by the Big Mac Index published by The Economist? A.The law of one price B.The purchasing power parity theorem C.The Fisher effect D.Flow of FDI E.The bandwagon effect

Q: Which of the following is true of the purchasing power parity (PPP) theory? A.A country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). B.The exchange rate will not change if relative prices change. C.The price of a "basket of goods" should be roughly equivalent in each country in relatively efficient markets. D.In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price. E.If the law of one price were true for all goods and services, the PPP exchange rate could not be found from any individual set of prices.

Q: If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power parity theory's prediction of the dollar/euro exchange rate be? A.$1 = €1.20 B.$1 = €1 C.$1 = €0.80 D.$1 = €0.90 E.$1 = €1.10

Q: To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory predict to be the equivalent of the dollar/yen exchange rate, E$/? A.E$/ = (1 + P)/P$ B.E$/ = (1 + P$)/P C.E$/ = P/P$ D.E$/ = P$/P E.E$/ = (1 + P$)/(1 + P)

Q: Which of the following has no impediments to the free flow of goods and services, such as trade barriers? A.Economic Union B.Currency Board C.Efficient market D.Carry trade E.European Monetary System

Q: 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? A.€320 B.€300 C.€250 D.€360 E.€150

Q: The law of one price states that: A.by comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient. B.a country's "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I). C.a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower. D.when the growth in a country's money supply is faster than the growth in its output, price inflation is fueled. E.in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

Q: Which of the following is true of the differences in relative demand and supply of currencies? A.They cannot be used to explain the determination of exchange rates. B.While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors. C.They provide a high-level understanding of exchange rates. D.While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. E.They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

Q: Which of the following is true of the determination of exchange rates? A.Differences in relative demand and supply do not explain the determination of exchange rates. B.Differences in relative demand and supply explain the factors underlying the phenomenon behind the demand for and supply of a currency. C.The differences in relative demand and supply alone provide a high-level understanding of what's behind the determination of exchange rates. D.While the differences in relative demand and supply provide an accurate explanation for appreciation of currencies, they fail to explain depreciation. E.The differences in relative demand and supply cannot explain or predict the conditions under which a particular currency will be in demand or not.

Q: 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? A.$34,000 B.$20,390 C.$25,000 D.$46,666 E.$39,454

Q: Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is 120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is 123 = $1. Which of the following transactions would yield immediate profit? A.Forward exchange B.Carry trade C.Currency swap D.Arbitrage E.Currency speculation

Q: What is meant by arbitrage? A.To provide insurance or hedge against the risks that arise from volatile changes in exchange rates B.A transaction between two parties that involves exchanging currency and executing a deal at some specific date in the future C.Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates D.The purchase of securities in one market for immediate resale in another to profit from a price discrepancy E.To borrow in one currency where interest rates are low and use the proceeds to invest in another currency where interest rates are high

Q: Which of the following is a key feature of the foreign exchange market? A.The foreign exchange market never sleeps. B.The foreign exchange market is located in London. C.The foreign exchange market is characterized by high transaction costs. D.The foreign exchange market is shut for two hours every day. E.The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities.

Q: Which of the following is a reason for London's dominance in the foreign exchange market? A.Great Britain's decision to retain the British pound instead of using the euro B.The preeminence of Financial Times Stock Exchange (FTSE) index as an economic health indicator C.London's location making it the link between the East Asian and New York markets D.London being the preferred headquarters destination for major multinational corporations E.London's trading centers opening soon after Tokyo's and New York's trading centers closing for the night

Q: Which of the following foreign exchange trading centers has the highest percentage of activity? A.Frankfurt B.London C.Paris D.Hong Kong E.Sydney

Q: Which of the following transactions is used to move out of one currency and into another for a limited period without incurring foreign exchange risk? A.Currency swap B.Currency speculation C.Carry trade D.Spot exchange E.Arbitrage

Q: 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? A.The dollar will depreciate against the euro. B.The market is undecided about the direction of currency movement. C.The dollar will appreciate against the euro. D.The dollar/euro exchange rate will be steady. E.The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.

Q: Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market? A.The spot exchange rate is currently $1 = 120 and changes to $1 = 130 after 30 days. B.The spot exchange rate is currently $1 = 120 and changes to $1 = 110 after 30 days. C.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 110 after 30 days. D.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 130 after 30 days. E.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 120.

Q: Which of the following indicates that the dollar is selling at a discount on the 30-day forward market? A.The spot exchange rate is $1 = 120 currently and $1 = 130 after 30 days. B.The spot exchange rate is $1 = 120 currently and $1 = 100 after 30 days. C.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 110 after 30 days. D.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 130 after 30 days. E.The current spot exchange rate is $1 = 120 and the 30-day forward rate is $1 = 120 after 30 days.

Q: Which of the following occurs when two parties agree to exchange currency and execute the deal at some specific date in the future? A.Forward exchange B.Spot exchange C.Carry trade D.Currency swap E.Arbitrage

Q: A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier 150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = 110. The importer can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = 105. Which of the following will happen if the exchange rate after 30 days is $1 = 90? A.The importer will earn a profit of approximately $236 per computer. B.The importer will earn a profit of approximately $171 per computer. C.The importer will earn a profit of approximately $65 per computer. D.The importer will incur a loss of approximately $67 per computer. E.The importer will incur a loss of approximately $105 per computer.

Q: 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? A.The importer will earn a profit of approximately $236 per computer. B.The importer will earn a profit of approximately $67 per computer. C.The importer will incur a loss of approximately $236 per computer. D.The importer will incur a loss of approximately $67 per computer. E.The importer will incur a loss of approximately $90 per computer.

Q: How are spot exchange rates determined? A.By using historical average prices of different currencies B.By the interaction between demand and supply of a currency relative to other currencies C.By taking the average of a basket of currencies D.By government decree E.By predicting future currency movements

Q: What is a firm engaging in when it insures itself against foreign exchange risk? A.Currency speculation B.Carry trade C.Hedging D.Currency swap E.Arbitrage

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

Q: The speculative element of the carry trade is that its success is based upon a belief that: A.there will be no adverse movement in exchange rates or interest rates. B.liquidity is the key factor in determining interest rates. C.increasing money supply will not drive inflation. D.spot exchange rates are more favorable than forward exchange rates. E.hedging insures a company against foreign exchange risks.

Q: 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: 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.

Q: Which of the following refers to carry trade? A.Providing insurance or hedging against the risks that arise from volatile changes in exchange rates B.A transaction between two parties that involves exchanging currency and executing a deal at some specific date in the future C.Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates D.The purchase of securities in one market for immediate resale in another to profit from a price discrepancy E.Borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high

Q: 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? A.A loss of $62,500 B.A loss of $66,667 C.A gain of $50,000 D.A gain of $62,500 E.A loss of $50,000