Q&A Hero

Q: Which of the following statements is true about a currency board system? A.Under a strict currency board system, interest rates adjust automatically based on the supply and demand of domestic currency. B.To convert domestic currency on demand into another currency, a currency board takes grants from the International Monetary Fund. C.This system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies. D.A currency board can issue additional domestic currency even when there are no foreign exchange reserves to back it. E.A currency board authorizes the government to print money and set interest rates.

Q: How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible? A.By borrowing funds from the International Monetary Fund and the World Bank B.By maintaining a trade surplus with foreign countries C.By holding foreign currency reserves equal at the fixed exchange rate to at least 100 percent of the domestic currency issued D.By importing more goods from foreign countries than it exports E.By printing foreign currencies

Q: What can a country introduce if it wants to commit itself to converting its domestic currency on demand into another currency at a fixed exchange rate? A.A free-float exchange rate system B.A clean-float exchange rate system C.A pure-float exchange rate system D.A currency board E.A gold standard

Q: Adopting which kind of an exchange rate regime moderates inflationary pressures in a country? A.Nominal B.Pegged C.Pure "free float" D.Clean float E.Real

Q: Which of the following holds true for a pegged exchange rate system? A.Adopting a pegged exchange rate regime increases inflationary pressures in a country. B.It is necessary for a country whose currency is chosen for the peg to pursue a sound monetary policy. C.Pegged exchange rates are popular among many of the world's largest and developed nations. D.The value of a pegged currency falls when the reference currency rises in value. E.It is similar to a floating exchange rate system rather than a fixed system.

Q: Which one of the following refers to an exchange rate system under which a country's exchange rate is allowed to fluctuate against other currencies within a target zone? A.Free float B.Fixed peg C.Adjustable peg D.Pure float E.Capital float

Q: Critics of floating exchange rates claim that trade deficits are determined by the: A.balance between savings and investment in a country. B.external value of the currency of a country. C.exchange rates of other currencies. D.valuations made by International Monetary Fund and the World Bank. E.mechanism of competitive currency devaluation.

Q: In comparison to a floating exchange rate regime, a fixed exchange rate system is characterized by: A.smoother trade balance adjustments. B.increased destabilizing effects of exchange rate speculation. C.greater autonomy in terms of monetary policy. D.higher monetary discipline. E.greater exchange rate uncertainty and volatility.

Q: Which of the following is an argument for a floating exchange rate system? A.Each country should be allowed to choose its own inflation rate. B.Speculation in exchange rates dampens the growth of international trade and investment. C.Unpredictability of exchange rate movements makes business planning difficult. D.Removal of the obligation to maintain exchange rate parity destroys a government's monetary control. E.Trade deficits can be determined by the balance between savings and investment in a country, not by the external value of its currency.

Q: Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, this would require the: A.country to import more than it exports. B.country to make its exports more expensive. C.International Monetary Fund to agree to a currency devaluation. D.government to expand monetary supply in the economy. E.government to undertake activities that led to exchange rate appreciation.

Q: Which of the following is true of monetary contraction in a fixed exchange rate system? A.It requires low interest rates. B.It increases the demand for money. C.It puts downward pressure on a fixed exchange rate. D.It leads to an inflow of money from abroad. E.It can lead to high price inflation.

Q: Which of the following is an argument for a fixed exchange rate system? A.Governments can contract their money supply without worrying about the need to maintain parity. B.Trade balance adjustments do not require the intervention of the International Monetary Fund. C.It ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation. D.Speculations in exchange rates boost exports and reduce imports. E.Each country should be allowed to choose its own inflation rate.

Q: Which of the following is a characteristic of the floating exchange rate regime? A.It allows for automatic trade balance adjustments. B.The use of monetary policy by the government is restricted. C.It allows for greater monetary discipline. D.It limits the destabilizing effects of exchange rate speculation. E.It eliminates volatility and uncertainty associated with exchange rates.

Q: Briefly describe the tactics and strategies that organizations should use to minimize foreign exchange exposure.

Q: Differentiate between a lead strategy and a lag strategy.

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

Q: Explain the concepts of transaction exposure and translation exposure.

Q: Describe the difference between fundamental analysis and technical analysis in forecasting exchange rate movements.

Q: Briefly describe the schools of thought regarding exchange rate forecasting.

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

Q: What is the Fisher effect?

Q: Describe the factors that explain the failure of the purchasing power parity theory to predict exchange rates accurately.

Q: How does an increase in money supply in an economy lead to inflation?

Q: How do the purchasing power parity theory and the law of one price relate the prices of commodities to exchange rate movements?

Q: What is meant by a currency swap?

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)