Multinational Business Finance 13th Edition Test Bank Chapter 9

subject Type Homework Help
subject Pages 9
subject Words 3026
subject Authors Arthur I. Stonehill, David K. Eiteman, Michael H. Moffett

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 9 Foreign
Exchange Rate Determination and Forecasting 9.1 Exchange Rate Determination: The
Theoretical Thread Multiple Choice Question: An important thing to remember about
foreign exchange rate determination is that parity conditions, asset approach, and balance
of payments approaches are ________ theories rather than ________ theories. A)
competing; complementary B) competing; contemporary C) complementary; contiguous
D) complementary; competing Answer:
Question: Which of the following did NOT contribute to the exchange rate collapse in
emerging markets in the 1990s? A) infrastructure weaknesses B) speculation on the part of
market participants C) the sharp reduction of cross-border foreign direct investment D) All
of the above contributed to the emerging markets exchange rate collapse of the 1990s.
Answer:
Question: The ________ provides a means to account for international cash flows in a
standardized and systematic manner. A) parity conditions B) asset approach C) balance of
payments D) International Fisher Effect Answer:
Question: The ________ approach argues that equilibrium exchange rates are achieved
when the net inflow of foreign exchange arising from current account activities is equal to
the net outflow of foreign exchange arising from financial account activities. A) balance of
payments B) monetary C) asset market D) law of one price Answer:
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Question: The ________ approach states that the exchange rate is determined by the
supply and demand for national currency stocks, as well as the expected future levels and
rates of growth of monetary stock. A) balance of payments B) monetary C) asset market
D) law of one price Answer:
Question: The ________ approach argues that exchange rates are determined by the supply
and demand for a wide variety of financial assets A) balance of payments B) monetary C)
asset market D) law of one price Answer:
Question: The ________ approach to the determination of spot exchange rates
hypothesizes that the most important factors are the relative real interest rate and a
countrys outlook for economic growth and profitability. A) balance of payments B) parity
conditions C) managed float D) asset market Answer:
Question: The asset market approach to forecasting assumes that whether foreigners are
willing to hold claims in monetary form depends on an extensive set of investment
considerations. These include all but which of the following choices? A) relative real
interest rates B) capital market liquidity C) political safety D) All of the above are
considered by investors in their decision process. Answer:
Question: ________ is defined as the spread of a crisis in one country to its neighboring
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countries and other countries with similar characteristics. A) Speculation B) Contagion C)
Capital market liquidity D) Political science Answer:
Question: Critics of the balance of payments approach to exchange rate determination
point to the emphasis on ________ of currency and capital rather than ________ of money
or financial assets. A) flows; stocks B) stocks; flows C) import; export D) export; import
Answer:
Question: Which of the following versions of PPP is thought to be the most relevant to
possibly explaining what drives exchange rate values? A) The Law of One Price B)
Absolute Purchasing Power Parity C) Relative Purchasing Power Parity D) The
International Fisher Effect Answer:
Question: It is safe to say that most determinants of the spot exchange rate are also
affected by changes in the spot rate. i.e., they are linked AND mutually determined.
Answer:
Question: The balance of payments approach of exchange rate theory is largely dismissed
by the academic community today, while the practitioner public still rely on different
variations of the theory for their decision making. Answer:
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Question: Technical analysis of exchange rates developed in part due to the forecasting
inadequacies of fundamental exchange rate theories. Answer:
Question: The authors claim that theoretical and empirical studies appear to show that
fundamentals do apply to the long-term for foreign exchange. Answer:
Question: The authors claim that random events, institutional frictions, and technical
factors may cause currency values to deviate significantly from their long-term
fundamental path. Answer:
Question: The asset market approach to forecasting is not applicable to emerging markets.
Answer:
Question: Most theories of technical analysis differentiate fair value from market value.
Answer:
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Question: Describe the asset market approach to exchange rate determination. How is this
consistent with economic theory of (say, security) prices in general? Answer:
Question: ________ is the active buying and selling of the domestic currency against
foreign currencies. A) Indirect Intervention B) Direct Intervention C) Foreign Direct
Investment D) Federal Funding Answer:
Question: Which of the following is NOT a technique used by governments or central
banks to impact domestic currency valuation? A) Indirect Intervention B) Direct
Intervention C) Capital Controls D) All of the above are techniques used to control
currency valuation. Answer:
Question: Which of the following is NOT a motivation for a government or central bank to
manipulate domestic currency valuation? A) fight inflation B) slow too rapid economic
growth C) spur too slow economic growth D) All of the above are motivations for the
government or central bank to manipulate currency values. Answer:
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Question: Slow economic growth and continued unemployment problems are common
reasons for central banks to hold currency values down. Answer:
Question: The fall in the value of the domestic currency will sharply reduce the purchasing
power of foreign tourists in the country whose currency values are falling. Answer:
Question: The International Monetary Fund, as one of its basic principles (Article IV),
encourages members to pursue "currency manipulation" to gain competitive advantages
over other members as opposed to engaging in military action to achieve the same
advantage. Answer:
Question: If a central bank wishes to "defend its currency," it might follow an expansive
monetary policy, which would drive real rates of interest up. Answer:
Question: A country wishing for its currency to fall in value, particularly when confronted
with a continual appreciation of its value against major trading partner currencies, the
central bank may work to lower real interest rates, reducing the returns to capital. Answer:
Question: Indirect intervention for domestic currency valuation typically uses tools of
monetary policy as opposed to using tools of fiscal policy. Answer:
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Question: Direct intervention for currency valuation involves limiting the ability to
exchange domestic currency for foreign currency. Answer:
Question: Explain how a central bank would engage in direct intervention to decrease the
value of its domestic currency. Since the 1970s it has been difficult for central banks alone
to engage in direct intervention to alter the value of their domestic currency. Identify and
explain at least two other activities in which a central bank could engage to alter the value
of their domestic currency. Answer:
Question: Which of the following was NOT an international currency crisis in the 1990s
and early 2000s? A) the Asian Crisis B) the Canadian Crisis C) the Argentine Crisis D) All
of the above were currency crises in the 1990s and 2000s. Answer:
Question: The Asian Currency crisis appeared to begin in: A) South Korea. B) Taiwan. C)
Thailand. D) Japan. Answer:
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Question: The "tequila effect" is a slang term used to describe a form of financial panic
called: A) run on the market. B) speculation. C) contrary investing. D) contagion. Answer:
Question: Prior to July 2, 1997, the Thai government: A) allowed the Thai Bhat to float
against major currencies. B) fixed the Bhats value against the Korean won only. C) fixed
the Bhats value against major currencies especially the U.S. dollar. D) none of the above
Answer:
Question: The authors did NOT identify which of the following as a root of the Asian
currency crisis? A) the collapse of some Asian currencies B) the rate of inflation in the
United States C) corporate socialism D) banking stability and management Answer:
Question: The authors refer to the practice of many Asian firms being largely controlled by
families of groups related to the governing body of the country as: A) illegal. B) insider
trading. C) cronyism. D) not in my back yard. Answer:
Question: The principle focus of the IMF bailout efforts during the Asian financial crisis
was: A) banking liquidity. B) shareholders wealth. C) reestablishing fixed currency
exchange rates in Asia. D) dollarization of Asian currencies. Answer:
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Question: The ________ is the Argentine currency unit. A) peso B) dollar C) real D) peseta
Answer:
Question: A currency board is: A) a structure, rather than a mere commitment, to limiting
the growth of the money supply in the economy. B) a recipe for conservative and prudent
financial management. C) designed to eliminate the power of politicians to exercise
judgment by relying on an automatic and unbendable rule. D) all of the above Answer:
Question: Argentinas economic performance in the 1990s while their peso was pegged to
the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of
unemployment. A) high; high B) low; low C) low; high D) high; low Answer:
Question: Which of the following did NOT contribute to the Russian currency crisis of
1998? A) an accelerated flight of capital B) generally deteriorating economic conditions C)
a surprisingly healthy government surplus that was neither funding internal investment nor
external debt service D) all of the above Answer:
Question: In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a
one-to-one basis. Answer:
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Question: Leading up to the Russian currency collapse of 1998, Russia followed a
currency policy of managed float that allowed their currency to slide daily at a 1.5% per
month rate. Answer:
Question: ________, traditionally referred to as chartists, focus on price and volume data
to determine past trends that are expected to continue into the future. A) Mappists B)
Trappist monks C) Filibusters D) Technical analysts Answer:
Question: Examples of a business motivation for long-run exchange rate forecasts include
all but which of the following? A) a major capital investment in a foreign country B) the
desire to hedge a 90-day security C) a portfolio manager considering investing in foreign
securities D) All of the above are examples of a business motivation for long-run exchange
rate forecast. Answer:
Question: Short-term foreign exchange forecasts are often motivated by such activities as
________ whereas long-term forecasts are more likely motivated by ________. A)
long-term investment; long-term capital appreciation B) long-term capital appreciation;
desire to hedge a receivable C) the desire to hedge a payable; the desire for long-term
investment D) the desire for long-term investment; the desire to hedge a payable Answer:
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Question: A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$
one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time
period. What does this imply the companys expected rate for the euro per pound to be in
one year? A) €1.40/£ B) £1.40/€ C) £1.54/€ D) €1.54/£ Answer:
Question: The longer the time horizon of the technical analyst the more accurate the
prediction of foreign exchange rates is likely to be. Answer:
Question: The single most important element of technical analysis is that future exchange
rates are based on the current exchange rate. Answer:
Question: The more efficient the foreign exchange market is, the more likely it is that
exchange rate movements are random walks. Answer:
Question: Technical analysts, traditionally referred to as chartists, focus on fundamental
data to determine past trends that are expected to continue into the future. Answer:
Question: Foreign exchange forecasting can be either long-term, or short-term in duration.
Compare and contrast the motivation for and the techniques a forecaster might use for each
of the time periods. Answer:
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