Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1
Fundamentals of Multinational Finance, 6e (Moffett et al.)
Chapter 9 Foreign Exchange Rate Determination
9.1 Exchange Rate Determination: The Theoretical Thread
1) 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
2) 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.
3) 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
2
4) 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
5) 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
6) 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
3
7) The ________ approach to the determination of spot exchange rates hypothesizes that the
most important factors are the relative real interest rate and a country's outlook for economic
growth and profitability.
A) balance of payments
B) parity conditions
C) managed float
D) asset market
8) 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.
9) ________ is defined as the spread of a crisis in one country to its neighboring countries and
other countries with similar characteristics.
A) Speculation
B) Contagion
C) Capital market liquidity
D) Political science
4
10) 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
11) 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
12) 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.
13) 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
5
14) Technical analysis of exchange rates developed in part due to the forecasting inadequacies of
15) The authors claim that theoretical and empirical studies appear to show that fundamentals do
16) The authors claim that random events, institutional frictions, and technical factors may cause
currency values to deviate significantly from their long-term fundamental path.
18) Most theories of technical analysis differentiate fair value from market value.
6
19) Describe the asset market approach to exchange rate determination. How is this consistent
with economic theory of (say, security) prices in general?
9.2 Currency Market Intervention
1) ________ 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
2) ________ is the alteration of economic or financial fundamentals that are thought to be drivers
of capital to flow in and out of specific currencies.
A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Capital Controls
7
3) ________ is the restriction of access to foreign currency by government.
A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Capital Controls
4) 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.
5) 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.
6) If the goal were to decrease the value of a country's currency - to fight an appreciation of the
domestic currency in exchange for foreign currency - the central bank would:
A) buy its own currency in exchange for foreign currency.
B) follow a restrictive monetary policy.
C) drive real rates of interest up.
8
7) If the goal were to increase the value of a country's currency - to fight an depreciation of the
domestic currency in exchange for foreign currency - the central bank would:
A) buy its own currency in exchange for foreign currency.
B) follow a expansive monetary policy.
C) drive real rates of interest down.
D) sell its own currency in exchange for foreign currency.
8) Slow economic growth and continued unemployment problems are common reasons for
9) 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.
10) 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
11) If a central bank wishes to "defend its currency," it might follow an expansive monetary
policy, which would drive real rates of interest up.
9
12) 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
13) Indirect intervention for domestic currency valuation typically uses tools of monetary policy
14) Direct intervention for currency valuation involves limiting the ability to exchange domestic
currency for foreign currency.
15) 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.
10
9.3 Disequilibrium: Exchange Rates in Emerging Markets
1) 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.
2) The Asian Currency crisis appeared to begin in:
A) South Korea.
B) Taiwan.
C) Thailand.
D) Japan.
3) 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.
4) Prior to July 2, 1997, the Thai government:
A) allowed the Thai Bhat to float against major currencies.
B) fixed the Bhat's value against the Korean won only.
C) fixed the Bhat's value against major currencies especially the U.S. dollar.
D) none of the above
11
5) 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
6) 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.
7) The principle focus of the IMF bailout efforts during the Asian financial crisis was:
A) banking liquidity.
B) shareholder's wealth.
C) reestablishing fixed currency exchange rates in Asia.
8) The ________ is the Argentine currency unit.
A) peso
B) dollar
C) real
D) peseta
12
9) 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
10) Argentina's 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
11) By 2001, crisis conditions had revealed three very important underlying problems
Argentina's economy EXCEPT:
A) The Argentine peso was overvalued.
B) The currency board regime had eliminated monetary policy alternatives for macroeconomic
policy.
C) The printing of paper money without restrictions, resulting in hyperinflation.
D) The Argentina government budget deficit was out of control - government spending
continued to increased but tax receipts did not.
13
12) 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
14) Leading up to the Russian currency collapse of 1998, Russia followed a currency policy of
15) The large and liquid capital and currency markets follow many of the principles outlined by
the different schools of thought on exchange rate determination (parity conditions, balance of
payments approach, and asset approach) relatively well in the medium to long term.
16) The smaller and less liquid markets and currency markets frequently demonstrate behaviors
that follow the principles outlined by the different schools of thought on exchange rate
determination (parity conditions, balance of payments approach, and asset approach) relatively
well in the medium to long term.
14
17) The roots of the Asian currency crisis extended from a fundamental change in the economics
of the region, the transition of many Asian nations from being net importers to net exporters.
18) The most visible roots of the crisis were in the excesses of capital inflows into Thailand
extending credit to a variety of domestic investments and enterprises beyond what the Thai
economy could support and creating an investment "bubble."
19) As economic conditions continued to deteriorate in Argentina by the end of 2001, banks
suffered increasing runs. The government, fearing that the increasing financial drain on banks
would cause their collapse, closed the banks for weeks.
15
20) In 1991, Argentina adopted a currency board (the Argentine peso had been pegged to the
U.S. dollar at a one-to-one rate of exchange) to fight hyperinflation. This currency board lasted
for a decade until the economic crisis of 2001. Discuss : 1) the pros and cons of a currency board
policy, 2) the crisis condition of the Argentina's economy by 2001, and 3) the lessons to be
drawn from the the Argentina story.
16
9.4 Forecasting in Practice
1) ________, 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
2) 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.
3) 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
17
4) 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 company's expected rate for the euro per pound to be in one year?
A) €1.40/£
B) £1.40/€
C) £1.54/€
D) €1.54/£
5) The longer the time horizon of the technical analyst the more accurate the prediction of
6) The single most important element of technical analysis is that future exchange rates are based
7) The more efficient the foreign exchange market is, the more likely it is that exchange rate
movements are random walks.
8) Technical analysts, traditionally referred to as chartists, focus on fundamental data to
determine past trends that are expected to continue into the future.
18
9) Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and
