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80) Many economists compare the process of ________ to fortune-telling because there is no
rationale for the assumption of predictability.
A) the efficient market school
B) fundamental analysis
C) a planned economy
D) the inefficient market school
E) technical analysis
81) A country's currency is referred to as ________ 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
82) 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
83) Residents of a South American country are not allowed to convert their currency into other
currencies. However, all foreign businesses with deposits in banks there may, at any time, convert
all their currency into foreign currency and take it out of the country. The currency in this country
is
A) leading.
B) nonconvertible.
C) externally convertible.
D) freely convertible.
E) lagging.
84) Why do 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
85) The currency in a small Asian nation is depreciating rapidly in value. As a result, residents of
the country and foreign businesses with an interest in the country are converting their currency into
U.S. dollars. This is an example of
A) deflation.
B) arbitrage.
C) liquidity rush.
D) capital flight.
E) currency swap.
86) The phenomenon of capital flight is most likely to occur when
A) the recovery phase of 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.
87) One way a business can deal with nonconvertibility of a currency is to engage in
A) price discrimination.
B) countertrade.
C) arbitrage.
D) price skimming.
E) currency speculation.
88) Countertrade is defined as
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.
89) ________ 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
90) An example of transaction exposure is when
A) companies have obligations for the purchase of goods at previously agreed prices.
B) companies borrow funds in domestic currency.
C) there is an impact of currency exchange rate changes on the reported financial statements of a
company.
D) there is a long-term effect of changes in exchange rates.
E) changing exchange rates persists on future prices, sales, and costs.
91) A company's translation exposure is based on the
A) long-run effect of changes in exchange rates on future prices, sales, and costs.
B) impact of currency exchange rate changes on the reported financial statements of a company.
C) extent to which a firm's future international earning power is affected by changes in exchange
rates.
D) extent to which the income from individual transactions is affected by fluctuations in foreign
exchange values.
E) obligations for the purchase or sale of goods and services at previously agreed prices.
92) ________ is concerned with the present measurement of past events.
A) Economic exposure
B) Transaction exposure
C) Arbitrage
D) Translation exposure
E) Currency speculation
93) ________ 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
94) What is meant by economic exposure?
A) extent to which a firm's future international earning power is affected by changes in exchange
rates
B) impact of currency exchange rate changes on the reported financial statements of a company
C) extent to which the income from individual transactions is affected by fluctuations in foreign
exchange values
D) extent to which the quantity of money in circulation rises faster than the stock of goods and
services
E) extent of disparity in prices, when expressed in the same currency, of similar products in
different countries
95) ________ 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
96) Cyber Corp., based in Toronto, decided it wanted to collect all of its foreign currency
receivables from Indonesia early because the currency in Indonesia was expected to depreciate.
This is an example of
A) the efficient market school.
B) the inefficient market school.
C) arbitration.
D) a lead strategy.
E) a lag strategy.
97) 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.
98) In terms of foreign exchange, what 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.
99) Define the foreign exchange market and provide an example of when a consumer would use
the exchange rate to make a purchase.
100) What is meant by carry trade? Why is it risky? Explain with an example.
101) Describe spot exchange rates and how they affect consumers.
102) What is meant by a currency swap?
103) Describe three important features of the foreign exchange market.
104) How does an increase in money supply in an economy lead to inflation?
105) Describe the factors that explain the failure of the purchasing power parity theory to predict
exchange rates accurately.
106) Describe the Fisher effect.
107) Explain how investor psychology and bandwagon effects impact the movement in exchange
rates.
108) Compare and contrast the efficient market school and the inefficient market school of
exchange rate forecasting.
109) Describe the difference between fundamental analysis and technical analysis in forecasting
exchange rate movements.
110) Briefly explain the difference between freely convertible, externally convertible, and
nonconvertible currency.
111) Explain when a business would use countertrade. Provide an example.
112) Explain the concepts of transaction exposure and translation exposure.
113) Explain the concept of economic exposure. How is it different from transaction exposure?
114) Differentiate between a lead strategy and a lag strategy.
115) Briefly describe the tactics and strategies that organizations should use to minimize foreign
exchange exposure.
