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Student name:__________
1) With the help of an example, explain how a tourist participates in the foreign exchange
market.
2) What are the main uses of foreign exchange markets for international business?
3) What is meant by the phrases “the dollar is selling at a discount” on the 30-day forward
market and “the dollar is selling at a premium” on the 30-day forward market?
4) Where is the foreign exchange market located? What is the nature of the market? Is the
market growing or shrinking on a global basis?
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5) What is the law of one price?
6) Discuss the failure of PPP theory to predict exchange rates accurately. What is the
purchasing power parity puzzle?
7) Compare and contrast the Fisher Effect and the International Fisher Effect.
8) Consider the role of investor psychology and bandwagon Effects on how well purchasing
power parity and the international Fisher effect explain short-term movements in exchange rates.
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9) Discuss the two schools of thought on exchange rate forecasting.
10) Explain the difference between fundamental analysis and technical analysis.
11) Compare and contrast currencies that are freely convertible, externally convertible, and
nonconvertible.
12) Describe translation exposure. How can translation exposure be minimized?
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13) Explain the notion of economic exposure. How can economic exposure be minimized?
14) How can a firm minimize its foreign exchange exposure?
15) The rate at which one currency is converted into another is known as the
A) exchange rate.
B) currency swap rate.
C) fluctuation rate.
D) carry over rate.
16) ________ arises from volatile changes in exchange rates.
A) Translational exposure
B) Foreign exchange risk
C) Economic exposure
D) Transactional exposure
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17) Currency _____ typically involves the short-term movement of funds from one currency
to another in the hopes of profiting from shifts in exchange rates.
A) hedging
B) risk mitigation
C) speculation
D) arbitrage
18) What are the two main functions of the foreign exchange market?
A) trading foreign company equities and converting currency
B) reducing currency volatility and setting interest rates
C) insuring companies against interest rate risk and enabling imports and exports
D) converting currency and providing some insurance against foreign exchange risk
19) A pair of shoes costs £40 in Britain. An identical pair costs $50 in the United States when
the exchange rate is £1 = $1.50. Which of the following is correct?
A) The United States offers a better deal.
B) The deal is the same in both countries.
C) Britain offers a better deal.
D) A trader can make money by buying the shoes in Britain and selling in the United
States at $50.
20) An exchange rate of €1 = $1.30 indicates that
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A) $1 is worth 1.30 euros.
B) one could get 1.30 euros for $1.
C) one euro buys 1.30 dollars.
D) one euro buys 0.77 dollars.
21) The _____ helps consumers compare the relative prices of goods and services in different
countries.
A) interest rate
B) GDP growth rate
C) exchange rate
D) tariff rate
22) An American company today invests some of its spare cash in a Hungarian money
market account that will earn 8 percent for two months. Which of the following, if it happens
during the next two months, would imply that the company will earn less than 8 percent on its
investment?
A) The Hungarian forint rises in value against the dollar.
B) Interest rates in the United States move down.
C) Short-term interest rates in Hungarian money markets shoot up.
D) The dollar appreciates against the Hungarian forint.
23) Which term refers to the rate at which one currency is converted into another?
A) basis point
B) spread
C) exchange rate
D) interchange rate
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24) The short-term movement of funds from one currency to another in the hopes of profiting
from shifts in exchange rates is known as
A) currency arbitrage.
B) currency speculation.
C) currency hedging.
D) currency risk mitigation.
25) Which of the following involves borrowing in one currency where interest rates are low,
and then using the proceeds to invest in another currency where interest rates are high?
A) carry trade
B) swing trade
C) channel trade
D) price action trade
26) Assume that the interest rate on borrowing in Japan is 1 percent, while the interest rate on
deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money
into Australian dollars and deposits it in an Australian bank to make a 4 percent margin. Which
type of trade is this an example of?
A) swing trade
B) carry trade
C) channel trade
D) price action trade
27) When a tourist goes to a bank in a foreign country to convert money into the local
currency, the exchange rate used is the
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A) currency swap rate.
B) forward rate.
C) carry trade.
D) spot rate.
28) _____ are reported on a real-time basis on many financial websites and are continually
changing—their value being determined by supply and demand for that currency relative to
others.
A) Spot exchange rates
B) Currency swaps
C) Forward exchange rates
D) Future exchange rates
29) When two parties agree to exchange currency and execute the deal immediately, the
transaction is a
A) futures exchange.
B) carry trade.
C) spot exchange.
D) forward exchange.
30) The _____ is the rate at which a foreign exchange dealer converts one currency into
another currency on a particular day.
A) spot exchange rate
B) forward exchange rate
C) futures exchange rate
D) spread
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31) Assume that the current exchange rate is €1 = $1.50. If you exchange 1,000 euros for
dollars, you will receive
A) $1,000.
B) $750.
C) $1,500.
D) $667.
32) _____ are exchange rates governing some specific future date foreign exchange
transactions.
A) Spot exchange rates
B) Forward exchange rates
C) Future exchange rates
D) Currency swaps
33) Assuming the 30-day forward exchange rate was $1 = 130 and the spot exchange rate
was $1 = ×120, the dollar is selling at a _____ on the 30-day forward market.
A) premium
B) margin
C) discount
D) subsidy
34) Which of the following refers to the simultaneous purchase and sale of a given amount of
foreign exchange for two different value dates?
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A) currency pairing
B) carry trade
C) currency exchange
D) currency swap
35) Which of the following is the most important foreign exchange trading center?
A) London
B) New York
C) Tokyo
D) Singapore
36) Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m. is ¥120 = $1, and
the yen/dollar exchange rate quoted in New York at the same time is ¥123 = $1. A dealer in New
York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo,
thereby making a profit. The dealer has engaged in
A) a currency swap.
B) an arbitrage.
C) atrade.
D) a straddle.
37) _____ is quoted for 30 days, 90 days, and 180 days into the future.
A) A forward exchange rate
B) A currency swap
C) A spot exchange rate
D) An arbitrage
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38) When two parties agree to exchange currency and execute the deal at some specific time
in the future, a _____ occurs.
A) currency swap
B) forward exchange
C) hedging
D) spot exchange
39) Differences in the spot exchange rate and the 30-day forward rate are normal and reflect
the expectations of the foreign exchange market about
A) anticipated currency swap rates.
B) stability in the global marketplace.
C) future currency movements.
D) the carry trades that will occur.
40) _____ is the simultaneous purchase and sale of a given amount of foreign exchange for
two different value dates.
A) An arbitrage
B) A carry trade
C) A spot exchange
D) A currency swap
41) The _____ is a global network of banks, brokers, and foreign exchange dealers connected
by electronic communications systems.
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A) foreign exchange market
B) united global database
C) global marketplace
D) foreign market database
42) The foreign exchange market is
A) open for only 12 hours in a day.
B) the market never sleeps.
C) open for most of the day, but closes for three hours each day—between 2:00 a.m. and
5:00 a.m. Greenwich Mean Time.
D) open during normal business hours (9:00 a.m. to 5:00 p.m., local time) in each of the
primary locations from which it operates: Tokyo, London, and New York.
43) Although a foreign exchange transaction can involve any two currencies, most
transactions involve _____ on one side.
A) pounds
B) yen
C) dollars
D) euros
44) _____ are transacted between international businesses and their banks, between banks,
and between governments when it is desirable to move out of one currency into another for a
limited period without incurring foreign exchange risk.
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A) Carry trades
B) Currency swaps
C) Arbitrages
D) Currency pairing
45) Which of the following is one of the most important trading centers in the foreign
exchange market?
A) Beijing
B) Sau Paulo
C) London
D) Seoul
46) The purchasing power parity (PPP) theory argues that the exchange rate will
A) increase if a country is experiencing inflation.
B) change even if relative prices remain unchanged.
C) increase if a country is experiencing deflation.
D) change if relative prices change.
47) Purchasing power parity theory states that given relatively efficient markets, the price of
a “basket of goods” should be
A) much less in industrialized countries.
B) much less in third world countries.
C) variable depending upon the current rate of exchange between the producer and
consumer of the products in the “basket.”
D) roughly equivalent in each country.
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48) Inflation occurs when
A) the quantity of money in circulation rises faster than the stock of goods and services.
B) the stock of goods and services increases and the quantity of money in circulation
decreases.
C) output increases faster than the money supply.
D) the money supply decreases and the output increases.
49) The purchasing power parity (PPP) theory tells us that a country with a high inflation rate
will
A) export more goods to other countries.
B) see depreciation in its currency exchange rate.
C) import more goods from other countries.
D) see an appreciation in its currency exchange rate.
50) The Fisher Effect states that
A) a country’s “real” rate of interest is the sum of the “nominal” interest rate and the
expected rate of inflation over the period for which the funds are to be lent.
B) there is a weak relationship between inflation rates and interest rates.
C) a country’s “nominal” interest rate is the sum of the required “real” rate of interest
and the expected rate of inflation over the period for which the funds are to be lent.
D) when investors are free to transfer capital between countries, “nominal” interest rates
will be the same in every country.
51) The International Fisher Effect has
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A) proven to have substantial power at predicting long-run changes in forward exchange
rates.
B) proven to have substantial power at predicting short-run changes in spot exchange
rates.
C) not proven to be a good predictor of long-run changes in forward exchange rates.
D) not proven to be a good predictor of short-run changes in spot exchange rates.
52) If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater
than the demand for it, what will happen?
A) The dollar will appreciate against the yen.
B) The dollar will depreciate against the yen.
C) The exchange rates will remain the same.
D) The yen will appreciate against the dollar.
53) The _____ states that in competitive markets free of transportation costs and barriers to
trade, identical products sold in different countries must sell for the same price when their price
is expressed in terms of the same currency.
A) law of one price
B) principle of consistent pricing
C) model of fair pricing
D) rational price theory
54) According to the law of one price, if the exchange rate between the British pound and the
dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for _____ in London.
A) £180
B) £50
C) £60
D) £80
55) Assume that the law of one price holds. A shirt that retails for $120 in New York sells for
£60 in London. The exchange rate between the British pound and the dollar is £1 = $1.50.
Assuming away transportation costs and trade barriers, this creates a profit-making opportunity
called
A) currency swap.
B) arbitrage.
C) currency trade.
D) straddle.
56) The _____ suggests that given relatively efficient markets, the price of a “basket of
goods” should be roughly equivalent in each country.
A) random walk theory
B) theory of competitive advantage
C) theory of price inflation
D) purchasing power parity theory
57) Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris
is equivalent to $3.75 at the prevailing euro/dollar exchange rate. Using the concept of
purchasing power parity, the euro is