1. What happens in the foreign exchange market does not directly impact the sales, profits,
and strategy of a multinational enterprise.
2. The foreign exchange market is a market for converting the currency of one country into
that of another country.
3. The currency of Argonia falls sharply in value against the currency of Palladia. This
exchange rate movement will boost Palladia’s exports to Argonia.
4. The foreign exchange market offers complete insurance against foreign exchange risk.
5. Foreign exchange risk refers to the risk of not getting paid for a product that is exported
from one country to another.
6. The euro/dollar exchange rate is €1 = $1.20. If it costs $36 to buy a European product,
the stated price of the product would be €36.
7. The short-term movement of funds from one currency to another in the hopes of profiting
from shifts in exchange rates is known as countertrade.
8. Companies engage in currency speculation to get minimal but assured returns from idle
cash.
9. Carry trade is a kind of speculation whose success is based upon a belief that there will
be no adverse movement in exchange rates.
10. The forward exchange rate refers to the rate at which a foreign exchange dealer converts
one currency into another currency on a particular day.
11. For most major currencies, forward exchange rates are quoted for 30 days, 90 days, and
180 days into the future.
12. Spot exchange rates and the 30-day forward rates are the same.
13. Assume that current dollar/yen spot exchange rate is $1 = ¥110. If the 30-day forward
exchange is $1 = ¥105, we say the dollar is selling at a premium on the 30-day forward market.
14. When a firm enters into a spot exchange contract, it is taking out insurance against
adverse future exchange rate movements.
15. Currency swaps 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.
16. A common kind of currency swap is spot against forward.
17. When companies wish to convert currencies, they typically enter the foreign exchange
market directly.
18. The integration of financial centers implies there can be no significant difference in
exchange rates quoted in the foreign exchange trading centers.
19. Although a foreign exchange transaction can involve any two currencies, most
transactions involve dollars on one side.
20. London has lost its leading position in the global foreign exchange market due to the
diminishing importance of the British pound.
21. If the law of one price were true for all goods and services, the purchasing power parity
(PPP) exchange rate could be found from any individual set of prices.
22. In the context of
The Economist
‘s “Big Mac Index,” assume that the average price of a Big
Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate. The average price of a
Big Mac in the United States is $3.58. This suggests that the Korean won is overvalued against
the U.S. dollar.
23. Theoretically, a country in which price inflation is very high should expect to see its
currency depreciate against that of countries in which inflation rates are lower.
24. Inflation occurs when the money supply in a country increases faster than output
increases.
25. For price discrimination to work, arbitrage opportunities must be unlimited.
26. In countries where inflation is expected to be high, interest rates also will be high.
27. Unlike the purchasing power parity theory, the international Fisher effect is a good
predictor of short-run changes in spot exchange rates.
28. Relative monetary growth, relative inflation rates, and nominal interest rate differentials
are all moderately good predictors of long-run changes in exchange rates.
29. In terms of exchange rate forecasting, the efficient market school argues that companies
should spend additional money trying to forecast short-run exchange rate movements.
30. Technical analysis, an approach to foreign exchange forecasting, does not rely on a
consideration of economic fundamentals.
31. When residents and nonresidents rush to convert their holdings of domestic currency into
a foreign currency, the phenomenon is generally referred to as capital flight.
32. Transaction exposure, a category of foreign exchange risk, refers to the impact of
currency exchange rate changes on the reported financial statements of a company.
33. Since translation exposure, a category of foreign exchange risk, is concerned with the
present measurement of past events, the resulting accounting gains or losses are said to be
unrealized, and therefore unimportant.
34. Economic exposure, a category of foreign exchange risk, is distinct from transaction
exposure, which 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.
35. Leading and lagging strategies involve accelerating payments from weak-currency to
strong-currency countries and delaying inflows from strong-currency to weak-currency
countries.