Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-06 Compare and contrast the differences between translation; transaction; and economic exposure;
and explain what managers can do to manage each type of exposure.
Topic: Implications for Managers
Multiple Choice Questions
41.
Which term refers to the rate at which one currency is converted into
another?
A.
Basis point
B.
Spread
C.
Exchange rate
D.
The foreign exchange market is a market for converting the currency of one
country into that of another country. An exchange rate is simply the rate at
which one currency is converted into another.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: Introduction
42.
What are the two main functions of the foreign exchange market?
A.
Trading of equities of foreign companies and currency conversion
B.
Reducing currency volatility and setting interest rates
C.
Insuring companies against interest rate risk and enabling imports and
exports
D.
Currency conversion and providing some insurance against foreign
exchange risk
The foreign exchange market serves two main functions. The first is to
convert the currency of one country into the currency of another. The
second is to provide some insurance against foreign exchange risk, or the
adverse consequences of unpredictable changes in exchange rates.
AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
43.
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 U.S. 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 it in
the U.S. at $50.
All else being equal, at an exchange rate £1 = $1.50, the shoe should have
cost $60 (40 × 1.5) in the U.S. At $50 for a pair, the U.S. offers a better
deal.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
44.
An exchange rate of €1 = $1.30 indicates that:
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.
The exchange rate is the rate at which the market converts one currency
into another. An exchange rate of €1 = $1.30 indicates that every euro is
worth 1.3 dollars.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
45.
The _____ helps us to compare the relative prices of goods and services in
different countries.
A.
interest rate
B.
GDP growth rate
C.
exchange rate
D.
tariff rate
The exchange rate is the rate at which the market converts one currency
into another. The exchange rate allows us to compare the relative prices of
goods and services in different countries.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
46.
Assume that an American company today invests some of its spare cash in
a Hungarian money market account that will earn 8 percent for a period of
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.
If the dollar appreciates, it will mean that the company will get lesser
amount of dollars when it takes its back. Each Hungarian forint will buy
lesser dollars than in the past.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
47.
International businesses use foreign exchange markets for all of the
following reasons except:
A.
to receive payments from foreign investments that may be in foreign
currencies.
B.
to pay a foreign company for its products or services in its country’s
currency.
C.
to invest for short terms in money markets when they have spare cash.
D.
to cover themselves from all risks involved in currency speculation.
In general, companies should beware, because speculation by definition is a
very risky business. The company cannot know for sure what will happen to
exchange rates. While speculators may profit handsomely if future currency
movements go in the direction predicted, they can also lose vast amounts of
money if they move in the other direction.
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
48.
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.
Currency speculation is one of the uses of foreign exchange markets.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
49.
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
The carry trade 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.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
50.
Assume that the interest rate on borrowings 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
The carry trade 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.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Topic: The Functions of the Foreign Exchange Market
51.
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.
When two parties agree to exchange currency and execute the deal
immediately, the transaction is referred to as a spot exchange.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Topic: The Functions of the Foreign Exchange Market
52.
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
The spot exchange rate is the rate at which a foreign exchange dealer
converts one currency into another currency on a particular day.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Topic: The Functions of the Foreign Exchange Market
53.
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
Each euro is worth $1.5. Therefore, you will receive $1,500 (1,000 × 1.5) for
1,000 euros.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Topic: The Functions of the Foreign Exchange Market
54.
_____ 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
Forward exchange rates represent market participants’ collective
predictions of likely spot exchange rates at specified future dates.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk.
Topic: The Functions of the Foreign Exchange Market
55.
Assuming the 30-day forward exchange rate were $1 = ¥130 and the spot
exchange rate were $1 = ¥120, the dollar is selling at a _____ on the 30-day
forward market.
A.
premium
B.
margin
C.
discount
D.
subsidy
$1 would buy more yen with a forward exchange than with a spot exchange.
In such a case, we say the dollar is selling at a premium on the 30-day
forward market.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk.
Topic: The Functions of the Foreign Exchange Market
56.
Which of the following refers to the simultaneous purchase and sale of a
given amount of foreign exchange for two different value dates?
A.
Currency pairing
B.
Carry trade
C.
Currency exchange
D.
Currency swap
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.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk.
Topic: The Functions of the Foreign Exchange Market
57.
Which of the following is the most important foreign exchange trading
center?
A.
London
B.
New York
C.
Tokyo
D.
Singapore
The most important trading centers are London (37 percent of activity),
New York (18 percent of activity), and Zurich, Tokyo, and Singapore (all
with around 5 to 6 percent of activity). Major secondary trading centers
include Frankfurt, Paris, Hong Kong, and Sydney
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk.
Topic: The Nature of the Foreign Exchange Market
58.
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(n):
A.
currency swap.
B.
arbitrage.
C.
carry trade.
D.
straddle.
Buying a currency low and selling it high is arbitrage.
AACSB: Reflective Thinking
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk.
Topic: The Nature of the Foreign Exchange Market
59.
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
At the most basic level, exchange rates are determined by the demand and
supply of one currency relative to the demand and supply of another.
AACSB: Reflective Thinking
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 10-04 Understand the different theories explaining how currency exchange rates are determined and
their relative merits.
Topic: Economic Theories of Exchange Rate Determination
60.
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
The law of one price states that in competitive markets free of
transportation costs and barriers to trade (such as tariffs), identical
products sold in different countries must sell for the same price when their
price is expressed in terms of the same currency. It helps understand how
prices are related to exchange rate movements.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-04 Understand the different theories explaining how currency exchange rates are determined and
their relative merits.
Topic: Economic Theories of Exchange Rate Determination