c10 Key
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 offers complete insurance against foreign exchange risk.
3. 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.
4. 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.
5. Companies engage in currency speculation to get minimal but assured returns from idle cash.
6. Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse
movement in exchange rates.
7. The forward exchange rate refers to the rate at which a foreign exchange dealer converts one currency into
another currency on a particular day.
8. Spot exchange rates and the 30-day forward rates are the same.
9. When a firm enters into a spot exchange contract, it is taking out insurance against adverse future exchange
rate movements.
10. 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.
11. A common kind of currency swap is spot against forward.
12. When companies wish to convert currencies, they typically enter the foreign exchange market directly.
13. The integration of financial centers implies there can be no significant difference in exchange rates quoted
in the foreign exchange trading centers.
14. Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars
on one side.
15. 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.
16. 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.
17. Inflation occurs when the money supply in a country increases faster than output increases.
18. For price discrimination to work, arbitrage opportunities must be unlimited.
19. In countries where inflation is expected to be high, interest rates also will be high.
20. Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run
changes in spot exchange rates.
21. Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately
good predictors of long-run changes in exchange rates.
22. 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.
23. Technical analysis, an approach to foreign exchange forecasting, does not rely on a consideration of
economic fundamentals.
24. 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.
25. 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.
26. 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.
27. Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency
countries and delaying inflows from strong-currency to weak-currency countries.
28. Which of the following enables organizations to conduct international trade without having to resort to
barter?
29. The currency of the country of Venadia falls sharply in value against the currency of Lutetia, a neighboring
country. Which of the following is a consequence of this exchange rate movement?
30. Which of the following is a function of the foreign exchange market?
31. Steven converted $1,000 to 105,000 for a trip to Japan. However, he spent only 50,000. During this
period, the value of the dollar weakened against the yen. Considering a current exchange rate of $1 = 100, how
many dollars did Steven spend on the trip?
32. A French company wants to invest 20 million euros for three months. The company found that investing in
a Thai money market account would give it a higher interest rate than domestic investments. Which of the
following is true about this investment?
33. Which of the following refers to currency speculation?
34. Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the
company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the
outcome of this transaction?
35. Which of the following refers to carry trade?
36. The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5
percent. In this scenario, a carry trade would be to:
37. The speculative element of the carry trade is that its success is based upon a belief that:
38. Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?
39. What is a firm engaging in when it insures itself against foreign exchange risk?
40. How are spot exchange rates determined?
41. An American company imports laptop computers from Japan. The company knows that after a shipment
arrives, it must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the American
company must pay the Japanese supplier 150,000 for each computer at the current dollar/yen spot exchange
rate of $1 = 110. The company intends to resell the computers the day they arrive for $1,600 each but it does
not have the funds to pay the Japanese supplier until the computers have been sold. Which of the following will
happen if the exchange rate after 30 days is $1 = 90?
42. A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a
Japanese supplier when a shipment arrives. The company will pay the Japanese supplier 150,000 for each
computer, and the current dollar/yen spot exchange rate is $1 = 110. The importer can sell the computers the
day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier
until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a
foreign exchange dealer at $1 = 105. Which of the following will happen if the exchange rate after 30 days is
$1 = 90?
43. Which of the following occurs when two parties agree to exchange currency and execute the deal at some
specific date in the future?
44. Which of the following indicates that the dollar is selling at a discount on the 30-day forward market?
45. Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward
market?
46. Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the
47. Which of the following transactions is used to move out of one currency and into another for a limited
period without incurring foreign exchange risk?
48. Which of the following foreign exchange trading centers has the highest percentage of activity?