Multinational Business Finance 13th Edition Test Bank Chapter 9

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 9 Foreign

Exchange Rate Determination and Forecasting 9.1 Exchange Rate Determination: The

Theoretical Thread Multiple Choice Question: An important thing to remember about

foreign exchange rate determination is that parity conditions, asset approach, and balance

of payments approaches are ________ theories rather than ________ theories. A)

competing; complementary B) competing; contemporary C) complementary; contiguous

D) complementary; competing Answer:

Question: Which of the following did NOT contribute to the exchange rate collapse in

emerging markets in the 1990s? A) infrastructure weaknesses B) speculation on the part of

market participants C) the sharp reduction of cross-border foreign direct investment D) All

of the above contributed to the emerging markets exchange rate collapse of the 1990s.

Answer:

Question: The ________ provides a means to account for international cash flows in a

standardized and systematic manner. A) parity conditions B) asset approach C) balance of

payments D) International Fisher Effect Answer:

Question: The ________ approach argues that equilibrium exchange rates are achieved

when the net inflow of foreign exchange arising from current account activities is equal to

the net outflow of foreign exchange arising from financial account activities. A) balance of

payments B) monetary C) asset market D) law of one price Answer:

Question: The ________ approach states that the exchange rate is determined by the

supply and demand for national currency stocks, as well as the expected future levels and

rates of growth of monetary stock. A) balance of payments B) monetary C) asset market

D) law of one price Answer:

Question: The ________ approach argues that exchange rates are determined by the supply

and demand for a wide variety of financial assets A) balance of payments B) monetary C)

asset market D) law of one price Answer:

Question: The ________ approach to the determination of spot exchange rates

hypothesizes that the most important factors are the relative real interest rate and a

countrys outlook for economic growth and profitability. A) balance of payments B) parity

conditions C) managed float D) asset market Answer:

Question: The asset market approach to forecasting assumes that whether foreigners are

willing to hold claims in monetary form depends on an extensive set of investment

considerations. These include all but which of the following choices? A) relative real

interest rates B) capital market liquidity C) political safety D) All of the above are

considered by investors in their decision process. Answer:

Question: ________ is defined as the spread of a crisis in one country to its neighboring

countries and other countries with similar characteristics. A) Speculation B) Contagion C)

Capital market liquidity D) Political science Answer:

Question: Critics of the balance of payments approach to exchange rate determination

point to the emphasis on ________ of currency and capital rather than ________ of money

or financial assets. A) flows; stocks B) stocks; flows C) import; export D) export; import

Answer:

Question: Which of the following versions of PPP is thought to be the most relevant to

possibly explaining what drives exchange rate values? A) The Law of One Price B)

Absolute Purchasing Power Parity C) Relative Purchasing Power Parity D) The

International Fisher Effect Answer:

Question: It is safe to say that most determinants of the spot exchange rate are also

affected by changes in the spot rate. i.e., they are linked AND mutually determined.

Answer:

Question: The balance of payments approach of exchange rate theory is largely dismissed

by the academic community today, while the practitioner public still rely on different

variations of the theory for their decision making. Answer:

Question: Technical analysis of exchange rates developed in part due to the forecasting

inadequacies of fundamental exchange rate theories. Answer:

Question: The authors claim that theoretical and empirical studies appear to show that

fundamentals do apply to the long-term for foreign exchange. Answer:

Question: The authors claim that random events, institutional frictions, and technical

factors may cause currency values to deviate significantly from their long-term

fundamental path. Answer:

Question: The asset market approach to forecasting is not applicable to emerging markets.

Answer:

Question: Most theories of technical analysis differentiate fair value from market value.

Answer:

Question: Describe the asset market approach to exchange rate determination. How is this

consistent with economic theory of (say, security) prices in general? Answer:

Question: ________ is the active buying and selling of the domestic currency against

foreign currencies. A) Indirect Intervention B) Direct Intervention C) Foreign Direct

Investment D) Federal Funding Answer:

Question: Which of the following is NOT a technique used by governments or central

banks to impact domestic currency valuation? A) Indirect Intervention B) Direct

Intervention C) Capital Controls D) All of the above are techniques used to control

currency valuation. Answer:

Question: Which of the following is NOT a motivation for a government or central bank to

manipulate domestic currency valuation? A) fight inflation B) slow too rapid economic

growth C) spur too slow economic growth D) All of the above are motivations for the

government or central bank to manipulate currency values. Answer:

Question: Slow economic growth and continued unemployment problems are common

reasons for central banks to hold currency values down. Answer:

Question: The fall in the value of the domestic currency will sharply reduce the purchasing

power of foreign tourists in the country whose currency values are falling. Answer:

Question: The International Monetary Fund, as one of its basic principles (Article IV),

encourages members to pursue “currency manipulation” to gain competitive advantages

over other members as opposed to engaging in military action to achieve the same

advantage. Answer:

Question: If a central bank wishes to “defend its currency,” it might follow an expansive

monetary policy, which would drive real rates of interest up. Answer:

Question: A country wishing for its currency to fall in value, particularly when confronted

with a continual appreciation of its value against major trading partner currencies, the

central bank may work to lower real interest rates, reducing the returns to capital. Answer:

Question: Indirect intervention for domestic currency valuation typically uses tools of

monetary policy as opposed to using tools of fiscal policy. Answer:

Question: Direct intervention for currency valuation involves limiting the ability to

exchange domestic currency for foreign currency. Answer:

Question: Explain how a central bank would engage in direct intervention to decrease the

value of its domestic currency. Since the 1970s it has been difficult for central banks alone

to engage in direct intervention to alter the value of their domestic currency. Identify and

explain at least two other activities in which a central bank could engage to alter the value

of their domestic currency. Answer:

Question: Which of the following was NOT an international currency crisis in the 1990s

and early 2000s? A) the Asian Crisis B) the Canadian Crisis C) the Argentine Crisis D) All

of the above were currency crises in the 1990s and 2000s. Answer:

Question: The Asian Currency crisis appeared to begin in: A) South Korea. B) Taiwan. C)

Thailand. D) Japan. Answer:

Question: The “tequila effect” is a slang term used to describe a form of financial panic

called: A) run on the market. B) speculation. C) contrary investing. D) contagion. Answer:

Question: Prior to July 2, 1997, the Thai government: A) allowed the Thai Bhat to float

against major currencies. B) fixed the Bhats value against the Korean won only. C) fixed

the Bhats value against major currencies especially the U.S. dollar. D) none of the above

Answer:

Question: The authors did NOT identify which of the following as a root of the Asian

currency crisis? A) the collapse of some Asian currencies B) the rate of inflation in the

United States C) corporate socialism D) banking stability and management Answer:

Question: The authors refer to the practice of many Asian firms being largely controlled by

families of groups related to the governing body of the country as: A) illegal. B) insider

trading. C) cronyism. D) not in my back yard. Answer:

Question: The principle focus of the IMF bailout efforts during the Asian financial crisis

was: A) banking liquidity. B) shareholders wealth. C) reestablishing fixed currency

exchange rates in Asia. D) dollarization of Asian currencies. Answer:

Question: The ________ is the Argentine currency unit. A) peso B) dollar C) real D) peseta

Answer:

Question: A currency board is: A) a structure, rather than a mere commitment, to limiting

the growth of the money supply in the economy. B) a recipe for conservative and prudent

financial management. C) designed to eliminate the power of politicians to exercise

judgment by relying on an automatic and unbendable rule. D) all of the above Answer:

Question: Argentinas economic performance in the 1990s while their peso was pegged to

the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of

unemployment. A) high; high B) low; low C) low; high D) high; low Answer:

Question: Which of the following did NOT contribute to the Russian currency crisis of

1998? A) an accelerated flight of capital B) generally deteriorating economic conditions C)

a surprisingly healthy government surplus that was neither funding internal investment nor

external debt service D) all of the above Answer:

Question: In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a

one-to-one basis. Answer:

Question: Leading up to the Russian currency collapse of 1998, Russia followed a

currency policy of managed float that allowed their currency to slide daily at a 1.5% per

month rate. Answer:

Question: ________, traditionally referred to as chartists, focus on price and volume data

to determine past trends that are expected to continue into the future. A) Mappists B)

Trappist monks C) Filibusters D) Technical analysts Answer:

Question: Examples of a business motivation for long-run exchange rate forecasts include

all but which of the following? A) a major capital investment in a foreign country B) the

desire to hedge a 90-day security C) a portfolio manager considering investing in foreign

securities D) All of the above are examples of a business motivation for long-run exchange

rate forecast. Answer:

Question: Short-term foreign exchange forecasts are often motivated by such activities as

________ whereas long-term forecasts are more likely motivated by ________. A)

long-term investment; long-term capital appreciation B) long-term capital appreciation;

desire to hedge a receivable C) the desire to hedge a payable; the desire for long-term

investment D) the desire for long-term investment; the desire to hedge a payable Answer:

Question: A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$

one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time

period. What does this imply the companys expected rate for the euro per pound to be in

one year? A) €1.40/£ B) £1.40/€ C) £1.54/€ D) €1.54/£ Answer:

Question: The longer the time horizon of the technical analyst the more accurate the

prediction of foreign exchange rates is likely to be. Answer:

Question: The single most important element of technical analysis is that future exchange

rates are based on the current exchange rate. Answer:

Question: The more efficient the foreign exchange market is, the more likely it is that

exchange rate movements are random walks. Answer:

Question: Technical analysts, traditionally referred to as chartists, focus on fundamental

data to determine past trends that are expected to continue into the future. Answer:

Question: Foreign exchange forecasting can be either long-term, or short-term in duration.

Compare and contrast the motivation for and the techniques a forecaster might use for each

of the time periods. Answer: