Deck 7: Dealing With Foreign Exchange

Question 1

When the United States sells products to China, US exporters often demand that they be paid in the Chinese yuan.

Answer 1

False

Question 2

The International Monetary Fund offers both loans and free grants to countries depending on the stability and need of the borrower.

Answer 2

False

Question 3

A deficit in the current account does not have to be balanced by other financial accounts.

Answer 3

False

Question 4

Even though a country may have a high currency risk, the country might still be worthy of investment.

Question 5

Only managers in financial firms have to worry about foreign exchange issues because non-financial firms are immune to risks of changing currencies.

Question 6

The current account balance consists of exports, minus imports of merchandise and services, plus income on US assets abroad, minus payments on foreign assets in the United States, plus unilateral government transfers and private remittances.

Question 7

The gold standard propelled the US dollar to commanding heights in the global economy.

Question 8

Purchasing power parity is the price of one currency in terms of another.

Question 9

The rise of a country s productivity is usually accompanied by increased demand for its home currency.

Question 10

The foreign exchange market has no central physical location but operates 24/7 and is the largest and most active market in the world.

Question 11

While theories on PPP, interest rates, and money supply give often-accurate predictions about long-term movements, investor psychology is regarded as the determinant behind short-term movements.

Question 12

Strategic hedging means spreading out activities in a number of countries in different currency zones to offset the currency losses in certain regions through gains in other regions.

Question 13

Smaller, internationally inexperienced firms sometimes outsource currency hedging to specialists such as currency traders.

Question 14

Governments that believe in a free market approach usually adopt floating exchange rate policies.

Question 15

Currency hedging is a popular way to minimize the foreign exchange risk inherent in all nonspot transactions.

Question 16

A large number of individuals and companies exchanging domestic currencies for US dollars in order to exit their home country is referred to as capital flight.

Question 17

The Bretton Woods system was formed at a conference in England.

Question 18

Under the gold standard, every central bank needed to maintain gold reserves in order to be able to redeem its currency in gold at a fixed price.

Question 19

Since foreign exchange is such a unique commodity, its markets are influenced only by economic factors and are free from the effect of social or political pressures.

Question 20

It is only crucial that managers pay attention to long-run movements informed by PPP, productivity changes, and balance of payments because short-run fluctuations always even out.

Question 21

The best practice for facing currency risk is to have a well thought-out currency management strategy and plan for both long-run movements and short-run movements.

Question 22

Traders and investors trading in a forward transactions market are most concerned about:

A) Political and social stability of the foreign country
B) Change in the spot rate
C) Regulation from the International Monetary Fund
D) Currency hedging

Question 23

What was one of the major reasons the gold standard fell apart?

A) Countries fighting in World War I printed excessive amounts of money to finance their war efforts.
B) Military campaigns during World War I stole much of the gold from foreign central banks.
C) Gold lost its value and was no longer reliable.
D) Gold became too rare and costly to maintain adequate reserves.

Question 24

____ allow participants to buy and sell currencies now for future delivery.

A) Swaps
B) Direct transactions
C) Spot transactions
D) Forward transactions

Question 25

Where does the International Monetary Fund receive its funds?

A) Member countries quota
B) Foreign direct investment
C) Subsidiary investing
D) Currency trading

Question 26

Which of the following is NOT one of the components of the balance of payments?

A) Currency trade
B) Merchandise trade
C) Service trade
D) Capital movement

Question 27

If central bankers raise interest rates to curb inflation, they risk driving currency ____. If their interventions in the foreign exchange market drive the currency ____, they may boost inflation.

A) Up, up
B) Up, down
C) Down, down
D) Down, up

Question 28

The ____ is defined as the difference between the offered price and the bid price.

A) Offer rate
B) Spread
C) Discount
D) Premium

Question 29

Which of the following is best defined by the conversion of one currency into another at Time 1, with an agreement to revert it back to the original currency at a specific Time 2 in the future ?

A) Currency swap
B) Direct currency transaction
C) Spot currency transaction
D) Forward currency transaction

Question 30

Which of the following is the concept behind the Big Mac index?

A) Purchasing power parity
B) Fixed exchange rate policy
C) Balance of payments
D) Currency swap

Question 31

____ is an international organization that was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

A) Bretton Woods System
B) World Bank
C) International Monetary Fund
D) Grameen Bank

Question 32

If a country s interest rate is high relative to other countries, the country will:

A) Develop a trade deficit.
B) Attract foreign funds.
C) Experience depreciation in its home currency.
D) Discourage foreign investing.

Question 33

A country experiencing a current account surplus will see its currency ____, while a country experiencing a current account deficit will see its currency ____.

A) Appreciate, appreciate
B) Appreciate, depreciate
C) Depreciate, appreciate
D) Depreciate, depreciate

Question 34

What is the law of one price, where the price for identical products in different countries should be the same if trade barriers are absent?

A) Purchasing power parity
B) Fixed exchange rate policy
C) Balance of payments
D) Currency swap

Question 35

Which of the following best describes a rate in which selective government intervention works hand-in-hand with allowing markets the freedom to work themselves out?

A) Floating rate
B) Fixed rate
C) Dirty float rate
D) Target exchange rate

Question 36

What measure did worried Latin American governments take to restrain the value of their currencies?

A) They bought foreign reserves
B) They extended reserve requirements for banks sales of foreign exchange
C) They made deposits into the Central Bank that attracted no interest
D) All of the above

Question 37

Why was the US dollar chosen as the currency to which other currencies would be pegged?

A) The US had high levels of productivity.
B) The US was experiencing a large trade surplus.
C) The US contributed approximately 70% of the global GDP.
D) All of these answers

Question 38

Which is NOT one of the primary types of foreign exchange transactions?

A) Swaps
B) Direct transactions
C) Spot transactions
D) Forward transactions

Question 39

Which of the following is NOT one of the three primary activities of the International Monetary Fund?

A) International monetary cooperation
B) Exchange stability
C) Pegging exchange rates
D) Orderly exchange arrangements

Question 40

In the trade relationship with China, why is the US dollar in more demand than the Chinese yuan?

A) More people demand the yuan domestically in China, so it is not used for imports and exports.
B) The dollar is the common transaction currency between the two countries.
C) The yuan is pegged to the US dollar.
D) Formal institutions and regulations demand the trade be conducted in the dollar.

Question 41

Identify the difference between fixed and floating exchange rates. Provide an example of a situation where the fixed and floating exchange rates are used.

Question 42

Which of the following is most focused on currency diversification?

A) Currency hedging
B) Spot transactions
C) Strategic hedging
D) Trading risk

Question 43

Briefly explain the cause for the fall of the Bretton Woods system and identify the modern situation.

Question 44

Which of the following is NOT an advantage of a strong US dollar?

A) US consumers benefit from low prices on imports.
B) US tourists benefit from lower prices when traveling abroad.
C) Lower prices on foreign goods help keep US prices level and inflation low.
D) US firms in import-competing industries face more low-cost imports.

Question 45

Describe what it means for a country to peg its currency to another, and give two benefits to this policy.

Question 46

Identify the concept behind the Big Mac index and provide an example why this index should be used with caution.