Question 1

Which of the following is an example of a currency risk?

Accepted Answer

When a supplier's currency is appreciating against yours, it means you will need more of your currency to purchase the same amount of goods, increasing costs and creating currency risk.

Question 2

Which of the following term refers to the type of currency used only for domestic business transactions, and is accepted only by the residents of the issuing country?

Accepted Answer

Nonconvertible currency, also known as a "soft currency," is typically used only for domestic transactions and is not accepted on the international market. This means it can only be used within the borders of the issuing country and is not exchanged by foreign banks or traded on foreign exchange markets.

Question 3

Which of the following should an international manager keep in mind about the constantly fluctuating exchange rates?

Accepted Answer

Option D is correct because it highlights the impact of exchange rate fluctuations on the cost or revenue of a firm due to the time lag between order placement and delivery. Options A, B, and C are incorrect because they do not accurately reflect the complexities of dealing with exchange rates in international business. For example, firms often do not quote prices exclusively in their own currency (A), agreements can be made to use a specific exchange rate (B), and if a supplier's currency is appreciating, the buyer would have to pay more, not less, of their currency (C).

Question 4

The U.S. dollar is an example of ________.

Accepted Answer

The U.S. dollar is an example of a convertible currency, meaning it can be freely exchanged for other currencies without major restrictions or the need for government intervention.

Question 5

Which of the following resolves the problem of making international payments and facilitates international investment and borrowing among firms, banks, and governments?

Accepted Answer

Foreign exchange resolves the problem of making international payments and facilitates international investment and borrowing among firms, banks, and governments by allowing the conversion of one currency into another. This enables international trade and financial transactions.

Question 6

Plas-Tex Exporting (Scenario)
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.
-Which of the following supports maintaining the current production status instead of increasing production?

Accepted Answer

The unpredictability of the euro/dollar exchange rate supports maintaining the current production status instead of increasing production, as it introduces a risk factor that could affect the profitability of exporting more storage containers to Europe.

Question 7

Which of the following is an effect caused by capital flight?

Accepted Answer

Capital flight decreases the ability of the nation to service debt and pay for imports because it reduces the nation's supply of hard currencies.

Question 8

Which of the following statements is TRUE when a national currency can be undervalued?

Accepted Answer

An undervalued currency can make a country's exports cheaper and imports more expensive, potentially leading to a trade surplus as the country sells more abroad than it buys.

Question 9

A U.S. company buys from a supplier whose currency is increasing against the dollar. Which of the following will the company most likely have to do if the purchasing price is expressed in the supplier's currency?

Accepted Answer

When the supplier's currency is increasing against the dollar, it means that each dollar buys less of the foreign currency. Therefore, if the purchasing price is expressed in the supplier's currency, the U.S. company will have to use more dollars to buy the same amount of the foreign currency to meet the purchasing price, leading to paying more in dollars than originally expected.

Question 10

Currency risk can best be defined as the risk that occurs when ________.

Accepted Answer

Currency risk, also known as exchange rate risk, occurs when the value of one currency changes in relation to another. This can affect the value of investments, transactions, and earnings when they are converted from one currency to another.

Question 11

What is the value of one country's currency expressed in relation to the currency of another country?

Accepted Answer

The value of one country's currency expressed in relation to the currency of another country is known as the exchange rate. This rate determines how much of one currency can be exchanged for another currency.

Question 12

Plas-Tex Exporting (Scenario)
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.
-Which of the following should be considered closely before Chisholm recommends increasing production to take advantage of the current exchange rate?

Accepted Answer

C is correct because if the euro depreciates more than the U.S. dollar, it could negatively affect Plas-Tex's revenue from European sales, making it crucial to consider before increasing production based on the current exchange rate.

Question 13

Plas-Tex Exporting (Scenario)
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.
-Which of the following questions would be more important for Chisholm to evaluate before presenting his manufacturing recommendations to shareholders?

Accepted Answer

Understanding the currency risk of exporting additional products to Europe is crucial for making informed manufacturing recommendations, especially given the context of recent changes in exchange rates affecting exports.

Question 14

Which of the following is an example of a country that has experienced dollarization?

Accepted Answer

Ecuador is an example of a country that has experienced dollarization. It adopted the US dollar as its official currency in the year 2000 to combat inflation and stabilize its economy.

Question 15

The most universally accepted currencies for international business transactions are the British pound, European euro, Japanese yen, and U.S. dollar, which are all considered hard or convertible currencies.

Accepted Answer

These currencies are widely accepted and traded across global financial markets, making them the standard for international business transactions due to their stability and reliability.

Question 16

A French company sells goods to a foreign customer whose currency is depreciating against the euro. Which of the following will the company most likely experience when completing the sale?

Accepted Answer

If the sales price was expressed in the buyer's currency and that currency is depreciating against the euro, the company will receive fewer euros when converting the payment back to euros.

Question 17

If last year one dollar equaled one euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely NOT occur?

Accepted Answer

When the dollar strengthens against the euro, making one dollar equal two euros, U.S. goods and services become more expensive for Europeans. This typically leads to a decrease in demand for U.S. exports to Europe, not an increase.

Question 18

Which of the following statements is TRUE about currencies?

Accepted Answer

Convertible currencies are those that can be easily exchanged for other currencies without significant restrictions or the need for approval from a central bank. This makes them ideal for international trade and investment.

Question 19

Because the firm either accepting or making the payment assumes the risk for the fluctuation, companies have a tendency to prefer handling international business transactions with their own country's currency rather than with the currency of another country.

Accepted Answer

Companies prefer dealing in their own currency to avoid the risks associated with currency fluctuation, as it simplifies budgeting and financial planning by eliminating the need to speculate on future exchange rates.

Question 20

If the currency of Country A is depreciating against a currency of Country B, exports from Country A to Country B should increase.

Accepted Answer

When the currency of Country A depreciates against the currency of Country B, goods and services from Country A become cheaper for buyers in Country B, potentially increasing exports from Country A to Country B.

Quiz 9: The International Monetary and Financial Environment