Question 1

The foreign exchange market is

Accepted Answer

A key feature of the foreign exchange market is that the market never sleeps. Tokyo, London, and New York are all shut for only three hours out of every 24.

Question 2

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

Accepted Answer

Buying a currency low and selling it high is arbitrage.

Question 3

The Fisher Effect states that

Accepted Answer

The Fisher Effect states that a country's "nominal" interest rate is the sum of the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent. (i = r + I)

Question 4

Assuming the 30-day forward exchange rate was $1 = 130 and the spot exchange rate was $1 = ×120, the dollar is selling at a ________ on the 30-day forward market.

Accepted Answer

$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.

Question 5

When two parties agree to exchange currency and execute the deal at some specific time in the future, a ________ occurs.

Accepted Answer

A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

Question 6

The International Fisher Effect has

Accepted Answer

The International Fisher Effect is not a good predictor of short-run changes in spot exchange rates.

Question 7

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will

Accepted Answer

The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

Question 8

The ________ is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.

Accepted Answer

The foreign exchange market is not located in any one place. It is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.

Question 9

Although a foreign exchange transaction can involve any two currencies, most transactions involve ________ on one side.

Accepted Answer

Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side.

Question 10

Which of the following is one of the most important trading centers in the foreign exchange market?

Accepted Answer

The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems. The most important trading centers are London, New York, Zurich, Tokyo, and Singapore.

Question 11

Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be

Accepted Answer

PPP theory states that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country. So, if a basket of goods costs $200 in the United States and ¥20,000 in Japan, PPP predicts that the dollar/yen exchange should be $200/¥20,000 or $.01 per Japanese yen.

Question 12

Which of the following is the most important foreign exchange trading center?

Accepted Answer

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.

Question 13

________ 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.

Accepted Answer

A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. 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.

Question 14

________ are exchange rates governing some specific future date foreign exchange transactions.

Accepted Answer

Forward exchange rates represent market participants' collective predictions of likely spot exchange rates at specified future dates.

Question 15

________ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Accepted Answer

A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Question 16

Which of the following refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates?

Accepted Answer

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.

Question 17

Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about

Accepted Answer

Such differences are normal; they reflect the expectations of the foreign exchange market about future currency movements.

Question 18

________ is quoted for 30 days, 90 days, and 180 days into the future.

Accepted Answer

For most major currencies, forward exchange rates are quoted for 30 days, 90 days, and 180 days into the future.

Question 19

Inflation occurs when

Accepted Answer

Inflation is a monetary phenomenon. It occurs when the quantity of money in circulation rises faster than the stock of goods and services, that is, when the money supply increases faster than output increases.

Question 20

The purchasing power parity (PPP) theory argues that the exchange rate will

Accepted Answer

The PPP theory argues that the exchange rate will change if relative prices change.

Quiz 10: The Foreign Exchange Market