Chapter 1

Question 1

An exchange rate system in which a currency’s value
is allowed to fluctuate in response to market forces.

Answer 1

Floating Exchange rate

Question 2

An exchange rate system in which the price of one currency’s
is fixed relative to another country by government authorities.

Answer 2

Fixed exchange rate

Question 3

A hybrid currency system in which a government loosely fixes the value of the national currency relative to one or more other countries.

Answer 3

Manage Floating Rate system

Question 4

An exchange rate system in which each unit of the domestic currency is backed by a unit of some foreign currency.

Answer 4

Currency Board Arrangement

Question 5

An exchange rate quoted in terms of units in domestic currency per unit of foreign currency.

Answer 5

Direct Quote

Question 6

An exchange rate quoted in terms of foreign currency per unit of domestic currency.

Answer 6

Indirect quoted

Question 7

A currency ?? when it buys less of another currency than it did previously.

Answer 7

Depreciate

Question 8

A currency ??? when it buys more of another currency than it did previously.

Answer 8

Appreciate

Question 9

The exchange rate that applies to immediate currency transactions.

Answer 9

Spot Exchange Rate

Question 10

The exchange rate quoted for a transactions
that will occur on a future date.

Answer 10

Forward Exchange Rate

Question 11

When one currency buys more of another on the on the forward market that it buys on the spot market.

Answer 11

Forward Premium

Question 12

When one currency buys less of another on the on the forward market that it buys on the spot market

Answer 12

Forward Discount

Question 13

An exchange rate between two currencies calculated by taking the ratio of the exchange rate of each currency.

Answer 13

Cross Exchange Rate

Question 14

A trading strategy in which traders buy a currency in a country where the value of that currency is too low and immediately sell the currency in another country where the currency value is too high.

Answer 14

Triangular Arbitrage

Question 15

The world’s largest financial market

Answer 15

Foreign Exchange Market

Question 16

Market Participants of Foreign Exchange

Answer 16

Exporters & importers
Investors
Hedgers
Speculators
Dealers
Governments

Question 17

To pay bills denominated in foreign currency or to convert foreign currency revenues back into the domestic currency

Answer 17

Importers & Exporters

Question 18

When they seek to buy and sell financial assets in foreign Countries

Answer 18

Investors

Question 19

influence currency values when they take position to offset the risks of their existing exposures to certain currencies

Answer 19

Hedgers

Question 20

Sell a currency if they expect it to depreciate and buy if they expect it to appreciate.

Answer 20

Speculators

Question 21

To put upward or downward pressure on currencies as circumstances dictate.

Answer 21

Government

Question 22

Types of Parity Conditions

Answer 22

❖Forward-Spot Parity
❖Purchasing Power Parity
❖Interest Rate Parity
❖Real Interest Rate Parity

Question 23

refer to the economic theories that link exchange rates, price levels (inflation), and interest rates.

Answer 23

International Parity

Question 24

term used to describe when two things are equivalent to one another

Answer 24

Parity

Question 25

is any equation expressing the relation between arbitrage-free prices for spot and forward delivery

Answer 25

Spot-forward Parity

Question 26

the current exchange rate

Answer 26

Spot rate

Question 27

the rate at which a bank agrees to exchange one currency for another in the future

Answer 27

Forward rate

Question 28

are simply price relatives that show the ratio of the prices in national currencies of the same goods or services in different countries.

Answer 28

Purchasing Power Parity

Question 29

A theory that says that identical good trading in different markets must sell at the same price.

Answer 29

Law of one price

Question 30

An equilibrium relationship that predicts that differences in risk-free interest rates in two countries must be tied to differences in currency values on the spot and forward markets.

Answer 30

Interest Rate Parity

Question 31

simply means that risk free investments should offer the same return after converting currencies everywhere.

Answer 31

Interest Rate Parity

Question 32

designed to exploit deviations from interest rate parity to earn an arbitrage profit.

Answer 32

Covered Interest Arbitrage

Question 33

is a strategy in which an investor uses a forward contract to hedge against exchange rate risk.

Answer 33

Covered Interest arbitrage

Question 34

An equilibrium relationship that predicts that the real interest rate will be the same in every country. This means that investors should earn the same real rate of return on risk-free investments no matter the country in which they choose to invest.

Answer 34

Real Interest Rate Parity

Question 35

The risk that movements in exchange rates will adversely affect the value of a particular transaction.

Answer 35

Transaction Risk

Question 36

The risk that exchange rate movements will adversely impact reported financial results on a firms financial statements.

Answer 36

Translation Exposure

Question 37

The risk that a firm’s value will fluctuate due to exchange rate movements.

Answer 37

Economic Exposure

Question 38

An equilibrium relationship that predicts that differences in risk-free interest rates in two countries must be tied to differences in currency values on the spot and forward markets.

Answer 38

Interest Rate Parity

Question 39

An equilibrium relation- ship that predicts that the real interest rate will be the same in every country

Answer 39

Real Interest Rate Parity

Question 40

The process by which investors determine the value of a potential investment project.

Answer 40

Capital Budgeting

Question 41

is the price at which the currency dealer is willing to sell foreign currency

Answer 41

Ask price

Question 42

is the price at which the dealer is willing to buy currency.

Answer 42

Bid Price

Question 43

To put upward or downward pressure on currencies as circumstances dictate.

Answer 43

Government