Chapter 9

Question 1

to investigate the short-run determination of exchange rates, the____ is used.

Answer 1

asset market approach i

Question 2

reducing a firm’s exposure in foreign exchange risk may include hedging in the

Answer 2

forward exchange markets, money markets and currency future markets.

Question 3

foreign exchange rates are influenced by:

Answer 3

a. inflation rates
b. differences in interest rates
c. government policies
d. expectations of foreign exchange markets participants

Question 4

rates changes continuously and is determined by the foreign exchange market.

Answer 4

Flexible exchang

Question 5

FACTORS THAT AFFECT EXCHANGE RATES IN THE LONG RUN

Answer 5

Relative Price Levels
a rise in a country’s price level causes its currency to depreciate.
Trade barriers
a fall in the country’s relative price level causes its currency to appreciate.
Preferences for Domestic vs. Foreign Goods
increase in the demand for a country’s exports causes it currency to appreciate, conversely, increase for import causes the domestic currency to depreciate.
Productivity
as a country becomes more productive relative to other countries, its currency appreciates.

Question 6

the indirect computation of the exchange rate of one currency from the exchange rates of two other currencies.

Answer 6

Cross rates

Question 7

current method of exchange rate determination.
During periods of extreme fluctuation in the value of a nation’s currency, intervention by governments or central banks may occur to maintain fairly stable exchange rates.

Answer 7

Managed Float

Question 8

rates rarely change and is usually set by the national government.

Answer 8

Fixed exchange

Question 9

exposed on foreign exchange risk are

Answer 9

importers, exporters, investors and multinational firms.

Question 10

Involve the exchange of bank deposits at some specified future date.

Answer 10

FORWARD TRANSACTIONS

Question 11

buy-and-sell strategy in more than one market to make a riskless profit.
foreign exchange quotations in two different countries must be in line with each other.

Answer 11

Arbitrage/Triangular Arbitrage

Question 12

the possibility of a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates.

Answer 12

Foreign exchange risk

Question 13

A country’s balance of trade refers to the difference in how much a country is importing versus exporting.

Answer 13

Balance of payments

Question 14

Involve immediate (two-day) exchange of bank deposits.

Answer 14

SPOT TRANSACTIONS

Question 15

the exchange rate at which the currency for future delivery is quoted.

Answer 15

FORWARD RATES

Question 16

arbitrage opportunities do not persist for a long time, thus, making spot exchange markets efficient.

Answer 16

true

Question 17

foreign funds are supplied at an indexed price but with an option to convert to a future-based fixed price when a specified basis differential exists between the two prices

Answer 17

trigger pricing

Question 18

Foreign Exchange Market also known as “Forex” is a global online network that buy and sell currency. It has no physical location, instead it is an over-the-counter market that operates 24 hours a day, seven days a week.

Answer 18

FOREIGN EXCHANGE MARKET

Question 19

focuses on the decisions to hold domestic or foreign assets

Answer 19

modern approach

Question 20

These are the two types of exchange rates:

Answer 20

flexible exchange
fixed exchange

Question 21

occur in the over-the-counter market where they negotiate the exchange rate, the length of the forward contract, and the commission.

Answer 21

forward transactions

Question 22

“Exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.”

Answer 22

Theory of Purchasing Power Parity

Question 23

emphasized the role of import and export demand

Answer 23

earlier approaches

Question 24

a contract does not hedge any exposure, rather it creates the exposure.

Answer 24

speculative forward contract

Question 25

cause interest rates to fall, decreasing its chance to acquire more foreign capital. The demand for the currency weakens, therefore, lowering the exchange rates.

Answer 25

Recession

Question 26

person involved in arbitrage

Answer 26

arbitrageur

Question 27

The Exchange rates of a currency fluctuate due to

Answer 27

imbalances between the supply and the demand levels which drive the market.

Question 28

Some of the Economic factors that affect the movement in Exchange rate:

Answer 28

Inflation
interest rates
Balance of payments
Government intervention
Recession
Political, economic conditions and public debts

Question 29

What are the Foreign Currency Exchange Rate Transactions?

Answer 29

SPOT TRANSACTIONS
FORWARD TRANSACTIONS

Question 30

is simply the rate at which country’s currency can be traded for another country’s currency. It has two components, the domestic currency and the foreign currency.

Answer 30

Exchange rate

Question 31

WHY ARE EXCHANGE RATE IMPORTANT?

Answer 31

Exchange rates are important because they affect the relative price of domestic and foreign goods.
The dollar price of French goods to an American is determined by the interaction of two factors: the price of the French goods in Euros and the euro/dollar exchange.
Exchange rates are among the most watched, and constantly evaluated economic measures.