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Chapter 08

Chapter 08

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Published by skwagwok

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Published by: skwagwok on Feb 13, 2010
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Chapter 8 Foreign Exchange Markets
True/False Questions
1.If a foreign currency appreciates, that country's goods and services become relativelymore expensive for U.S. buyers.Answer: True Page: 223-224 Level: Medium2.A U.S. firm agrees to import textiles from Hong Kong and pay in 90 days. Theinvoice requires payment in Hong Kong dollars. The U.S. importer could hedge thiscurrency risk by buying the HK dollar forward.Answer: True Page: 226 Level: Easy3.In 1971 the Bretton Woods Agreement established th`t for the first time cqrrencyvalues would be fixed against one another within narrow bands.Answer: False Page: 221 Level: Easy4.In 1973 the Smithsonian Agreement II ediminated fixed exchange rates for the major economies.Answer: True Page: 221 Level: Easy5.If you can convert 150 Swiss francs to $90 the exchange rate is 1.67 fralcs per dollar.Answer: True Page: 223 Level: Medium6.If the dollar is in)tially worth 120 yen and then the exchange rate changes so that thedollar is now worth 115 yen, the value of the yen has depreciated.Answer: False Page: 223 Level: Medium7.If the euro per yen ratio falls the value of the yen has risen.Answer: False Page: 223 Level: Medium8.If the U.S. has inflation of 3% and Europe has inflation of 5%, the value of the Euroshould increase, ceteris paribus.Answer: False Page: 235-236 Level: Easy
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9.A U.S. bank has £12 million worth of loans and £10 million worth of deposits inBritain. The bank would benefit from a drop in the value of the pound against thedollar.Answer: False Page: 231 Level: Medium10.A country with lower interest rates than another country is likely to see its currencyappreciate.Answer: True Page: 235,239 Level: Medium
Multiple Choice Questions
11.Foreign exchange trading in 2004 averaged about _____________ per day.A)$101 millionB)$1.1 billionC)$101 billionD)$1.88 trillionE)$101 trillionAnswer: D Page: 226 Level: Easy12.In 2004, the U.S. imported goods and services worth about _____________ andexported about _________ leading to a current account ____________.A)$1.3 trillion; $1.6 trillion; deficitB)$1.3 trillion; $1.6 trillion; surplusC)$1.3 trillion; $1.3 trillion; balanceD)$1.6 trillion; $1.3 trillion; deficitE)$2.0 trillion; $1.5 trillion; deficit.Answer: E Page: 220 Level: Medium13.A U.S. investor has borrowed pounds, converted them to dollars and invested thedollars in the U.S. to take advantage of interest rate differentials. To cover thecurrency risk the investor shouldA)Sell pounds forwardB)Buy dollars forwardC)Buy pounds forwardD)Sell pounds spotE)None of the aboveAnswer: C Page: 231-234 Level: Difficult
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14.A U.S. bank borrowed dollars, converted them to euros and invested in eurodenominated CDs to take advantage of interest rate differentials. To cover thecurrency risk the investor shouldA)Sell dollars forwardB)Sell euros forwardC)Buy euros forwardD)Sell euros spotE)None of the aboveAnswer: B Page: 231-234 Level: Difficult15.A U.S. firm has £50 million in assets in Britain which they need to repatriate in 6months. They could hedge the exchange rate risk byA)Buying pounds forwardB)Selling pounds forwardC)Borrowing poundsD)Both B and C would hedge the risk E)Both A and C would hedge the risAnswer: D Page: 231-234 Level: Difficult16.A U.S. firm has borrowed £50 million from a British firm. The borrower will need toconvert dollars to pounds to repay the loan when it is due. The U.S. firm could hedgethe exchange rate risk byA)Buying pounds forwardB)Selling pounds forwardC)Borrowing poundsD)Both B and C would hedge the risk E)Both A and C would hedge the risAnswer: A Page: 231-234 Level: Medium
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