Fundamentals of Multinational Finance, 3e (Moffett) Chapter 7

1

Foreign Exchang e Rate Determi nation and Forecast 7.1

i n g

Mul tipl e Ch oic e an d Tru e/F als e Qu esti ons

1)

The to remember about foreign exchange rate determination is that parity conditions, importa asset approach, and balance of payments approaches are ________ theories rather nt thing than ________ theories. A)

competing; complementary B)

competing; contemporary C)

complement ary. contiguous D) .

complement ary. competing Answer: .

D Topic : .

Complementar y Theories Skill: .

Recognition 2) .

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s? A) .

Infrastructur e weaknesses. B) .

Speculation on the part of market participants. C) .

The sharp D) reduction of cross-border foreign direct investment. .

All of the above contributed to the emerging markets exchange rate collapse of the 1990s. Answer: .

D Topic : .

Market Collapse Skill: .

Recognition 3) .

. Answer: . i. they are linked AND mutually determined.e.It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate.

TRUE Topic : .

Determinants of Spot Exchange Rates Skill: .

Conceptual 4) .

A popular speculation in the 1990s was A) .

.U.S. investors B) investing in Japanese securities to take advantage of Japan's higher nominal and real interest rates.

Japanese investors C) investing in the United States securities to take advantage of the higher U.S. . nominal and real interest rates.

dollar against the Russian Ruble. D) .selling short the U.S.

Answer: .None of the above was a popular speculation technique in the 1990s.

B Topic : .

International Speculation Skill: .

Recognition .

5) .

The provides a means to account for international cash flows in a standardized and ________ systematic manner. A) .

parity B) conditions .

asset C) approach .

balance of D) payments .

international Fisher effect Answer: .

C Topic : .

Balance of payments Skill: .

Recognition 6) .

Which of the following is NOT a current account activity? A) .

.Net B) import/export of goods (Balance of Trade).

Net C) import/export of services. .

D) .Net portfolio investment.

All of the above are activities of the current account. Answer: .

C Topic : .

Current Account Skill: .

Conceptual 7) .

The h argues that equilibrium exchange rates are achieved when the net inflow of ________ foreign exchange arising from current account activities is equal to the net outflow approac of foreign exchange arising from financial account activities. A) .

balance of B) payments .

monetary C) .

asset market D) .

law of one price Answer: .

A Topic : .

Exchange Rates Skill: .

Recognition 8) .

as well as the expected future levels and rates of growth approac of monetary stock A) .The h states that the exchange rate is determined by the supply and demand for ________ national currency stocks.

balance of B) payments .

monetary C) .

asset market D) .

law of one price Answer: .

B Topic : .

Exchange Rates Skill: .

Recognition 9) .

The argues that exchange rates are determined by the supply and demand for a wide ________ variety of financial assets A) .

balance of B) payments .

monetary C) .

asset market D) .

law of one price Answer: .

C Topic : .

Exchange Rates Skill: .

Recognition 10) .

Technic analysis of exchange rates developed in part due to the forecasting inadequacies of al fundamental exchange rate theories. Answer: .

TRUE Topic : .

Exchange Rates Skill: .

Conceptual 11) .

The h to the determination of spot exchange rates hypothesizes that the most ________ important factors are the relative real interest rate and a country's outlook for approac economic growth and profitability. A) .

balance of B) payments .

parity C) conditions .

managed D) float .

asset market Answer: .

D Topic : .

Asset Market Skill: .

Recognition 12) .

A) .The mise as to the key factors for exchange rate determination. They conclude that authors ________ is important in the short run. but that ________ determines long run compro exchange rates.

Fisher effect. PPP B) .

PPP .asset C) markets. interest rates. and expectations.

Fisher effect D) .PPP.

and expectations Answer: . interest rates.Fisher effect. asset prices.

B Topic : .

Key Factors for Equilibrium in Foreign Exchange Markets Skill: .

Conceptual 13) .

past trends that are expected to continue into the future. focus on price and volume data to determine .________ traditionally referred to as chartists. A) .

Mappists B) .

Trappist C) Monks .

Filibusters D) .

Technical analysts Answer: .

D Topic : .

Technical Analysis Skill: .

Recognition 14) .

The longer the time horizon of the technical analyst the more accurate the prediction of foreign exchange rates is likely to be. Answer: .

FALSE Topic : .

Technical Analysis Skill: .

Conceptual .

15) .

A) .Shortterm foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.

long-term capital appreciation .long-term B) investment.

desire to hedge a receivable .long-term C) capital appreciation.

the desire for long-term investment D) .the desire to hedge a payable.

the desire to hedge a payable Answer: .the desire for long-term investment.

C Topic : .

Key Factors for Equilibrium in Foreign Exchange Markets Skill: .

Recognition 16) .

the more likely it is that exchange rate movements are random walks.The more efficient the foreign exchange market is. Answer: .

TRUE Topic : .

Market Efficiency Skill: .

Conceptual 17) .

and an exchange rate of $1.A major U. multinat ional firm has forecast the euro/dollar rate to be euro1. What does this imply the company's expected rate for the euro per pound to be in one year? A) .10/$ one year hence.40 for the British pound (£) in the same time period.S.

40/£ B) .euro 1.

£1.40£/euro C) .

54/euro D) .£1.

54/£ Answer: .euro 1.

D Topic : .

Currency Cross Rates Skill: .

Analytical 18) .

Answer: .The claim that theoretical and empirical studies appear to show that fundamentals do authors apply to the long-term for foreign exchange.

TRUE Topic : .

Key Factors for Equilibrium in Foreign Exchange Markets Skill: .

Recognition 19) .

institutional frictions. and technical factors may cause authors currency values to deviate significantly from their long-term fundamental path.The claim that random events. Answer: .

TRUE Topic : .

Key Factors for Equilibrium in Foreign Exchange Markets Skill:

Recognition

20)

The claim that the theories of international currency values hold better for less liquid authors and poorly capitalized markets. Answer:

FALSE

Topic :

Key Factors for Equilibrium in Foreign Exchange Markets Skill:

Recognition

21)

Which of the following was not an international currency crisis in the 1990s and early 2000s? A) .

The Asian B) Crisis .

The Russian Crisis C) .

The D) Argentine Crisis .

All of the above were currency crises in the 1990s and 2000s. Answer: .

D Topic : .

International Currency Crises Skill: .

Recognition 22) .

A) .The Asian Currency crisis appeared to begin in ________.

South Korea B) .

Taiwan C) .

Thailand D) .

Japan Answer: .

C Topic : .

International Currency Crises Skill: .

Recognition 23) .

the Thai government A) . 1997.Prior to July 2.

B) .allowed the Thai Bhat to float against major currencies.

fixed the C) Bhat's value against the Korean won only. .

fixed the D) Bhat's value against major currencies especially the U. dollar. .S.

Answer: .None of the above.

C Topic : .

International Currency Crises Skill: .

Recognition 24) .

The effect" is a slang term used to describe a form of financial panic called ________. "tequila A) .

run on the B) market .

speculation C) .

contrary D) investing .

contagion Answer: .

D Topic : .

International Currency Crises Skill: .

Recognition 25) .

The authors did not identify which of the following as a root of the Asian currency crisis? A) .

The collapse of some Asian currencies. B) .

.The rate of C) inflation in the United States.

.Corporate D) socialism.

Banking stability and management. Answer: .

B Topic : .

International Currency Crises Skill: .

Conceptual .

26) .

Corpora te socialism in the Asian markets could be contributed in part A) .

to the B) relatively short and stable post-WWII history of capitalism in their markets. .

a belief by of Asian companies that their governments would not allow them to fail. the owners C) .

the practice of lifetime employment at many corporations. D) .

all of the above. Answer: .

D Topic : .

International Currency Crises Skill: .

Recognition 27) .

The refer to the practice of many Asian firms being largely controlled by families of authors groups related to the governing body of the country as ________. A) .

illegal B) .

insider C) trading .

cronyism D) .

not in my backyard Answer: .

C Topic : .

International Currency Crises Skill: .

Recognition 28) .

principl A) .The e focus of the IMF bailout efforts during the Asian financial crisis was ________.

banking B) liquidity .

shareholder' s wealth C) .

reestablishin g fixed currency exchange rates in Asia D) .

dollarization of Asian currencies Answer: .

A Topic : .

Asian Crisis Skill: .

Recognition 29) .

In the years immediately preceding 1998 the Russian Ruble operated under a ________ type of exchange rate regime. A) .

fixed B) .

free floating (market determined) C) .

managed D) floating .

pegged (to the U.S. dollar) Answer:

C

Topic :

Asian Crisis Skill:

Recognition

30)

________ is the official Chinese currency. A)

Baht B)

Won C)

Ringgit D) .

Renminbi Answer: .

D Topic : .

Asian Crisis Skill: .

Recognition .

31) .

The of the Russian Ruble in the 1990s (until the Russian debt crisis) was considered an stability observable success of the Yeltsin administration. Answer: .

TRUE Topic : .

Russian Crisis Skill: .

Recognition 32) .

A) .35/$) in 1997. the Russian government would intervene in the markets to stabilize the Ruble. If the exchange rate approached Ru5.70/$ to Ru6. or if the exchange rate approached Ru6.70/$ the government would ________ Rubles using foreign exchange and gold.35/$ they would ________ Rubles.When the Russian Ruble reached the limits of the bands about its managed float targets (Ru5.

sell B) .buy.

buy C) .sell.

buy. buy D) .

sell. sell Answer: .

B Topic : .

Russian Crisis Skill: .

Conceptual 33) .

35/$.70/$-Ru6. A) .After government (in August 1998) allowed the Ruble to move outside its official trading the range of between Ru5. the value of the Ruble eventually ________ to Russian around ________ by May 1999.

increased. B) Ru13/$ .

50/$ . C) Ru4.increased.

Ru13/$ D) .decreased.

decreased. Ru25/$ Answer: .

D Topic : .

Russian Crisis Skill: .

Recognition 34) .

It is safe to say that the Russian transition from a communist economy to a capitalist economy has been smooth for the Russian people Answer: .

FALSE Topic : .

Russian Crisis Skill: .

Recognition 35) .

A) .The ________ is the Argentine currency unit.

peso B) .

dollar C) .

real D) .

peseta Answer: .

A Topic : .

Argentine Crisis Skill: .

Recognition .

36) .

the government of the country is officially responsible for: fixed A) .Under a exchange rate regime.

Intervention in the foreign exchange markets using reserves and gold. B) .

Setting the fixed/parity exchange rate. C) .

D) .Maintaining the fixed/parity exchange rate.

Answer: .All of the above.

D Topic : .

Exchange Rate Equilibrium Skill: .

Conceptual 37) .

Which of the following is NOT a factor in determining exchange rate equilibrium? A) .

relative B) inflation rates .

relative C) interest rates .

market D) expectations .

All of the above are factors in determining equilibrium exchange rates. Answer: .

D Topic : .

Exchange Rate Equilibrium Skill: .

Recognition 38) .

The Asian currency crisis was primarily a A) .

.parity B) conditions problem.

.an asset C) markets problem.

.balance of D) payments problem.

Answer: .PPP problem.

C Topic : .

Asian Crisis Skill: .

Recognition 39) .

A) .The Ruble crisis of 1998 was a complex combination of speculative pressures best Russian explained by ________ to exchange rate determination.

parity B) conditions approach .

asset C) approach .

balance of D) payments approach .

PPP approach Answer: .

B Topic : .

Russian Crisis Skill: .

Recognition 40) .

Which of the following is a driver in the determination of foreign exchange rates under the Asset Market Approach to forecasting? A) .

relative B) inflation rates .

relative real interest rates C) .

forward D) exchange rates .

the current account balance Answer: .

B Topic : .

Relative Real Interest Rates Skill: .

Recognition .

41) .

S.The U. ic bubble burst after the attacks of September 11.S. economic downturn? A) . 2001. Which of the following econom could be considered a contributing factor to the U.

S.a negative B) reassessment of long-term economic growth prospects in the U. .

a newly C) formed level of political risk .

lower D) expected earnings .

all of the above Answer: .

D Topic : .

2001 Skill: .September 11.

Conceptual 42) .

A currency board is A) .

a structure. mere commitment. rather than a B) . to limiting the growth of the money supply in the economy.

a recipe for conservative and prudent financial management. C) .

D) .designed to the power of politicians to exercise judgment by relying on an automatic and eliminate unbendable rule.

Answer: .all of the above.

D Topic : .

Currency Board Skill: .

Recognition 43) .

Answer: . dollar on a one-to-one basis.In 1991 the Argentine peso was fixed to the value of the U.S.

TRUE Topic : .

Argentine Financial Crisis Skill: .

Recognition 44) .

S.Argenti ic performance in the 1990s while their peso was pegged to the U. econom A) . dollar can be na's characterized as ________ rates of inflation and ________ rates of unemployment.

high B) .high.

low C) .low.

low; high D)

high; low Answer:

C

Topic :

Argentine Financial Crisis Skill:

Conceptual

45)

During the

1990s Argentina's exports became some of the least expensive in all of South America thanks in part to the pegging of the Argentine peso to the U.S. dollar. Answer:

FALSE

Topic :

Argentine Financial Crisis Skill: .

Recognition 46) .

00 per Argentine peso.One of the solutions to the Argentine peso crisis of 2003 was to devalue the peso to the approximate value of $2. Answer: .

TRUE Topic : .

Argentine Financial Crisis Skill: .

Recognition .

47) .

"Oversh exchange rate changes in response to an action of the Federal Reserve would be an ooting" example of A) .

.a market B) inefficiency.

.a market C) efficiency.

the Fisher D) Effect. .

none of the above. Answer: .

A Topic : .

Market Inefficiency Skill: .

Recognition 48) .

2006 the value of the Yuan will officially Chinese change from 8.The ment announces that on December 31.287 Yuan/$ to 7. A) .500 Yuan/$. This would be an official ________ of the govern Chinese currency of ________.

50% B) .revaluation. 9.

revaluation.49% C) . 10.

50% D) . 9.devaluation.

49% Answer: . 10.devaluation.

B Topic : .

Currency Revaluation Skill: .

2 .Analytical 7.

Ess

1)

Foreign forecasting can be either long-term, or short-term in duration. Compare and exchan contrast the motivation for and the techniques a forecaster might use for each of ge the time periods. Answer:

Short-run forecasts are usually more tactical in nature as a firm may desire to reduce exchange rate risk associated with foreign receivable or payables. Technical factors and short-term market expectations are often more important for short-run forecasters than long-run parity or fundamental economic conditions. Long-run forecasts are more strategic in nature as firms make key decisions about entering new foreign markets. Longer time horizons tend to be less accurate but also require less accuracy. What forecasters typically desire is a general long-run understanding of the relationships between markets. Fundamental analysis and parity conditions tend to be more important than technical factors in this type of forecasting.

2)

Describ asset market approach to exchange rate determination. How is this consistent with e the economic theory of (say, security) prices in general? Answer:

The asset market approach to exchange rate determination looks at relative interest rates and prospects for economic growth and profitability. This is consistent with the pricing of equity securities in that the price of a share of stock should reflect expectations about the timing, magnitude, and risk of future cash flows. In other words, expectations about what is to come is more important to the price of an asset, including currency prices, than what has occurred in the past.

3) .

Assume has a balance of payments surplus. How would the government and markets react your to "correct" this imbalance under a fixed exchange rate regime? Under a floating country exchange rate regime? Answer: .

Under a fixed exchange regime. Under a floating exchange rate regime. thus reducing exports.A BOP surplus means there is a surplus demand for the country's currency most likely due to a surplus of exports of goods and services. and moving the balance of payments toward equilibrium. the government is obligated to attempt to keep the BOP at or near zero. . increasing imports. Demand for the currency would in theory push the value up. the excess demand for the home currency would result in an appreciating currency on the foreign exchange markets. This surplus demand for currency means the government must supply it to the international markets by using currency to buy gold or foreign currencies in the international market place.

Sign up to vote on this title
UsefulNot useful