SOM Ch 10 MC

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1. According to the Fisher effect, if the "real" rate of interest in a country is 4 percent and the expected annual B. 13 percent
inflation is 9 percent, what would the "nominal" interest rate be?

A. 5 percent

B. 13 percent

C. 9 percent

D. 36 percent

E. 2.25 percent
2. An American company imports laptop computers from Japan. The company knows that after a shipment arrives, D. The
it must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the American company must importer will
pay the Japanese supplier ×150,000 for each computer at the current dollar/yen spot exchange rate of $1 = ×110. incur a loss of
The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds approximately
to pay the Japanese supplier until the computers have been sold. Which of the following will happen if the $67 per
exchange rate after 30 days is $1 = ×90? computer.

A. The importer will earn a profit of approximately $236 per computer.

B. The importer will earn a profit of approximately $67 per computer.

C. The importer will incur a loss of approximately $236 per computer.

D. The importer will incur a loss of approximately $67 per computer.

E. The importer will incur a loss of approximately $90 per computer.

3. Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following C. The dollar
is true of the foreign exchange dealers' market's expectations about the dollar over the next 30 days? will
appreciate
against the
A. The dollar will depreciate against the euro. euro.

B. The market is undecided about the direction of currency movement.

C. The dollar will appreciate against the euro.

D. The dollar/euro exchange rate will be steady.

E. The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.
4. Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the D. Arbitrage
New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ×123 = $1.
Which of the following transactions would yield immediate profit?

A. Forward exchange

B. Carry trade

C. Currency swap

D. Arbitrage

E. Currency speculation
5. Companies can deal with the problem of nonconvertibility of currency by engaging in: B. countertrade.

A. price discrimination.

B. countertrade.

C. arbitrage.

D. price skimming.

E. currency speculation.
6. The currency of the country of Venadia falls sharply in value against the currency of B. Venadia's exports to Lutetia will
Lutetia, a neighboring country. Which of the following is a consequence of this exchange increase, because Venadian goods
rate movement? will become cheaper in Lutetia.

A. Lutetia's products will achieve a competitive pricing in Venadia.

B. Venadia's exports to Lutetia will increase, because Venadian goods will become cheaper
in Lutetia.

C. Venadia's products will cost more in Lutetia.

D. There will be no difference in the volume or direction of trade.

E. Lutetia's exports to Venadia will increase, because Lutetian goods will become cheaper in
Venadia.
7. During inflation, an increase in the amount of currency available leads to: B. changes in the relative demand-and-
supply conditions in the foreign exchange
market.
A. overheating of the economy thereby reducing the production levels in the
economy.

B. changes in the relative demand-and-supply conditions in the foreign exchange

market.

C. a reduction in the rate of inflation thus leading to an appreciation of the

currency.

D. decreased lending by banks thereby resulting in more savings.

E. a decrease in the demand for goods and services, which drives currency value
higher.
8. The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how C. €250
much would a camera that retails for $300 in New York sell for in Germany?

A. €320

B. €300

C. €250

D. €360

E. €150
9. The failure to find a strong link between relative inflation rates and exchange rate C. purchasing power parity puzzle.
movements has been referred to as the:

A. currency crisis.

B. banking crisis.

C. purchasing power parity puzzle.

D. bandwagon effect.

E. foreign exchange risk.

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

B. by comparing the prices of identical products in different currencies, it is

possible to determine the "real" or purchasing power parity exchange rate
that would exist if markets were efficient.

C. a country in which price inflation is running wild should expect to see its
currency depreciate against that of countries in which inflation rates are
lower.

D. when the growth in a country's money supply is faster than the growth in
its output, price inflation is fueled.

E. in competitive markets free of transportation costs and trade barriers,

identical products sold in different countries must sell for the same price.
11. A French company wants to invest 20 million euros for three months. The
company found that investing in a Thai money market account would give it
a higher interest rate than domestic investments. Which of the following is
true about this investment?
B. The investment is not risk-free because foreign
currency movements in the intervening period can
affect the profitability of the firm.

A. The investment is risk-free because money market investments are

considered to be equivalent to bank deposits.

B. The investment is not risk-free because foreign currency movements in

the intervening period can affect the profitability of the firm.

C. The investment is risk-free because such investments also lock foreign

exchange rates for the duration of the investment.

D. The investment is not risk-free because money market instruments are

considered to be the most speculative of all investments.

E. The investment is risk-free because the Thai money market is considered

to be more stable and secure than other markets.
12. The government of Beryllia tightly controls the ability of its residents to convert its currency into C. externally convertible.
other currencies. However, all foreign businesses with deposits in banks of Beryllia may, at any
time, convert all their currency into foreign currency and take them out of the country. Beryllia's
currency is said to be:

A. leading.

B. nonconvertible.

C. externally convertible.

D. freely convertible.

E. lagging.
13. How are spot exchange rates determined? B. By the interaction
between demand and
supply of a currency
A. By using historical average prices of different currencies relative to other currencies

B. By the interaction between demand and supply of a currency relative to other currencies

C. By taking the average of a basket of currencies

D. By government decree

E. By predicting future currency movements

14. How is a country's currency referred to when its government allows both residents and D. Freely convertible
nonresidents to purchase unlimited amounts of a foreign currency with it?

A. Externally convertible

B. Nonconvertible

C. Leading

D. Freely convertible

E. Lagging
15. How is a currency classified if only nonresidents may convert it into a foreign currency without any A. Externally
limitations? convertible

A. Externally convertible

B. Nonconvertible

C. Leading

D. Freely convertible

E. Lagging
16. If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing A. $1 = €1.20
power parity theory's prediction of the dollar/euro exchange rate be?

A. $1 = €1.20

B. $1 = €1

C. $1 = €0.80

D. $1 = €0.90

E. $1 = €1.10
17. If a country's government does not control the rate of growth in money supply: D. its currency could
depreciate in the
future.
A. its future inflation rate will be low.

B. its taxes will decrease in the future.

C. it will see reduced spending on public infrastructure projects.

D. its currency could depreciate in the future.

E. its output of goods and services will exceed money supply, thereby fueling deflation.
18. In countries where inflation is expected to be high, interest rates also will be high, because investors C. Fisher effect.
want compensation for the decline in the value of their money. This relationship is referred to as the:

A. PPP theory puzzle.

B. lead strategy.

C. Fisher effect.

D. bandwagon effect.

E. international Fisher effect.

19. The interest rate on borrowings in Rhodia is 2 percent and the interest rate C. borrow money in Rhodian currency, convert it
on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would into Maritian currency, and deposit it in a Maritian
be to: bank.

A. borrow money in Maritian currency, convert it into Rhodian currency, and

deposit it in a Rhodian bank.

B. borrow money in Rhodian currency and invest in stocks with good growth
potential in Rhodia.

C. borrow money in Rhodian currency, convert it into Maritian currency, and

deposit it in a Maritian bank.

D. invest in bank deposits of Maritia and reinvest the earnings in Rhodia.

E. invest in bank deposits of Rhodia and reinvest the earnings in Maritia.

20. In terms of foreign exchange, which of the following is true of leading and C. They can help firms minimize their transaction
lagging strategies? and translation exposure.

A. They primarily protect long-term cash flows from adverse changes in

exchange rates.

B. They are used to minimize economic exposure of companies.

C. They can help firms minimize their transaction and translation exposure.

D. They involve accelerating payments from strong-currency to weak-

currency countries.

E. They are limited by governments because they create pressure on strong

currencies.
21. In terms of foreign exchange, which of the following observations is true of D. They can put pressure on a weak currency.
leading and lagging strategies?

A. They are easy to implement.

B. They primarily protect long-term cash flows from adverse changes in

exchange rates.

C. Firms need minimal bargaining power to implement them.

D. They can put pressure on a weak currency.

E. They accelerate payments from strong-currency to weak-currency

countries.
22. In terms of the approaches to exchange rate forecasting, which of the following D. Fundamental analysis
draw(s) on economic theory to construct sophisticated econometric models for
predicting exchange rate movements?

A. Technical analysis

B. Fractional integration models

C. Markov switching models

D. Fundamental analysis

E. Chart analysis
23. A lag strategy involves: A. delaying the collection of foreign
currency receivables when a foreign
currency is expected to appreciate.
A. delaying the collection of foreign currency receivables when a foreign
currency is expected to appreciate.

B. delaying the collection of foreign currency receivables when a foreign currency

is expected to depreciate.

C. attempting to collect foreign currency receivables early when a foreign

currency is expected to appreciate.

D. paying foreign currency payables (to suppliers) before they are due when a
currency is expected to appreciate.

E. paying foreign currency payables (to suppliers) before they are due when a
currency is expected to depreciate.
24. The law of one price states that:
A. by comparing the prices of identical products in different
currencies, it would be possible to determine the "real" or PPP
exchange rate that would exist if markets were efficient.
E. in competitive markets free of transportation costs and trade
barriers, identical products sold in different countries must sell
for the same price when their price is expressed in terms of the
same currency.

B. a country's "nominal" interest rate (i) is the sum of the required

"real" rate of interest (r) and the expected rate of inflation over
the period for which the funds are to be lent (I).

C. a country in which price inflation is running wild should expect

to see its currency depreciate against that of countries in which
inflation rates are lower.

D. when the growth in a country's money supply is faster than

the growth in its output, price inflation is fueled.

E. in competitive markets free of transportation costs and trade

barriers, identical products sold in different countries must sell
for the same price when their price is expressed in terms of the
same currency.
25. A lead strategy involves: D. attempting to collect foreign currency receivables early
when a foreign currency is expected to depreciate.

A. delaying foreign currency payables when a currency is

expected to appreciate.

B. delaying foreign currency payables when a currency is

expected to depreciate.

C. attempting to collect foreign currency receivables early

when a foreign currency is expected to appreciate.

D. attempting to collect foreign currency receivables early

when a foreign currency is expected to depreciate.

E. delaying the collection of foreign currency receivables when

a foreign currency is expected to appreciate.
26. The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. B. depreciate by 3 percent against the Japanese
Applying the international Fisher effect, the Brazilian real should: yen.

A. appreciate by 3 percent against the Japanese yen.

B. depreciate by 3 percent against the Japanese yen.

C. appreciate by 1.5 percent against the Japanese yen.

D. depreciate by 1.5 percent against the Japanese yen.

E. appreciate by 15 percent against the Japanese yen.

27. The phenomenon of capital flight is most likely to occur when: B. the value of the domestic currency
depreciates rapidly because of hyperinflation.

A. the recovery phase post an economic depression nears its end.

B. the value of the domestic currency depreciates rapidly because of

hyperinflation.

C. a country's economic prospects are stable and indicate growth.

D. interest rates are low for a prolonged period of time.

E. governments lift convertibility restrictions on their currency.

28. The purchasing power parity (PPP) theory best predicts exchange rate changes C. underdeveloped capital markets.
for countries with:

A. appreciating currencies.

B. stable currencies.

C. underdeveloped capital markets.

D. small differentials in inflation rates.

E. industrialized economies.
29. The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see: D. depreciation in its
currency exchange rate.

A. appreciation in its currency exchange rate.

B. a decrease in interest rates.

C. the collapse of the gold standard.

D. depreciation in its currency exchange rate.

E. a decrease in its money supply.

30. Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three A. A loss of $62,500
months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which
of the following is the outcome of this transaction?

A. A loss of $62,500

B. A loss of $66,667

C. A gain of $50,000

D. A gain of $62,500

E. A loss of $50,000
31. The speculative element of the carry trade is that its success is based upon a belief that: A. there will be no adverse
movement in exchange
rates or interest rates.
A. there will be no adverse movement in exchange rates or interest rates.

B. liquidity is the key factor in determining interest rates.

C. increasing money supply will not drive inflation.

D. spot exchange rates are more favorable than forward exchange rates.

E. hedging insures a company against foreign exchange risks.

32. Steven converted $1,000 to ×105,000 for a trip to Japan. However, he spent only ×50,000. During this period, C. $450
the value of the dollar weakened against the yen. Considering a current exchange rate of $1 = ×100, how many
dollars did Steven spend on the trip?

A. $550

B. $523

C. $450

D. $600

E. $500
33. To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P× be D. E$/× =
the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory P$/P×
predict to be the equivalent of the dollar/yen exchange rate, E$/×?

A. E$/× = (1 + P×)/P$

B. E$/× = (1 + P$)/P×

C. E$/× = P×/P$

D. E$/× = P$/P×

E. E$/× = (1 + P$)/(1 + P×)

34. A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a B. The
Japanese supplier when a shipment arrives. The company will pay the Japanese supplier ×150,000 for each importer will
computer, and the current dollar/yen spot exchange rate is $1 = ×110. The importer can sell the computers the earn a profit
day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier of
until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a approximately
foreign exchange dealer at $1 = ×105. Which of the following will happen if the exchange rate after 30 days is $1 $171 per
= ×90? computer.

A. The importer will earn a profit of approximately $236 per computer.

B. The importer will earn a profit of approximately $171 per computer.

C. The importer will earn a profit of approximately $65 per computer.

D. The importer will incur a loss of approximately $67 per computer.

E. The importer will incur a loss of approximately $105 per computer.

35. What is a firm engaging in when it insures itself against foreign C. Hedging
exchange risk?

A. Currency speculation

B. Carry trade

C. Hedging

D. Currency swap

E. Arbitrage
36. What is meant by arbitrage? D. The purchase of securities in one market for
immediate resale in another to profit from a price
discrepancy
A. To provide insurance or hedge against the risks that arise from
volatile changes in exchange rates

B. A transaction between two parties that involves exchanging currency

and executing a deal at some specific date in the future

C. Simultaneous purchase and sale of a given amount of foreign

exchange for two different value dates

D. The purchase of securities in one market for immediate resale in

another to profit from a price discrepancy

E. To borrow in one currency where interest rates are low and use the
proceeds to invest in another currency where interest rates are high
37. What is meant by economic exposure? A. The extent to which a firm's future international
earning power is affected by changes in exchange rates

A. The extent to which a firm's future international earning power is

affected by changes in exchange rates

B. The impact of currency exchange rate changes on the reported

financial statements of a company

C. The extent to which the income from individual transactions is

affected by fluctuations in foreign exchange values

D. The extent to which the quantity of money in circulation rises faster

than the stock of goods and services

E. The extent of disparity in prices, when expressed in the same

currency, of similar products in different countries
38. What is meant by translation exposure? B. The impact of currency exchange rate
changes on the reported financial statements
of a company
A. The long-run effect of changes in exchange rates on future prices, sales, and
costs

B. The impact of currency exchange rate changes on the reported financial

statements of a company

C. The extent to which a firm's future international earning power is affected by

changes in exchange rates

D. The extent to which the income from individual transactions is affected by

fluctuations in foreign exchange values

E. The obligations for the purchase or sale of goods and services at previously
agreed prices
39. When dominant enterprises in an industry exercise a degree of pricing power, A. price discrimination.
setting different prices in different markets to reflect varying demand conditions,
it is referred to as:

A. price discrimination.

B. premium pricing.

C. psychological pricing.

D. price skimming.

E. price leadership.
40. Which of the following approaches to forecasting exchange rate movements uses A. Technical analysis
price and volume data to determine past trends?

A. Technical analysis

B. Behavioral equilibrium model

C. Interest rate parity equation model

D. Fundamental analysis

E. Portfolio balance model

41. Which of the following caused a decline in the dollar/yen carry trade during B. Decrease in interest rate differentials as the
2008-2009? U.S. rates came down

A. Increase in risk appetite making the carry trade less attractive

B. Decrease in interest rate differentials as the U.S. rates came down

C. Increase in interest rate differentials as Japanese interest rates came down

D. Decrease in interest rate differentials as the U.S. interest rates went up

E. Decrease in interest rate differentials as the Japanese rates went up

42. Which of the following enables organizations to conduct international trade A. Foreign exchange market
without having to resort to barter?

A. Foreign exchange market

B. Caribbean Single Market and Economy

C. Auction market

D. Countertrade

E. Balance-of-trade equilibrium
43. Which of the following foreign exchange trading centers has the highest B. London
percentage of activity?

A. Frankfurt

B. London

C. Paris

D. Hong Kong

E. Sydney
44. Which of the following has no impediments to the free flow of C. Efficient market
goods and services, such as trade barriers?

A. Economic Union

B. Currency Board

C. Efficient market

D. Carry trade

E. European Monetary System

45. Which of the following indicates that the dollar is selling at a C. The current spot exchange rate is $1 = ×120 and the 30-
discount on the 30-day forward market? day forward rate is $1 = ×110 after 30 days.

A. The spot exchange rate is $1 = ×120 currently and $1 = ×130 after

30 days.

B. The spot exchange rate is $1 = ×120 currently and $1 = ×100 after

30 days.

C. The current spot exchange rate is $1 = ×120 and the 30-day

forward rate is $1 = ×110 after 30 days.

D. The current spot exchange rate is $1 = ×120 and the 30-day

forward rate is $1 = ×130 after 30 days.

E. The current spot exchange rate is $1 = ×120 and the 30-day

forward rate is $1 = ×120 after 30 days.
46. Which of the following instances indicates that the dollar is selling D. The current spot exchange rate is $1 = ×120 and the 30-
at a premium on the 30-day forward market? day forward rate is $1 = ×130 after 30 days.

A. The spot exchange rate is currently $1 = ×120 and changes to $1 =

×130 after 30 days.

B. The spot exchange rate is currently $1 = ×120 and changes to $1 =

×110 after 30 days.

C. The current spot exchange rate is $1 = ×120 and the 30-day

forward rate is $1 = ×110 after 30 days.

D. The current spot exchange rate is $1 = ×120 and the 30-day

forward rate is $1 = ×130 after 30 days.

E. The current spot exchange rate is $1 = ×120 and the 30-day

forward rate is $1 = ×120.
47. Which of the following is a drawback of the purchasing power A. It does not appear to be a strong predictor of short-run
parity theory? movements in exchange rates covering time spans of five years.

A. It does not appear to be a strong predictor of short-run

movements in exchange rates covering time spans of five years.

B. It does not explain change in exchange rates in terms of

change in relative prices.

C. It cannot explain when the demand of a particular currency

would exceed its supply and vice versa.

D. It does not address inflation in situations where governments

control the rate of growth in money supply.

E. It cannot predict exchange rate changes for countries with

high rates of inflation and underdeveloped capital markets.
48. Which of the following is a function of the foreign exchange A. To provide some insurance against foreign exchange risk
market?

A. To provide some insurance against foreign exchange risk

B. To protect short-term cash flow from adverse changes in

exchange rates

C. To eliminate volatile changes in exchange rates

D. To reduce the economic exposure of a firm

E. To enable companies to engage in capital flight when

countertrade is not possible
49. Which of the following is a key feature of the foreign exchange A. The foreign exchange market never sleeps.
market?

A. The foreign exchange market never sleeps.

B. The foreign exchange market is located in London.

C. The foreign exchange market is characterized by high

transaction costs.

D. The foreign exchange market is shut for two hours every day.

E. The foreign exchange market is poorly interconnected giving

rise to ample arbitrage opportunities.
50. Which of the following is an example of transaction exposure? A. Obligations for the purchase of goods at
previously agreed prices

A. Obligations for the purchase of goods at previously agreed prices

B. Borrowing of funds in domestic currency

C. Impact of currency exchange rate changes on the reported financial

statements of a company

D. Long-term effect of changes in exchange rates

E. The effect of changing exchange rates on future prices, sales, and costs
51. Which of the following is a reason for London's dominance in the foreign C. London's location making it the link between
exchange market? the East Asian and New York markets

A. Great Britain's decision to retain the British pound instead of using the euro

B. The preeminence of Financial Times Stock Exchange (FTSE) index as an

economic health indicator

C. London's location making it the link between the East Asian and New York
markets

D. London being the preferred headquarters destination for major

multinational corporations

E. London's trading centers opening soon after Tokyo's and New York's trading
centers closing for the night
52. Which of the following is a reason for the failure of the purchasing power A. It assumes away transportation costs and
parity (PPP) theory to predict exchange rates accurately? trade barriers.

A. It assumes away transportation costs and trade barriers.

B. It does not take into account the law of one price.

C. It does not take into account the practice of arbitrage.

D. It assumes that the markets are not efficient.

E. It does not consider government influence on a nation's money supply.

53. Which of the following is a reason why governments limit convertibility of D. To preserve their foreign exchange reserves
their currency?

A. To encourage foreign investments

B. To control currency appreciation

C. To encourage capital flight

D. To preserve their foreign exchange reserves

E. To promote neo-mercantilism
54. Which of the following is a step taken to manage foreign exchange risk? C. Firms need to develop strategies for dealing
with economic exposure.

A. Firms should focus solely on managing transaction and translation

exposures.

B. Forecasting future exchange rate movements should be avoided as it is

speculative.

C. Firms need to develop strategies for dealing with economic exposure.

D. Firms should avoid central control of exposure.

E. Firms should not distinguish between transaction and translation exposure

and economic exposure.
55. Which of the following is a variable used in exchange rate forecasting models C. Inflation rate
based on fundamental analysis?

A. Relative strength indicator

B. Moving average

C. Inflation rate

D. Business cycles

E. Regression
56. Which of the following is a way in which an enterprise with some market power B. Differentiating otherwise identical
might limit arbitrage so that their price discrimination policy works? products among nations along some line,
such as design or packaging

A. Pricing its products identically despite huge differences in demand across

different markets

B. Differentiating otherwise identical products among nations along some line,

such as design or packaging

C. Adopting a pricing strategy that matches what competitors charge in each of

the different national markets

D. Limiting sales of its products to only a few nations

E. Selling its products at higher prices than normal to break even by selling fewer
units
57. Which of the following is concerned with the effect of exchange rate changes on B. Transaction exposure
individual transactions, most of which are short-term affairs that will be executed
within a few weeks or months?

A. Purchasing power parity

B. Transaction exposure

C. Economic exposure

D. Translation exposure

E. Currency speculation
58. Which of the following is concerned with the present measurement of past D. Translation exposure
events?

A. Economic exposure

B. Transaction exposure

C. Arbitrage

D. Translation exposure

E. Currency speculation
59. Which of the following is illustrated by the Big Mac Index published by The B. The purchasing power parity theorem
Economist?

A. The law of one price

B. The purchasing power parity theorem

C. The Fisher effect

D. Flow of FDI

E. The bandwagon effect

60. Which of the following is the reason for the failure of purchasing power parity theory A. The impact of investor psychology on
and international Fisher effect in predicting short-term movements in exchange short-run exchange rate movements
rates?

A. The impact of investor psychology on short-run exchange rate movements

B. The strong relationship between inflation rates and interest rates

C. The impact of interest rates and short-term exchange rate movements

D. The strong relationship between interest rate differentials and subsequent

changes in spot exchange rates

E. Government intervention in cross-border trade that violates the assumption of

efficient markets
61. Which of the following is true of a country that is running a deficit on a balance-of- B. It may result in depreciation of the
payments current account? country's currency on the foreign
exchange market.

A. It is importing fewer goods and services than it is exporting.

B. It may result in depreciation of the country's currency on the foreign exchange

market.

C. It will lead to very low interest rates in the country.

D. It will lead to a shortage of the country's currency in the foreign exchange market.

E. It is engaging in neo-mercantilism.
62. Which of the following is true of inflation? D. It occurs when the quantity of money in circulation rises
faster than the stock of goods and services.

A. It occurs when the demand for a particular currency is more

than the supply.

B. It occurs when securities are purchased in one market for

immediate resale in another.

C. It occurs when two parties agree to exchange currency and

execute a deal at a specific date in the future.

D. It occurs when the quantity of money in circulation rises faster

than the stock of goods and services.

E. It occurs when output increases faster than the money supply.

63. Which of the following is true of the determination of exchange E. The differences in relative demand and supply cannot
rates? explain or predict the conditions under which a particular
currency will be in demand or not.

A. Differences in relative demand and supply do not explain the

determination of exchange rates.

B. Differences in relative demand and supply explain the factors

underlying the phenomenon behind the demand for and supply
of a currency.

C. The differences in relative demand and supply alone provide

a high-level understanding of what's behind the determination of
exchange rates.

D. While the differences in relative demand and supply provide

an accurate explanation for appreciation of currencies, they fail
to explain depreciation.

E. The differences in relative demand and supply cannot explain

or predict the conditions under which a particular currency will
be in demand or not.
64. Which of the following is true of the differences in relative demand and E. They cannot explain or predict when the
supply of currencies? demand of a particular currency would exceed its
supply and vice versa.

A. They cannot be used to explain the determination of exchange rates.

B. While they provide an understanding of the major factors underlying

exchange rates, they exclude minor factors.

C. They provide a high-level understanding of exchange rates.

D. While they provide an accurate explanation for appreciation of currencies,

they fail to explain depreciation.

E. They cannot explain or predict when the demand of a particular currency

would exceed its supply and vice versa.
65. Which of the following is true of the efficient market school of thought D. Inaccuracies in predictions will not be
toward exchange rate forecasting? consistently above or below future spot rates;
they will be random.

A. Forward rates are not unbiased predictors of future spot rates.

B. Accurate predictions of future spot rates can be calculated from publicly

available information.

C. Prices do not reflect all available information about the market.

D. Inaccuracies in predictions will not be consistently above or below future

spot rates; they will be random.

E. Forecasts might provide better predictions of future spot rates than

forward exchange rates do.
66. Which of the following is true of the purchasing power parity (PPP) theory? C. The price of a "basket of goods" should be
roughly equivalent in each country in relatively
efficient markets.
A. A country's "nominal" interest rate (i) is the sum of the required "real" rate
of interest (r) and the expected rate of inflation over the period for which the
funds are to be lent (I).

B. The exchange rate will not change if relative prices change.

C. The price of a "basket of goods" should be roughly equivalent in each

country in relatively efficient markets.

D. In competitive markets free of transportation costs and trade barriers,

identical products sold in different countries must sell for the same price.

E. If the law of one price were true for all goods and services, the PPP
exchange rate could not be found from any individual set of prices.
67. Which of the following is true when a government is strongly committed to A. The country's future inflation rate may
controlling the rate of growth in money? be low.

A. The country's future inflation rate may be low.

B. The country's currency will steadily depreciate significantly and instantly in the
foreign exchange market.

C. The country's economy will be marked by an abundance of liquidity.

D. The country will see a good number of populist measures not funded by taxation.

E. The country will struggle to match money supply with adequate supply of goods
and services.
68. Which of the following observations is true of technical analysis, an approach to E. It does not rely on a consideration of
exchange rate forecasting? economic fundamentals.

A. It draws on economic theory to construct models for predicting exchange rate

movements.

B. The variables contained in this model typically include relative money supply
growth rates, inflation rates, and interest rates.

C. There is a sound theoretical rationale for the assumption of predictability

underlying this approach.

D. Owing to its drawbacks, this approach has declined in importance over the last
few years, giving way to fundamental analysis.

E. It does not rely on a consideration of economic fundamentals.

69. Which of the following occurs when a government increases the money supply? C. It makes it easier for banks to borrow
from the government.

A. It results in an overall decrease in credit.

B. It makes it difficult for individuals and companies to borrow from banks.

C. It makes it easier for banks to borrow from the government.

D. It causes a decrease in demand for goods and services.

E. It causes price deflation as the money supply exceeds goods and services output.
70. Which of the following occurs when residents and nonresidents of a D. Capital flight
country rush to convert their holdings of domestic currency into a foreign
currency?

A. Deflation

B. Arbitrage

C. Liquidity rush

D. Capital flight

E. Currency swap
71. Which of the following occurs when two parties agree to exchange A. Forward exchange
currency and execute the deal at some specific date in the future?

A. Forward exchange

B. Spot exchange

C. Carry trade

D. Currency swap

E. Arbitrage
72. Which of the following positions is adopted by the inefficient market D. Investing in forecasting services can improve the
school of thought toward exchange rate forecasting? foreign exchange market's estimate of future
exchange rates.

A. Forward exchange rates are the best possible predictors of future spot
exchange rates.

B. Forward exchange rates represent market participants' collective

predictions of likely spot exchange rates.

C. Companies cannot beat the markets because forward rates reflect all
available information about likely future changes in exchange rates.

D. Investing in forecasting services can improve the foreign exchange

market's estimate of future exchange rates.

E. The foreign exchange market is efficient at setting forward rates, which

are unbiased predictors of future spot rates.
73. Which of the following premises is technical analysis, an D. Previous market trends and waves can be used to predict
approach to exchange rate forecasting, based on? future market trends and waves.

A. Price and volume data cannot be used to determine past

trends.

B. Econometric models drawn from economic theory are best

suited to predict exchange rate movements.

C. The foreign exchange market is efficient and forward

exchange rates are the best predictors of future spot exchange
rates.

D. Previous market trends and waves can be used to predict

future market trends and waves.

E. Since forward exchange rates are the best predictors of future

spot rates, it makes no sense to invest in forecasting.
74. Which of the following refers to carry trade? E. Borrowing in one currency where interest rates are low and
then using the proceeds to invest in another currency where
interest rates are high
A. Providing insurance or hedging against the risks that arise
from volatile changes in exchange rates

B. A transaction between two parties that involves exchanging

currency and executing a deal at some specific date in the future

C. Simultaneous purchase and sale of a given amount of foreign

exchange for two different value dates

D. The purchase of securities in one market for immediate resale

in another to profit from a price discrepancy

E. Borrowing in one currency where interest rates are low and

then using the proceeds to invest in another currency where
interest rates are high
75. Which of the following refers to countertrade? E. A range of barter-like agreements by which goods and
services can be exchanged for other goods and services

A. A short-term movement of funds from one currency to

another in the hopes of profiting from shifts in exchange rates

B. The exchange rate at which a foreign exchange dealer will

convert one currency into another that particular day

C. Simultaneous purchase and sale of a given amount of foreign

exchange for two different value dates

D. The purchase of securities in one market for immediate resale

in another to profit from a price discrepancy

E. A range of barter-like agreements by which goods and

services can be exchanged for other goods and services
76. Which of the following refers to currency speculation? A. The short-term movement of funds from one currency to
another in the hopes of profiting from shifts in exchange rates

A. The short-term movement of funds from one currency to

another in the hopes of profiting from shifts in exchange rates

B. The exchange rate at which a foreign exchange dealer will

convert one currency into another that particular day

C. Simultaneous purchase and sale of a given amount of foreign

exchange for two different value dates

D. The purchase of securities in one market for immediate resale

in another to profit from a price discrepancy

E. The growth in a country's money supply exceeding the growth

in its output, leading to price inflation
77. Which of the following refers to the bandwagon effect? C. Traders move like a herd, all in the same
direction and at the same time, in response to
each other's perceived actions.
A. Securities are purchased in one market for immediate resale in another.

B. Dominant enterprises exercise a degree of pricing power, setting different

prices in different markets to reflect varying demand conditions.

C. Traders move like a herd, all in the same direction and at the same time, in
response to each other's perceived actions.

D. Governments routinely intervene in international trade, creating tariff and

nontariff barriers to cross-border trade.

E. The output of goods and services grows at a lesser rate than that of the
money supply.
78. Which of the following refers to the extent to which the income from D. Transaction exposure
individual transactions is affected by fluctuations in foreign exchange
values?

A. Translation exposure

B. Economic exposure

C. Purchasing power parity

D. Transaction exposure

E. Forward exchange rate

79. Which of the following refers to the extent to which the reported C. Translation exposure
consolidated results and balance sheets of a corporation are affected by
fluctuations in foreign exchange values?

A. Economic exposure

B. Transaction exposure

C. Translation exposure

D. Countertrade

E. Carry trade
80. Which of the following states that for any two countries, the spot exchange rate should change in an C. International Fisher
equal amount but in the opposite direction to the difference in nominal interest rates between the two effect
countries?

A. Bandwagon effect

B. Law of one price

C. International Fisher effect

D. Helms-Burton Act

E. Purchasing power parity (PPP) theory

81. Which of the following transactions is used to move out of one currency and into another for a limited A. Currency swap
period without incurring foreign exchange risk?

A. Currency swap

B. Currency speculation

C. Carry trade

D. Spot exchange

E. Arbitrage
82. Which of the following weakens the link between relative price changes and changes in exchange rates A. Government
predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets? intervention in cross-
border trade

A. Government intervention in cross-border trade

B. The relationship between money supply and price inflation

C. The impact of increase in currency on relative demand and supply conditions of currencies

D. Excessive growth in money supply

E. The insignificant impact of transportation costs on international trade

83. The yen/dollar exchange rate is ×120 = $1 in London and ×123 = $1 in New York at the same time. What is the net profit C.
if a dealer takes $1,000,000 to purchase ×123,000,000 in New York and engages in arbitrage by selling it in London? $25,000

A. $34,000

B. $20,390

C. $25,000

D. $46,666

E. $39,454