Forex Quiz:

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The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates is a currency swap. A True )

B False )

Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another. A True )

B False )

PPP theory predicts that changes in relative prices will result in a change in exchange rates. A True )

B False )

PPP has proven to be a strong and accurate predictor of exchange rates. A True )

B False )

One way companies can deal with nonconvertible currencies is countertrade accepting goods or services as payment. A True )

B False )

The ________ is the rate at which one currency is converted in another. A exchange rate )

B currency market ) foreign exchange market

C )

D currency swap rate )

International businesses use the foreign exchange markets for all of the following reasons except to buy and sell A goods in a foreign )market to pay a foreign company for its B products or )services in the country's currency to capitalize on high interest rates C offered in foreign )markets when making short term investments of spare cash to exchange payments it D receives in foreign ) currencies

Currency speculation: is not a common A use of foreign )exchange markets. is a quick, virtually B risk free )investment. typically involves the short-term C movement of funds )from one currency to another to profit from exchange rates. has little impact on foreign exchange D rates, currencies ) and countries.

If a tourist buys local currency, the exchange rate used will be the A tourist rate )

1 0

the dollar will buy D foreign les )exchange

1 1 C real rate )

B)

spot rate

D forward rate )

Long-term investing

When foreign exchange dealers expect the dollar to appreciate against another currency, the dollar

the dollar is A) selling at a discount 1 2 the dollar is selling B) at a premium the dealers expect the dollar to C depreciate relative )to the foreign currency causes the B currency to )appreciate causes the C currency to go )down in value creates a volatile D currency situation )

1 3 The law of one price was one of the first acts of the A European )Parliament, outlawing price discrimination. states that in competitive B markets identical )products must sell for the same price if the price is expressed in terms of the same

currency, except for transportation costs and barriers to trade. affects currency transactions of MNE C operating in ) different countries. was more significant before D the introduction of ) the euro.

1 4 Which of the following is NOT true about inflation: There is a connection A between exchange )rate movements and inflation. When the growth in a country's money B supply is faster )than the growth in output, price inflation is fueled. Governments would in general C prefer to raise )taxes than expand the money supply. It is government policy that D determines )whether the rate of growth in a country's money

supply is greater than the rate of growth in output.

1 5 ________________ _____ is an explosive and seemingly uncontrollable price inflation in which money loses value very rapidly. A currency crisis A )

B PPP ) The International C Fisher Effect )

D Hyperinflation )

1 6 The formula i = r + I is known as

A PPP ) the Efficient Market B Theory ) the Inefficient C Market Theory )

D the Fisher Effect )

1 7 Investor psychology can have a major impact on exchange rates. One such phenomenon is known as the ______________ , which becomes a self-fulfilling prophecy. A Soros effect )

B bandwagon effect )

"greed is good" C effect ) spot exchange rate D effect )

1 8 Relative monetary growth, relative inflation rates and nominal interest dare differentials are: moderately good predictors of shortA run changes in ) exchange rates. poor predictors of B short-term changes )in exchange rates. moderately good predictors of longC run changes in ) exchange rates. poor predictors of D long-term changes )in exchange rates.

1 9 The _______ school of thought does not believe that forward exchange rates are the best possible predictors of future spot rates. A efficient market )

B inefficient market )

C Fisher effect ) International Fisher D effect )

2 0 Two schools of thought approach forecasting of future spot rates: ________________ analysis, which draws on economic theory to construct sophisticated econometric models and ________________

analysis, in which price and volume historic trends are expected to continue. theoretical; A practical )

B construct; time-line ) fundamental; C technical ) scientific; D speculative )

2 1 A country's currency is said to be ______ when the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it. externally A convertible )

B freely convertible ) internally C convertible )

D nonconvertible )

2 2 Capital flight is most likely to occur when the A value of domestic )currency is appreciating rapidly. occurs when residents and B nonresidents rush )to convert their holdings of domestic currency into foreign currency. affects tourists but has only a marginal C impact on business ) transactions. is actively encouraged by D governments in )well-defined circumstances.

2 3 The extent to which the income from individual transactions is affected by fluctuations in the foreign exchange values is known as translation A exposure )

B economic exposure ) transaction C exposure ) geographic D exposure )

2 4 Translation exposure: occurs when exchange rates are A erroneously posted )in foreign exchange markets.

are easily controlled by the B management of a ) company. affects reported financial C statements of a ) company. is concerned with the measurement D of potential future ) events.

2 5 Which of the following is not a common mechanism for ensuring a firm maintains an appropriate mix for minimizing its foreign exchange exposure? Central control of exposure to protect A resources among )sub-units' tactics and strategies Distinguishing among transaction, B translation and ) economic exposure Forecasting future C exchange rates ) Speculating in exchange rates to

D protect return on )investment

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