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Exam 10: The Foreign Exchange Market

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Question 21

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Explain PPP. Use an example to show how PPP can help explain exchange rates.

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PPP theory states that given relatively ...

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Question 22

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There are no impediments to the free flow of goods and services in an efficient market.

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Question 23

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According to the law of one price, if the exchange rate between the British pound and the dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for _____ in London.

Currency speculation typically involves the long-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

A(n) _____ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

Compare and contrast currencies that are freely convertible, externally convertible, and nonconvertible.

The rate at which one currency is converted into another is known as the fluctuation rate.

The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as:

When two parties agree to exchange currency and execute the deal immediately, the transaction is a:

How can a firm minimize its foreign exchange exposure?

Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

A pair of shoes costs £40 in Britain. An identical pair costs $50 in the United States when the exchange rate is £1 = $1.50. Which of the following is correct?

The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

Technical analysis draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it, what will happen?

A lag strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

_____ uses price and volume data to determine past trends, which are expected to continue into the future.

Describe translation exposure. How can translation exposure be minimized?

An inefficient market is one in which prices do not reflect all available information.

Capital flight is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation, or when a country's economic prospects are shaky in other respects.