question

Which of the following is transacted when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk? a. Swap b. Delivery c. Commercial paper d. Straddle

answer

Swap

question

Which of the following is a major reason why governments limit convertibility of their currency? a. To encourage foreign investments. b. To have a tight grip on fiscal policy. c. To maintain an illusion of growth. d. To preserve their foreign exchange reserves.

answer

To preserve their foreign exchange reserves.

question

How are spot exchange rates in the foreign exchange markets determined? a. By using historical average prices. b. By the relative demand and supply for different currencies. c. By taking the average of a basket of currencies. d. By government decree.

answer

By the relative demand and supply for different currencies.

question

Which of the following is a key feature of the foreign exchange market? a. The market never sleeps. b. The market is located in London. c. The market is characterized by high transaction costs. d. The market is shut for only three hours.

answer

The market never sleeps.

question

Which of the following refers to the purchase of securities in one market for immediate resale in another to profit from a price discrepancy? a. Exercise b. Straddle c. Arbitrage d. Swap

answer

Arbitrage

question

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is $1 = $100Yen and that the yen/dollar exchange rate quoted in New York at the same time is $1 = 120. Which profit making situation exists here? a. Option b. Hedge c. Swap d. Arbitrage

answer

arbitrage

question

Currency carry trade takes advantage of: a. temporary undervaluation of one currency vis-à-vis another. b. differences in interest rates between countries. c. mispricing of stocks trading in two exchanges. d. high volatility in currency exchange rates.

answer

differences in interest rates between countries.

question

Which of the following occurs when the quantity of money in circulation rises faster than the stock of goods and services? a. Liquidity crunch b. Deflation c. Trade surplus d. Inflation

answer

inflation

question

The rapid rise in the value of the dollar on the foreign exchange market in the 1990s hurt the price competitiveness of many U.S. producers in world markets. U.S. manufacturers that relied heavily on exports saw their export volume and world market share decline. This is an example of: a. income exposure. b. transaction exposure. c. economic exposure. d. translation exposure.

answer

economic exposure

question

In 2002-2007, the euro rose in value against the dollar. This boosted the dollar profits of American multinationals with significant operations in Europe. Which of the following is this an example of? a. Economic exposure b. Transaction exposure c. Translation exposure d. Income exposure

answer

translation exposure

question

A currency is said to be _____ when only nonresidents may convert it into a foreign currency without any limitations. a. externally convertible b. nonconvertible c. part-convertible d. freely convertible

answer

externally convertable

question

A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier ×150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = ×110. The importer knows she can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ×105. Which of the following will happen if the exchange rate after 30 days is $1 = ×90? a. The importer will earn a profit of $236 per computer. b. The importer will earn a profit of $171 per computer. c. The importer will earn a profit of $65 per computer. d. The importer will incur a loss of $67 per computer.

answer

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

question

Assume that the exchange rate between the euro and the dollar is € 1 = $1.20. A camera that retails for $300 in New York sells for € 200 in Berlin. Ignoring any transaction costs or barriers, this represents an initial arbitrage profit potential of: a. $60. b. $80. c. $20. d. $100.

answer

$60 Feedback: € 200 = $240 (€ 200 x 1.2). The difference of $60 ($300-$240) is the profit potential.

question

You exchanged $1,000 to 105,000 yen for a trip to Japan. During your stay, you spent 50,000 yen. Also, during this period the dollar weakened against the yen to 100 to a dollar. On your return, you went to the bank to exchange the remaining yen. How many dollars did you spend on the trip? a. $550 b. $523 c. $450 d. $600

answer

$450 Feedback: The remaining 55,000 yen would yield 550 dollars when the exchange rate is 100 yens for a dollar. Amount spend during the trip is $450 ($1,000 - $550).

question

A French company has 20 million euros it wants to invest for three months. Investing in a Thai money market account gives the company a higher return than domestic investments. Is this investment risk-free? Why or why not? a. Yes, because money market investments are considered to be equivalent to bank deposits. b. No, because foreign currency movements in the intervening period can affect the profitability. c. Yes, because such investments also lock foreign exchange rates for the duration of the investments. d. No, because money markets instruments are considered to be the most speculative of all investments.

answer

No, because foreign currency movements in the intervening period can affect the profitability. Feedback: The rate of return it earns on this investment depends not only on the Thai interest rate, but also on the changes in the value of the Thai Baht against the euro in the intervening period.

question

A _____ is the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates. a. currency barter b. currency exercise c. currency option d. currency swap

answer

currency swap

question

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following reflects the foreign exchange dealers' expectations about the dollar over the next 30 days? a. The dollar will depreciate against the euro. b. The dealers are undecided about the direction of movement. c. The dollar will appreciate against the euro. d. The dollar/euro exchange rate will be steady.

answer

The dollar will appreciate against the euro.

question

The theory of purchasing power parity (PPP) links changes in the exchange rate between two countries' currencies to: a. changes in the countries' price levels. b. changes in the countries' population. c. changes in the countries' political structure. d. changes in the countries' productivity levels.

answer

changes in the countries' price levels.

question

Which is the most important foreign exchange trading center in terms of percentage of activity? a. Zurich b. London c. New York d. Singapore

answer

London

question

_____ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services. a. Countertrade b. Price discrimination c. Cartelization d. Dumping

answer

countertrade

question

T/F: A floating exchange rate is a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the law of supply and demand.

answer

true

question

T/F: Since the Bretton Woods system of floating exchange rates collapsed in 1973, the world

answer

false

question

T/F: A dirty float is called so because the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.

answer

true

question

T/F: The Central bank is similar to a Currency board and both act as banks of last resort

answer

false

question

T/F: The Bretton Woods agreement legalized the use of devaluation as a tool of competitive trade policy.

answer

false

question

T/F: A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.

answer

true

question

T/F: If the IMF agrees that the country's balance of payments is in "fundamental disequilibrium," the system of adjustable parities allows for the devaluation of a country's currency by more than 10 percent.

answer

true

question

T/F: One criticism of the IMF is that its traditional policy prescriptions represent "one-size-fits-all" approach to macroeconomic policy that is inappropriate for many countries.

answer

true

question

Which of the following refers to the institutional arrangements countries adopt to govern exchange rates? a. International Monetary Fund b. Global agreement on exchange rates c. International monetary system d. Bretton Woods Arrangement

answer

international moneytary system

question

When the foreign exchange market determines the relative value of a currency, the country is said to adhere to a _____ exchange rate regime. a. fixed b. dirty float c. floating d. pegged

answer

floating

question

The voting rights within the IMF are roughly proportionate to the___________ _________made by member nations. The US has 17% of the vote followed by Japan and Germany. US, Japan and Europe together account for more than 80% of the vote in the IMF. The breakdown of the democratic process becomes clear as the Jamaican people are removed from participation in the decisions that truly affect their lives. a. Democratic votes b. Economic contributions c. Economic gains d. Great progress

answer

economic contributions

question

A free trade zone is a: a. New legislation passed for international trade. b. Geographical Zones in which trade is fair. c. Geographical area in which commerce can be conducted without tariffs being applied d. Geographical area in which Free Trade regional agreement has been carried out.

answer

Geographical area in which commerce can be conducted without tariffs being applied

question

The IMF assumes that the combination of increased interest rates and ________ ______ ________ ________ will shift resources from domestic consumption to private investment. It is further assumed that keeping the price of local labor down will be an incentive for increasing employment and production. a. a steady government spending b. Increase in government spending c. Cutbacks in government spending d. None of the above e. Local machinery f. Patronization

answer

cutbacks in government spending

question

T/F: The central bank is government owned and not separate from the country's finance ministry

answer

false

question

T/F: One of the factors that contributed to the Mexican crisis was that the central bank began converting short term debt, denominated in pesos, into dollar- denominated bonds. This conversion resulted in an increase in foreign reserves and a decrease in debt.

answer

false

question

All of the following contributed to the Asian crisis of 1997 except:

answer

production driven by domestic demand.

question

Identify the countries worst affected by the Southeast Asian crisis of 1997?

answer

Indonesia, Thailand, and South Korea

question

The Asian meltdown began in mid-1997 in _____ when it became clear that several key financial institutions were on the verge of default.

answer

Thailand

question

Which of the following actions by the Mexican government in December 1994, exacerbated the sale of the peso and contributed to the rapid 40 percent drop in its value?

answer

Currency devaluation

question

Which of the following economies in Southeast Asia was considered relatively more stable during the crisis on 1997?

answer

Singapore

question

Which of the following was the objective of establishing the International Monetary Fund (IMF)?

answer

Maintain order in the international monetary system.

question

In 2001, the WTO launched a new round of talks aimed at further liberalizing the global trade and investment framework. It was held at:

answer

Doha.

question

One concern of globalization critics is that a global economy shifts economic power away from _____ and toward _____.

answer

national governments; supranational organizations

question

Many economists and business leaders believe that globalization offers several benefits including:

answer

rising incomes of consumers.

question

One of the consequences of globalization that is appreciated by people from developing countries is that:

answer

the changes that progress has brought to their standard of living.

question

Opponents of outsourcing in advanced economies like the U.S. and Western Europe contend that:

answer

falling trade barriers allow firms to move manufacturing activities to countries where wage rates are much lower.

question

Supporters of globalization insist that dislocation in the form of lost jobs is a trade-off that will ultimately lead to the economy being better off. What are they justifying in this case?

answer

free trade

question

The principle argument of those who opposed NAFTA centered on the fear that ratification would result in:

answer

mass exodus of jobs from the United States into Mexico.

question

Which three countries implemented the NAFTA?

answer

Canada, Mexico, and the United States

question

When is capital flight most likely to occur?

answer

when domestic currency depreciates rapidly because of hyperinflation.

question

The absence of a legal system that protects property rights and the machinery to enforce that system usually results in:

answer

a reduction in the incentive to engage in productive economic activity.

question

Five of the fastest-growing economies of the past 30 years—China, South Korea, Taiwan, Singapore, and Hong Kong—had one thing in common at the start of their economic growth:

answer

undemocratic governments.

question

Peruvian development economist Hernando de Soto has argued that much of the developing world will fail to reap the benefits of capitalism until:

answer

property rights are better defined and protected.

question

What happens when governments control or dominate a national economy?

answer

Businesses are greatly restricted with the government doing most of the controlling and siphoning.

question

Is there a relationship between open markets and political freedom?

answer

It is true that some totalitarian governments can have open markets

question

A(n) _____ has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members.

answer

common market

question

A regional free trade agreement will benefit the world only if:

answer

the amount of trade it creates exceeds the amount it diverts.

question

An agreement between countries in a geographic region to reduce tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other is referred to as:

answer

regional economic integration.

question

All of the following were objectives of the Single European Act EXCEPT:

answer

increasing the powers of the European Commission in matters of competitive policy.

question

Bolivia, Chile, Ecuador, Colombia, and Peru signed an agreement in 1969 to create the:

answer

Andean Pact

question

Identify the EU institution responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states.

answer

European Commission

question

In 1990, the MERCOSUR pact was expanded to include:

answer

Paraguay and Uruguay.

question

The most enduring free trade area in the world is the:

answer

European Free Trade Association.

question

The two main reasons that have made regional economic integration difficult to achieve are:

answer

concerns about costs and national sovereignty.

question

What was the objective of the Single European Act?

answer

It committed member countries to work toward establishment of a single market by December 31 1992.

question

Which of the following countries are currently members of the European Free Trade Association (EFTA)?

answer

Norway, Iceland, Liechtenstein, and Switzerland

question

_____ occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area.

answer

Trade diversion

International Business Exam #3 – Flashcards

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