8: FOREIGN EXCHANGE MARKET

Philippine Peso

In the quote 53.50 USD – PHP, what is the variable currency?

a. Philippine Peso

b. Hong Kong Dollar

c. U.S. Dollar

d. Pound Sterling

U.S. Dollar

In the quote 53.50 USD – PHP, what is the base currency?

a. Philippine Peso

b. Hong Kong Dollar

c. U.S. Dollar

d. Pound Sterling

Relatively low-interest rates

Which of the following actions would not tend to increase the value of a country's currency?

a. relatively low-interest rates

b. government trade policies that limit imports

c. relatively low rate of inflation

d. restrictions on foreign exchange transactions

Increases

An increase in the value of a foreign currency relative to the U.S. dollar ____ the conversion value of the foreign subsidiary's liabilities.

a. decreases

b. increases

c. does not affect on

d. is an average of

Philippine Peso

In the quote 53.50 USD – PHP in Manila, what is the domestic currency?

a. Philippine Peso

b. Hong Kong Dollar

c. U.S. Dollar

d. Pound Sterling

Direct Quote

In the quote 53.50 USD – PHP in Manila, what type of quote is it?

a. Indirect Quote

b. American Quote

c. Inspiring Quote

d. Direct Quote

Offset the interest rate differential between the two currencies

When interest rate parity exists, the forward rate will differ from the spot rate by just enough to ____.

a. offset the difference in the real rate of return

b. permit the buyer of a covered option to make a profit

c. offset the interest rate differential between the two currencies

d. result in a perfect interest rate arbitrage

Exchange rate risk

Firms engaged in international transactions incur ____ because of fluctuations in the exchange rates among currencies.

a. credit risk

b. political risk

c. market risk

d. exchange rate risk

interest rates

The theory of interest rate parity states that the annual percentage differential in the forward market for a currency quoted in terms of another currency is equal to the approximate difference in ____

prevailing in the two countries.

a. inflation rates

b. interest rates

c. trade deficit rates

d. growth rates

Imposition of tariffs

Which of the following trade policies will tend to decrease the supply of the country's currency in the foreign exchange market?

a. imposition of tariffs

b. imposition of export quotas

c. financing exports with low-interest loans

d. imposition of tariffs and export quotas

Decrease

A high rate of inflation within a country will tend to ____ the value of its currency concerning the currencies of other countries that are experiencing lower rates of inflation.

a. increase

b. decrease

c. do not affect on

d. cannot be determined because of insufficient information

I only

In considering purchasing power parity, the relationship is:

I. not applicable due to tariffs.

II. is applicable despite trade barriers.

a. I only

b. II only

c. Both I and II

d. Neither I nor II

Fixed exchange rate system

A system in which a country’s currency is pegged to the value of another currency like the U.S. dollar, is called a

a. currency board arrangement

b. floating exchange rate system

c. fixed exchange rate system

d. managed floating rate system

Answer not given

All of the following items are needed to compute relative purchasing power parity EXCEPT:

a. spot price

b. home country interest rate

c. expected foreign country inflation rate

d. answer not given

The country of the currency of issue.

Foreign bonds are sold primarily in

a. countries other than the country in which the issue is denominated.

b. Western Europe.

c. Japan.

d. the country of the currency of issue.

I and III only

Which of the following statements best describe a foreign exchange market?

I. a network of banks and brokers based in financial centers around the world.

II. one of several specific locations in major cities where bankers and brokers trade foreign currencies.

III. very similar to international stock exchanges except that currencies are traded.

a. I and II only.

b. I and III only

c. II and III only

d. All of them

Premium

If the 6-month forward rate for the Japanese Yen is $0.00917 and the spot rate is $0.00903, then the forward Yen is trading at a(n):

a. discount.

b. expected gain.

c. premium.

d. answer not given

is based on immediate delivery of currency.

A spot exchange rate for two currencies

a. is based on immediate delivery of currency.

b. is always constant over time.

c. will not exceed the forward exchange rate for the currencies

d. is not determinable

Which of the following statement/s is/are true about the forward exchange rate between two

currencies?

I. It depends on the date of delivery of one of the currencies.

II. It can fluctuate over time.

III. It is always stated in terms of US dollars.

a. I and II are true.

b. I and III are true

c. II and III are true

d. All are true

Discount

If the spot rate is greater than the forward exchange rate, the forward currency is said to be trading at

a:

a. premium.

b. gain.

c. discount.

d. loss.

Exchange rate risk

It is a chance of making more or less money on an international business transaction because of exchange rate fluctuations.

a. exchange rate risk

b. credit risk

c. political risk

d. business risk

I and III only

Which of the following are likely to lead to an appreciation of the Philippine peso?

I. Higher real Philippine interest rates

II. Higher nominal Philippine interest rates

III. Lower inflation in the Philippines

a. I and II only

b. I and III only

c. II and III only

d. All of them

US products will become less expensive in the Philippines.

If the peso appreciates relative to the dollars then:

a. US products will become less expensive in the Philippines.

b. Philippine products will become less expensive in the US.

c. the price of products will not be affected.

d. US products will become more expensive in the Philippines.

Supply and demand of the currency

It determines the price of the currency in a floating exchange rate environment.

a. Bangko Sentral ng Pilipinas

b. Supply and demand of the currency

c. International Monetary Fund

d. Asian Development Bank