Exam 16: Foreign Exchange Derivative Markets

Which of the following statements is NOT correct regarding forward contracts?

When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency.

If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?

Which of the following are most likely to provide currency forward contracts to their customers? ​

If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

Currency futures contracts are standardized, whereas forward contracts are more flexible and can specify whatever amount and maturity date are desired.

____ forecasting involves the use of historical exchange rate data to predict future values. ​

If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies and would place ____ pressure on the values of foreign currencies (with respect to the dollar). ​

In the Wall Street Journal , you observe that the British pound (£)is quoted at $1.65. The Australian dollar (A$)is quoted at $0.60. What is the value of the Australian dollar in British pounds?

Which of the following statements is  NOT correct?

The forward rate is the exchange rate for immediate delivery.

The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.

If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when it is received, sell it in the spot market.

The speculative risk of purchasing a ____ is that the foreign currency's value ____ over time.

Currency futures contracts differ from forward contracts in that they ​

Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreases to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity.

The indirect exchange rate is always the reciprocal of the direct exchange rate.

Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.