Exam 10: The Foreign Exchange Market

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.

The ________ school of thought argues that forward exchange rates do the best possible job of forecasting future spot rates and therefore investing in forecasting services would be a waste of money.

If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a discount in the forward market.

Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be

Although a foreign exchange transaction can involve any two currencies, most transactions involve ________ on one side.

Which of the following involves borrowing in one currency where interest rates are low, and then using the proceeds to invest in another currency where interest rates are high?

________ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services.

Assuming the 30-day forward exchange rate was $1 = 130 and the spot exchange rate was $1 = ×120, the dollar is selling at a ________ on the 30-day forward market.

The ________ states that, for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

When two parties agree to exchange currency and execute the deal at some specific time in the future, a ________ occurs.

Which of the following is one of the most important trading centers in the foreign exchange market?

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.

What are the two main functions of the foreign exchange market?

Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is equivalent to $3.75 at the prevailing euro/dollar exchange rate. Using the concept of purchasing power parity, the euro is

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

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

The efficient market school argues that investing in exchange rate forecasting services would be a waste of money.

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

________ 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.

An American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment?