Exam 10: 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:

The risk that arises from volatile changes in exchange rates is known as _____.

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.

_____ are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk.

Arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time.

What is meant by the phrases 'the dollar is selling at a discount' on the 30-day forward market and 'the dollar is selling at a premium' on the 30-day forward market?

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

If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.

What is the concept that is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs?

Which of the following is the most important foreign exchange trading center?

_____ 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.

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

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.

Explain the notion of economic exposure. How can economic exposure be minimized?

If a country has an externally convertible currency:

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 _____ helps us to compare the relative prices of goods and services in different countries.

Which term refers to the rate at which one currency is converted into another?

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