Exam 10: The Foreign Exchange Market

Discuss the two schools of thought on exchange rate forecasting.

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?

Which of the following refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates?

An inefficient market is one in which prices do not reflect all available information.

A lag strategy involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

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

Consider the role of investor psychology and bandwagon effects on how well PPP and the International Fisher Effect explain short-term movements in exchange rates.

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

To minimize the risk of an unanticipated change in exchange rates,a company can protect itself by entering into a forward exchange contract.

The PPP theory argues that the exchange rate will change even if relative prices remain unchanged.

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

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

The PPP theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

_____ uses price and volume data to determine past trends,which are expected to continue into the future.

A pair of shoes costs £40 in Britain.An identical pair costs $50 in the United States when the exchange rate is £1 = $1.50.Which of the following is correct?

Capital flight 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.

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

_____ 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.

The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.

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