concepts

Question 1

Market for converting the currency of one country into that of another country

Answer 1

foreign exchange market

Question 2

the rate at which one currency is converted into another

Answer 2

exchange rate

Question 3

the adverse consequences of unpredictable changes in exchange rates.

Answer 3

foreign exchange risk

Question 4

short-term movement of funds from one currency to another in hopes of profiting from shifts in exchange rates.

Answer 4

currency speculation

Question 5

borrows one currency where interest rates are low and invests these in another currency where interest rates are high.

Answer 5

carry trade

Question 6

Rate at which a foreign exchange dealer converts one currency into another currency on a particular day.
Determined by the interaction between supply and demand.
Changes continually.

Answer 6

spot exchange rates

Question 7

two parties agree to exchange currency and execute the deal at some specific date in the future.

Answer 7

forward exchange

Question 8

typically quoted for 30, 90, or 180 days into the future.

Answer 8

forward exchange rate

Question 9

Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

Answer 9

currency swaps

Question 10

Global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.

Answer 10

foreign exchange market

Question 11

process of buying a currency low and selling it high

Answer 11

arbitrage

Question 12

which currency is a vehicle currency

Answer 12

US DOLLAR

Question 13

most important trading centers

Answer 13

london, new york, zurich, etc

Question 14

Important Factors Impacting Future Exchange Rate Movements

Answer 14

A country’s price inflation.
A country’s interest rate.
Market psychology.

Question 15

In competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when price is in the same currency.

Answer 15

the law of one price

Question 16

markets in which few impediments to international trade and investment exist—the price of a “basket of goods” should be roughly equivalent in each country.

Answer 16

efficient markets

Question 17

predicts that changes in relative prices result in changes in exchange rates.

Answer 17

purchasing power parity

Question 18

When inflation is relatively high, a currency should

Answer 18

depreciate

Question 19

when does inflation occur

Answer 19

When the growth in the money supply is greater than the growth in output

Question 20

Indicates it is not completely accurate in estimating exchange rate changes in the short run but relatively accurate in the long run.

Answer 20

empirical tests of ppp theory

Question 21

Assumes away transportation costs and barriers to trade.
Governments routinely intervene in trade and foreign exchange market.
Investor psychology plays a role on exchange rate movements.

Answer 21

purchasing power parity puzzle

Question 22

i = r + I
a country’s nominal interest rate (i) is the sum of the required real rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).

Answer 22

fisher effect

Question 23

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.
(s1-s2 blahblahblah)

Answer 23

International Fisher effect (IFE):

Question 24

occurs when expectations on the part of traders turn into self-fulfilling prophecies, and traders join and move exchange rates based on group expectations.

Answer 24

bandwagon effect

Question 25

Investor psychology is influenced by

Answer 25

political factors and microeconomic events.

Question 26

moderately good predictors of long-run changes in exchange rates, poor predictors of short-run changes

Answer 26

Relative monetary growth, relative inflation rates, and nominal interest rate differentials

Question 27

prices do not reflect all available information.

Answer 27

inefficient market

Question 28

Draws upon economic factors like interest rates, monetary policy, inflation rates, or balance of payments information to predict exchange rates.

Answer 28

fundamental analysis

Question 29

Uses price and volume data to determine past trends that are expected to continue. economists are skeptical.

Answer 29

technical analysis

Question 30

both residents and nonresidents can purchase unlimited amounts of foreign currency with the domestic currency.

Answer 30

freely convertible

Question 31

only nonresidents can convert their holdings of domestic currency into a foreign currency.

Answer 31

externally convertible

Question 32

both residents and nonresidents are prohibited from converting their holdings of domestic currency into a foreign currency.

Answer 32

nonconvertible

Question 33

when residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency.

Answer 33

capital flight

Question 34

barter-like agreements by which goods and services can be traded for other goods and services—to facilitate international trade.

Answer 34

counter trade

Question 35

extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Mainly concerned with short-term transactions.

Answer 35

transaction exposure

Question 36

impact of currency exchange rate changes on the reported financial statements of a company. Deals with the present measurement of past events.

Answer 36

translation exposure

Question 37

extent to which a firm’s future international earning power is affected by changes in exchange rates. Concerned with the long-run effect of exchange rates on future prices, sales, and costs.

Answer 37

economic exposure

Question 38

collecting 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.

Answer 38

lead strategy

Question 39

delaying collecting foreign currency receivables if the currency is expected to appreciate and delaying payables if the currency is expected to depreciate

Answer 39

lag strategy

Question 40

The institutional arrangement that governs exchange rates.

Answer 40

International Monetary System

Question 41

where the foreign exchange market determines the relative value of a currency.

Answer 41

floating exchange rate system

Question 42

when the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

Answer 42

pegged exchange rate system

Question 43

when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency.

Answer 43

managed float or dirty float system

Question 44

countries fix their currencies against each other at a mutually agreed upon value

Answer 44

Fixed exchange rate system

Question 45

a country abandons its own currency and adopts another

Answer 45

typically us dollar- dollarization

Question 46

the practice of pegging currencies to gold and guaranteeing convertibility.

Answer 46

gold standard

Question 47

the amount of a currency needed to purchase one ounce of gold.

Answer 47

gold per value

Question 48

When the income a country’s residents earn from its exports is equal to the money its residents pay for imports.

Answer 48

balance-of-trade equilibrium.

Question 49

The Bretton Woods Agreement established two multinational institutions:

Answer 49

imf, world bank