Exam of Ocay (2nd)

Question 1

S1: One way to test the PPP theory is to choose at least one country and compare the differential in the inflation rates within the country to the percentage change in the foreign currency’s value during several time periods

S2: One way to test the PPP theory is to choose two countries and compare the differential in their inflation rates to the percentage change in the foreign currency’s value during several time periods

Answer 1

FALSE,TRUE

Question 2

In this exchange rate system, their home currency’s value is attached to a foreign currency or to some unit of account

Answer 2

PEGGED

Question 3

S1: The idea behind PPP theory is that as soon as the prices become relatively lower in one country, consumers in the other country will stop buying imported goods and shift to purchasing domestic goods instead

S2: The idea behind PPP theory is that as soon as the prices become relatively higher in one country, consumers in the other country will continue buying imported goods and shfft to purchasing domestic goods instead

Answer 3

FALSE; FALSE

Question 4

This is the process of capitalizing on the interest rate differential between two countries while covering your exchange rate risk with a forward contract

Answer 4

COVERED INTEREST ARBITRAGE

Question 5

This represents the relationship between the annualized yield of risk-free debt and the time to maturity at a given point in time

Answer 5

YIELD CURVE

Question 6

This refers to the replacement of a foreign currency with U.S. dollar

Answer 6

DOLLARIZATION

Question 7

This is the risk an investment’s returns could suffer as a result of political changes or instability in a country

Answer 7

POLITICAL RISK

Question 8

In this exchange rate system, if an exchange rate begins to move too much, governments intervene to maintain it within the boundaries

Answer 8

FIXED

Question 9

The value of money is determined by the demand for it, just like the value of goods and services

Answer 9

CURRENCY VALUES

Question 10

This accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas

Answer 10

RELATIVE FORM OF PPP

Question 11

S1: In interest rate parity theory, the spot rate of one currency with respect to another will change in reaction to the differential in inflation rates between the two countries

S2: In international fisher effect theory, the spot rate of one currency with respect to another will change in accordance with the differential in interest rates between the two countries

Answer 11

FALSE; TRUE

Question 12

This refers to simultaneously buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset

Answer 12

ABITRAGE

Question 13

This is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies

Answer 13

FLOATING EXCHANGE

Question 14

In this exchange rate system, the exchange rate system that exists today for some currencies lies somewhere between fixed and freely floating

Answer 14

MANAGED FLOAT

Question 15

S1: IFE theory suggests that exchange rate movements are caused by inflation rate differentials

S2: PPP theory suggests that exchange rate movements are caused by inflation rate differentials

Answer 15

FALSE ;TRUE

Question 16

When the Fed intervenes in the foreign exchange market and simultaneously engages in offsetting transactions in the Treasury securities markets, it is engaging in

Answer 16

STERILIZED INTERVENTION

Question 17

In this exchange rate system, exchange rate values are determined by market forces without intervention by governments

Answer 17

FREELY FLOATING

Question 18

This refers to capitalizing on a discrepancy in quoted prices by making a riskless profit

Answer 18

ARBITRAGE

Question 19

This refers to the lack of compatibility or similarity between two or more facts

Answer 19

DISREPANCY

Question 20

To force the dollar to depreciate, this system is done by exchanging dollars that it holds as reserves for other foreign currencies in the foreign exchange market

Answer 20

DIRECT INTERVENTION

Question 21

This is the result of a discrepancy between three foreign currencies that occurs when the currency’s exchange rates do not exactly match up

Answer 21

TRIANGULAR ARBITRAGE

Question 22

This refers to course or principle of action adopted or proposed by a government, party, business, or individual

Answer 22

POLICIES

Question 23

S1: According to the so-called International Fisher effect, nominal risk-free interest rates contain a real rate of return and anticipated inflation

S2: According to the so-called Purchasing Power parity, nominal risk-free interest rates contain a real rate of return and anticipated inflation

Answer 23

TRUE; FALSE

Question 24

S1: In interest rate parity theory, the forward rate of one currency with respect to another will contain a premium that is determined by the differential in interest rates between the two countries

S2: In purchasing power parity theory, the spot rate of one currency with respect to another will change in reaction to the differential in inflation rates between the two countries

Answer 24

TRUE; TRUE

Question 25

This establishes the way in which the exchange rate is determined

Answer 25

EXCHANGE RATE SYSTEM

Question 26

In this exchange rate system, exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries

Answer 26

FIXED

Question 27

This is an over-the-counter (OTC) global marketplace that determines the exchange rate for currencies around the world

Answer 27

EXCHANGE MARKET

Question 28

When the Fed intervenes in the foreign exchange market without adjusting for the change in the money supply, it is engaging in

Answer 28

NON STERILIZED INTERVENTION

Question 29

S1: In interest rate parity theory, the forward rate of one currency with respect to another will contain a premium that is determined by the differential in interest rates between the two countries S2: In international fisher effect theory, the spot rate of one currency with respect to another will change in accordance with the differential in interest rates between the two countries

Answer 29

TRUE; TRUE

Question 30

This refers to nominal risk-free interest rates contain a real rate of return and anticipated inflation

Answer 30

INTERNATIONAL FISHER

Question 31

This is the process of buying a currency at the location where it is priced cheap and immediately selling it at another location where it is priced higher

Answer 31

LOCATIONAL ARBITRAGE

Question 32

S1: The absolute form of PPP suggests that prices of the same basket of products in two different countries should be equal when measured in a common currency. S2: The relative form of PPP acknowledges that because of these market imperfections, prices of the same basket of products in different countries will not necessarily be the same when measured in a common currency

Answer 32

TRUE; TRUE

Question 33

S1: Inflation rates and interest rates can have a significant impact on exchange rates and therefore can influence the value of MNCs S2: One of the most popular and controversial theories in international finance is the purchasing power parity (PPP) theory

Answer 33

TRUE; TRUE

Question 34

This is based on the notion that without international barriers, consumers shift their demand to wherever prices are lower

Answer 34

ABSOLUTE FORM OF PPP

Question 35

This is based in Frankfurt and is responsible for setting monetary policy for all participating European countries

Answer 35

EUROPEAN CENTAL BANK

Question 36

A central bank in the United States that may intervene in the foreign exchange markets to control its currency’s value

Answer 36

FEDERAL RESERVE SYSTEM

Question 37

This refers to the attempts to quantify the inflation–exchange rate relationship

Answer 37

PURCHASING POWER PARITY

Question 38

A type of exchange rate in which a currency’s value is fixed against either the value of another country’s currency or another measure of value, such as gold.

Answer 38

PEGGED EXCHANGE RATE

Question 39

When countries experience substantial net outflows of funds, they commonly intervene by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency. This is what type of intervention?

Answer 39

INDIRECT INTERVENTION

Question 40

S1: In interest rate parity theory, the forward rate of one currency with respect to another will contain a premium that is determined by the differential in interest rates between the two countries S2: In interest rate parity theory, the spot rate of one currency with respect to another will change in reaction to the differential in inflation rates between the two countries

Answer 40

TRUE; FALSE