12: Foreign Exchange

1. Money is the primary item transacted in: (a) money markets. (b) capital markets. (c) foreign exchange markets. (d) Wal-Mart and Best-Buy. (e) commodity markets. (f) real estate markets.

2. Of the following variables, the one that has increased at the fastest percentage rate during the past twenty years or so has been: (a) the U.S. money supply M1. (b) flows of funds across international borders. (c) the U.S. national debt. (d) total interest payments by corporate borrowers. (e) the exchange rate of the Japanese yen. 3. The value of one currency relative to another is called the (a) terms of trade. (b) exchange rate. (c) swap parameter. (d) arbitrage ratio. (e) currency coefficient. 4. A French speculator who bought real estate in Hawaii for $1 million when the euro was trading at 1.1 per dollar and who sold the real estate for $1.1 million after the euro to dollar rate changed to 1.0 per dollar would have: (a) gained from bearing exchange rate risk. (b) broken even in real purchasing power expressed in euros. (c) lost approximately 2% on the investment. (d) been better off had the real estate been purchased originally with dollars. (e) lost even more by buying land in France.

5. A Japanese speculator who bought U.S. real estate for $13 million when the yen was trading at 130 per dollar and who sold the real estate a year later for $14 million after the yen to dollar rate fell to 110 per dollar would have: (a) gained from bearing exchange rate risk. (b) broken even in purchasing power expressed in yen. (c) lost on this financial investment. (d) been much better off had the real estate been purchased originally with yen. (e) lost even more by buying land in Japan. 6. A stronger dollar will be most likely to benefit (a) textile producers in South Carolina. (b) wheat farmers in Montana. (c) automobile manufacturers in Michigan. (d) American consumers. (e) foreigners who buy products imported from the United States. 7. A Japanese speculator who bought California real estate for $6 million when the yen was trading at 100 per dollar and who sold the real estate a year later for $5.8 million after the yen to dollar rate rose to 120 per dollar would have: (a) gained from bearing exchange rate risk. (b) broken even in purchasing power expressed in yen. (c) lost roughly 2% on the investment. (d) been better off had the real estate been purchased originally with dollars. (e) lost even more by buying land in Japan. 8. If equilibrium real interest rates in the United States rise to an all time high, people in China are more likely to: (a) buy U.S. bonds. (b) invest in economic capital in China. (c) import goods from the United States. (d) raise prices on all Chinese exports. (e) import goods from Korea instead of the United States.
9.

Depreciation of a currency under a system of flexible exchange risk is most like (a) default risk in a corporate bond. (b) devaluation under a fixed exchange rate system. (c) inflation risk. (d) an import quota. (e) a subsidy on exports.

Ralph Byrns

Test Bank for Corporate Finance and Financial Markets

10. Everything else constant, a stronger dollar will mean that (a) tourists vacationing in the United States can buy things at less cost to them. (b) Americans can vacation in England at less cost. (c) French cheese becomes more expensive. (d) Japanese cars become more expensive. 11. If one U.S. dollar exchanges for 1/2 British pound, 120 yen, and 12 French francs, then one French franc will be exchanged for: (a) 1/10 yen. (b) 1/20 pound. (c) 12 dollars. (d) 10 yen. 12. Potentially harmful effects to exporters or importers from exchange risk can be mitigated most efficiently by: (a) exchange controls. (b) forward markets. (c) prudent macroeconomic policy. (d) a balanced capital account. (e) reserve currency provisions. 13. If U.S. balance of payments deficits indicate disequilibrium, the markets for currencies of countries experiencing balance of payments surpluses are characterized by: (a) shortages. (b) surpluses. (c) excessive scarcity. (d) overproduction. 14. If the exchange rate between the dollar and the Euro were flexible, it would move toward equilibrium at: (a) XR1. (b) XR2. (c) XR3. (d) 0. 15. At XR1 in the diagram, there is: (a) a dollar glut. (b) a dollar shortage. (c) neither a dollar shortage nor a dollar glut. (d) a long term equilibrium. 16. To maintain a pegged exchange rate of XR1, the U.S. would be under pressure to: (a) sell convertible currencies and buy dollars. (b) sell dollars and purchase convertible currencies. (c) allow the dollar to depreciate. (d) buy gold. 17. The theory that goods in one country will be identical in price to the goods in any other country after adjustments for exchange rates, necessary transactions costs, and barriers is known as the: (a) the law of one price. (b) theory of value. (c) efficient exchange rate theory. (d) natural rate theory. (e) free market theory. 18. The fixed exchange rate agreement that lasted from 1945-1971 was called the: (a) General Agree on Trade and Tariffs. (b) World Trade Organization. (c) Bretton Woods system. (d) World Bank. 19. The gold standard that was in place before World War I was important because it: (a) allowed people engaging in monetary transactions to have a sense of reliability that is not there today. (b) encouraged world trade by eliminating exchange rate risk. (c) gave

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people the chance to actually create their own money if gold was found. (d) allowed the country to have complete control over its monetary policy, which is unlike today. 20. Exchange rates are permitted to fluctuate from day to day but central banks consistently rein the value of their respective currency in by buying and selling currencies. This type of system is known as a: (a) managed (dirty) float. (b) clean float. (c) top heavy float. (d) base structured float. 21. From the end of World War II until 1971, for purposes of international payments the United States backed the U.S. dollar with gold in accord with sections of the: (a) Treaty of Bretton Woods. (b) revised Federal Reserve Act, Regulation Q. (c) McFadden Act. (d) Charter of the United Nations. (e) Glass-Stiegel Act. 22. Eurodollars are: (a) money used in Europe. (b) money used in the United States. (c) European dollars deposited in foreign banks outside of the United States or in foreign branches of U.S. banks. (d) U.S. dollars deposited in foreign banks outside of the United States or in foreign branches of U.S. banks. 23. Europeans increasingly substituting American jellybeans for French candy could logically be a consequence of: (a) depreciation of the dollar. (b) retaliation against a boycott on French wine by American consumers. (c) depreciation of the euro. (d) appreciation of the dollar. (e) the Adkins diet becoming a fad in France. 24. A central bank that allows the purchase or sale of domestic currency by foreigners to affect the domestic monetary base and thus, the money supply, is pursuing a policy known as: (a) sterilized foreign exchange intervention. (b) arbitrage. (c) exchange rate fixing. (d) unsterilized foreign exchange intervention. (e) dirty float. 25. Under the US bookkeeping system, the US Balance of Payments account would be debited if: (a) a British tourist at Disney World bought a Mickey Mouse hat. (b) a gourmet shop in Chapel Hill purchased a selection of foreign wines and cheeses for sale in the store. (c) a German paid Euros far an LA Lakers jersey in a shop in Manila. (d) an international student pays tuition to attend this class. 26. Exchange rate risk has never been reduced for anyone by the: (a) introduction of the euro. (b) law of one price. (c) International Monetary Fund. (d) gold standard. 27. If people all over the world increasingly began to prefer the sleek designs of American cars to the reliability of Japanese cars, a likely consequence would be: (a) appreciation of the dollar relative to the yen. (b) depreciation of the dollar relative to the euro. (c) appreciation of the yen relative to the euro. (d) depreciation of the euro relative to the yen. (e) appreciation of the euro relative to the dollar. 28. If the dollar depreciates relative to the euro: (a) Europeans become less interested in American goods. (b) more Americans will vacation in Europe. (c) Americas net exports will fall. (d) Americans goods become cheaper, relative to European goods. 29. A likely reason for a company to hold Eurodollars is that: (a) the dollar is the most widely used currency in the world, making it less costly to conduct transactions abroad. (b) Eurodollars have begun to replace the US dollar as the worlds preferred medium of

Ralph Byrns

Test Bank for Corporate Finance and Financial Markets

exchange. (c) Eurodollars are subject to especially stringent reserve requirements. (d) interest rates on Eurodollars usually exceed interest rates on long term Certificates of Deposit. 30. Foreign exchange markets have sometimes proven very profitable to those who invest in them. This market is organized: (a) on the New York Stock Exchange. (b) as a very elite, private market. (c) as an over-the-counter market. (d) only through foreign investors. 31. Globally efficient markets require: (a) relative prices for all goods everywhere to be identical after adjusting for exchange rates, tariffs and quotas, and minimally necessary transaction costs. (b) stable and fixed exchange rates. (c) transaction costs to be equal around the world. (d) trade barriers to be enacted and increased proportionally. 32. When a financial crisis causes domestic residents and foreigners to move their financial capital out of a country, the countrys: (a) government usually issues new treasury bonds. (b) currency depreciates. (c) currency appreciates. (d) government usually buys foreign currency to counteract the loss. 33. Domestic currency tends to appreciate in response to increases in: (a) nominal interest rates in other countries. (b) domestic productivity. (c) the domestic money supply. (d) domestic real interest rates. 34. A Eurodollar is: (a) an example of a Eurocurrency. (b) a European dollar. (c) the exchange rate between the Euro and the dollar. (d) central bank in Europe. 35. When the domestic currency is _______, the central bank must _______ domestic currency to keep the exchange rate fixed, but as a result it gains international reserves.: (a) undervalued \ sell. (b) undervalued \ buy. (c) overvalued \ sell. (d) overvalued \ buy. 36. An unsterilized intervention in which domestic currency is purchased by selling foreign assets leads to a ____ in international reserves, an ________ in the money supply, and a ________of the domestic currency: (a) gain, increase, deprecation. (b) drop, decrease, appreciation. (c) gain, increase, appreciation. (d) drop, decrease, depreciation. 37. In the long run, if other countries do not retaliate, raising trade barriers against imports into the home country under a system of flexible exchange rates causes the domestic currency to: (a) devaluate. (b) revaluate. (c) appreciate. (d) depreciate. 38. A change in the exchange rate has a direct effect on American consumers primarily because it affects the costs of: (a) domestic goods. (b) grocery store goods. (c) imported goods. (d) all goods. 39. In the fixed exchange rate system, when the domestic currency is undervalued, the central bank must ________ domestic currency to keep the exchange rate fixed, but as a result it ________ international reserves: (a) sell, loses. (b) purchase, loses. (c) purchase, gains. (d) sell, gains.

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40. Absolute commitment to a fixed exchange rate system puts pressure on a nations central bank to: (a) buy domestic currency if its currency is overvalued. (b) sell foreign currency if its currency is overvalued. (c) buy domestic currency if its currency is undervalued. (d) float their currency if the foreign currency is overvalued. 41. A foreign exchange intervention with an offsetting open market operation that leaves the domestic monetary base unchanged is called: (a) forward foreign exchange intervention. (b) sterilized foreign exchange intervention. (c) unsterilized foreign exchange intervention. (d) none of the above. 42. When a central bank allows the purchase or sale of domestic currency by foreigners to affect the monetary base and thus, the money supply, the process is termed: (a) a bilateral monetization. (b) a fiat currency swap. (c) an unsterilized foreign exchange intervention. (d) forward foreign exchange intervention. (e) unilateral currency exchange. (f) sterilized foreign exchange intervention. 43. When a countrys currency appreciates, the countrys goods abroad become ______ and foreign goods in that country become _______. (a) more expensive; cheaper (b) cheaper; more expensive (c) taller; shorter (d) shorter; taller 44. When a countrys currency becomes more valuable compared to other currencies, that countrys goods overseas becomes ________ while imported goods become ________. (a) less expensive; less expensive (b) more expensive; more expensive (c) more expensive; less expensive (d) less expensive; more expensive 45. Nations absolutely committed to a fixed exchange rate system will usually be forced to have their central banks: (a) buy domestic currency if their currency is overvalued. (b) sell foreign currency if their currency is overvalued. (c) buy foreign currency if their domestic currency is undervalued. (d) float their currency if the foreign currency is overvalued. 46. The current account in a countrys balance of payments accounting includes the sum of the countrys: (a) balance of trade and its capital account. (b) statistical discrepancy and its flows of funds. (c) net flows of payments for services and its balance of trade. (d) net currency flows and its capital account. 47. Capital controls: (a domestic governments limits on international transactions) do not suffer the disadvantage that they: (a) are seldom effective. (b) foster corruption. (c) make devaluation less likely. (d) could allow governments to avoid taking the steps to reform their financial system to deal with a crisis. 48. When an industry suffers from increased foreign competition due to the appreciation of its domestic currency, the industry will often: (a) pressure the central bank to pursue a higher rate of money growth to lower the exchange rate. (b) pressure the central bank to decrease money supply to lower the exchange rate. (c) pressure the central bank to pursue a more contractionary monetary policy of increasing the money supply. (d) pressure the central bank to a lower rate of money growth to raise the exchange rate.

Ralph Byrns

Test Bank for Corporate Finance and Financial Markets

49. Persistent deficits in the current account of the U.S. balance of payments and the accompanying inflows of international financial capital during the 1980s and again in the 2000s were at least partially reflective of: (a) the increasingly successful collusion of OPEC countries in raising oil prices. (b) losses of virtually all U.S. comparative advantages. (c) persistent record-breaking federal budget deficits. (d) undervaluation of the dollar in international financial markets. 50. Financial systems in developing and ex-communist countries that face low rates of growth are said to be financially repressed. Financial repression is not commonly cited as arising from: (a) poor legal systems. (b) weak accounting standards. (c) inadequate government regulation. (d) nationalization of banks. (e) lack of foreign investment. 51. When persistent federal budget deficits cause foreigners to buy US real estate or corporate assets or corporate stocks or bonds, their purchases are: (a) exerting pressure for the dollar to devalue. (b) likely to be unprofitable investments if the dollar depreciates significantly. (c) exporting their debts to the United States. (d) exerting pressure for their own countries currencies to appreciate. 52. When foreign central banks buy US Treasury bonds when the dollar is under pressure to depreciate because of persistent federal deficits, the foreign central banks are effectively: (a) artificially supporting the dollar. (b) facilitating the ability of the US federal government to run deficits. (c) often making financial investments contrary to the interests of their own citizens. (d) all of the above. 53. Not among reasons that the adoption of the Euro is expected to increase economic prosperity in Europe is because it will: (a) reduce the need for flows of goods and resources between regions. (b) reduce transactions costs. (c) encourage political cooperation. (d) increase market competition. 54. Developing nations seeking assistance from the International Monetary Fund are not commonly required to: (a) reduce their government budget deficits. (b) reduce their current account deficit, effectively resolving balance of payments problems. (c) maintain a tight fiscal policy. (d) reduce their capital account deficits, effectively reducing their balance of payments problems. 55. When large U.S. balance-of-trade deficits lead to balance-of-trade surpluses in other countries, this leads to: (a) decreases in US international reserves. (b) no change in domestic or international reserves. (c) increases in US international reserves. (d) increases in US domestic reserves. 56. The Bretton Woods system that operated from 1946 until 1971 was one in which central banks agreed: (a) to buy and sell their own currencies to keep their exchange rates fixed. (b) not to intervene in the foreign exchange market to maintain a fixed exchange rate regime that had existed prior to World War I. (c) to limit domestic money growth to the average of the five largest industrial nations. (d) to limit domestic money growth to the growth rates of their real GDPs.

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57. Most of the world switched from being on a fixed exchange rate system to a floating exchange rate system [the dirty float]: (a) at the beginning of World War II, when financial and political instability in Europe proved highly contagious. (b) in 1971, when President Nixon announced that the United States dollar was no longer backed with gold in any fashion. (c) at the end of World War I, under the terms of the Treaty of Versailles. (d) when the Soviet Union collapsed and became 15 separate and sovereign nations between 1989 and 1990. 58. The enormous federal budget deficits of the 1980s, the early-1990s, and from 2001 onward have been largely accommodated through: (a) more severe tradeoffs between unemployment and inflation. (b) large trade deficits. (c) the specie-flow mechanism. (d) inflation of the domestic exchange rate. 59. Historically, the single most profitable category of export per unit for citizens of the United States as a whole has been: (a) iron and steel. (b) U.S. currency. (c) financial technology. (d) laissez faire economic policies. 60. If transaction costs were zero, relative prices for goods or resources would be identical everywhere in the world after adjusting for exchange rates, according to the: (a) classical exchange rate theory. (b) law of one price. (c) relative exchange currency theorem. (d) theory of zero purchasing parity disparity. (e) theory of currency equalization. 61. The theory of purchasing power parity suggests that long-run changes in the exchange rates between two countries are determined by changes in the relative: (a) structures of quotas and tariffs between the countries. (b) ratios of net exports relative to each countrys GDP. (c) price levels of the countries. (d) productivity of labor between the countries. 62. If a central bank does not want the purchase or sale of domestic currency to affect the monetary base and the money supply, the central bank can: (a) change the exchange rate. (b) engage in unsterilized intervention. (c) reduce tariffs and other trade barriers to imports. (d) engage in sterilized intervention. 63. A situation in which the residents of a relatively small and unstable country abandon the countrys own currency and begin using currency issued in a significantly larger and more stable economy is called: (a) paritization. (b) dollarization. (c) commodification. (d) empoundment. (e) a currency swap. 64. The process wherein one country stops issuing its own currency and uses a different currency as its medium of exchange is called: (a) internationalization. (b) dollarization. (c) unitization. (d) privatization. (e) unification. 65. All of the following countries have been dollarized at one time or another except for: (a) Panama. (b) El Salvador. (c) Argentina. (d) Germany. (e) Italy.

Ralph Byrns

Test Bank for Corporate Finance and Financial Markets