1. If the exporter and the importer agree that a transaction will be in the currency of the exporters country, the exporter then bears all the risks of exchange rate fluctuation. 
a. True
*b. False

2. The stated goal of the European Union is to eventually transform the euro to be a challenger to the U. S. dollar in its role as a preferred third-country currency. 
*a. True
b. False

3. The type of exchange rate for a foreign currency for immediate delivery (roughly the price of a foreign currency to be delivered within 48 hours) is called the forward rate. 
a. True
*b. False

4. Some currencies are traded in the futures market as commodities. 
*a. True
b. False

5. As a theory of exchange rate determination, Purchasing Power Parity is the observation that exchange rates reflect the differences between nominal interest rates in different countries. 
a. True
*b. False

6. The International Fisher effect is the observation that exchange rates reflect the differences between nominal interest rates in different countries. 
*a. True 
b. False

7. In the long run, technical forecasting of exchange rates is very accurate. 
a. True
*b. False

8. An options market hedge is, in effect, an insurance policy against unfavorable exchange rate fluctuations. 
*a. True
b. False

9. A characteristic of options hedging is that options are commonly traded for many different currencies. 
a. True
*b. False

10. If it is agreed that an international exchange will be in the currency of the exporters country, then there is no exchange rate fluctuation risk for the importer. 
a. True
*b. False

11. Although there are many variables affecting the exchange rate of currencies, applications of fundamental forecasting using multiple regression and ANOVA readily overcome the problem of having all these variables. 
a. True
*b. False

12. Although the Bank for International Settlements originally limited its membership to European Central Banks, the United States Central Bank joined in 1974. 
a. True
*b. False

13. The Ex-Im Bank provides loans to small exporters. 
a. True
*b. False

14. The principle of Interest Rate Parity is that the forward exchange rate should be expressed as a premium if the foreign country is experiencing higher nominal rates than the domestic country. 
a. True
*b. False

15. Technical forecasting methods are essentially based upon time-series analysis. 
*a. True
b. False

16. In fundamental forecasting methods, the exchange rate of a specific currency is the dependent variable. 
*a. True
b. False

17. The Japanese government has been known to keep the value of the yen down in order to boost the Japanese economy through under-valued exports. 
*a. True
b. False

18. Documents transferred through SWIFT have the same value as original paper documents. 
*a. True
b. False

19. The Ex-Im Bank is the curator of the SDR. 
a. True
*b. False

20. Importers generally prefer quotes that are written in the currency of the exporters country. 
a. True
*b. False

21. For an exporter, there is a strategic advantage in quoting prices in the importers currency and reducing the currency fluctuation risk with a forward market hedge or a money market hedge. 
*a. True
b. False

1. In valuing a currency, the direct quote is
~ The direct quote is the value of the foreign currency expressed in units of the domestic currency, while the indirect quote is the value of the domestic currency and refers to the traditional way of expressing the value of a currency like the Canadian dollar and the Japanese yen. 
@ The direct quote is the value of the foreign currency expressed in units of the domestic currency, while the indirect quote is the value of the domestic currency and refers to the traditional way of expressing the value of a currency like the Canadian dollar and the Japanese yen. 
a. the traditional way of expressing the value of a currency like the Canadian dollar. 
*b. the value of the foreign currency expressed in units of the domestic currency. 
c. the traditional way of expressing the value of a currency like the Japanese yen. 
d. the value of the domestic currency expressed in units of foreign currency. 
e. the value of the foreign currency in Special Drawing Rights

2. In the United States, the Wall Street Journal publishes the forward rates for the currencies of _____ countries. 
~ The WSJ publishes only the forward rates for four currencies: the British pound, the Japanese yen, the Swiss franc, and the Canadian dollar. 
@ The WSJ publishes only the forward rates for four currencies: the British pound, the Japanese yen, the Swiss franc, and the Canadian dollar. 
*a. four
b. six
c. twelve
d. twenty
e. fifteen

3. Countries representing the greatest percentage of world trade all have _____ currencies. 
~ Pegged currencies are used by countries with unstable, volatile currencies, whereas most developed countries have stable currencies for which it is reasonable to expect a predictable exchange rate. 
@ Pegged currencies are used by countries with unstable, volatile currencies, whereas most developed countries have stable currencies for which it is reasonable to expect a predictable exchange rate. 
a. pegged 
b. volatile
*c. floating
d. call
e. non-convertible

4. As a theory of exchange rate determination, the Fisher effect 
~ The Fisher effect is the observation that a country's nominal interest rate (what a borrower actually has to pay for a loan) comprises both the inflation rate in that country and the real interest rate that borrowers are paying. Purchasing Power Parity holds that exchange rates should reflect the price differences of each and every product between countries and is reflected in the Big Mac Index. Interest Rate Parity is most closely links the forward exchange rate of a foreign currency to its spot rate. 
@ The Fisher effect is the observation that a country's nominal interest rate (what a borrower actually has to pay for a loan) comprises both the inflation rate in that country and the real interest rate that borrowers are paying. Purchasing Power Parity holds that exchange rates should reflect the price differences of each and every product between countries and is reflected in the Big Mac Index. Interest Rate Parity is most closely links the forward exchange rate of a foreign currency to its spot rate. 
a. holds that exchange rates are unpredictable and should not be relied upon. 
b. holds that exchange rates should reflect the price differences of each and every product between countries. 
c. links the forward exchange rate of a foreign currency to its spot rate. 
d. reflects the Big Mac Index. 
*e. holds that a countrys nominal interest rate is comprised of the inflation rate and the real interest rate of money, essentially identical for all countries. 

5. Market-based forecasting of exchange rates
~ All of these options are illustrative of market-based forecasting. 
@ All of these options are illustrative of market-based forecasting. 
a. is based on the premise that the market knows best. 
b. captures the collective knowledge of sophisticated speculators in the future spot rate of a currency. 
c. does not take into account potential government interventions. 
d. uses a combination of many sophisticated forecasting tools
*e. all answers in this set of responses apply to market-based forecasting. 

6. Companies that will successfully and regularly retain their risk of currency fluctuation are those that
~ Large, sophisticated traders will not assume risks outlined in the answers regarding large exposure, being ignorant of the risks, or being unable to afford major currency fluctuations. Traders who are unfamiliar with the process often ignorantly expose themselves to unwarranted risks of currency fluctuation. 
@ Large, sophisticated traders will not assume risks outlined in the answers regarding large exposure, being ignorant of the risks, or being unable to afford major currency fluctuations. Traders who are unfamiliar with the process often ignorantly expose themselves to unwarranted risks of currency fluctuation. 
*a. are very large traders, sophisticated in international finance. 
b. are exporters or importers that have large exposure. 
c. are ignorant of the risks. 
d. cannot afford major currency fluctuations. 
e. trade with countries where currencies fluctuate a lot. 

7. A forward market hedge
~ A forward market hedge consists of selling forward the currency that will eventually be collected from a foreign receivable. 
@ A forward market hedge consists of selling forward the currency that will eventually be collected from a foreign receivable. 
a. allows a bank to protect itself from currency fluctuations. 
*b. involves selling forward foreign currency yet to be received. 
c. involves selling forward the currency necessary to cover a foreign payable. 
d. allows an exporter to purchase currency without risk to pay a receivable. 
e. allows a bank to reduce its foreign currency risk by selling currency forward to traders. 

8. In an options market hedge there is the option to sell or purchase certain currencies at a certain exchange rate either on or before a certain date. The agreed-upon exchange rate is called the
~ The correct answer is strike price. 
@ The correct answer is strike price. 
a. international leverage. 
b. trade dimension. 
c. leveraging currency. 
d. transaction exposure. 
*e. strike price. 

9. SDRs of the International Monetary Fund can be used in international transactions:
~ Special Drawing Rights (SDRs) are an artificial currency whose value is determined by the value of a basket of four currencies: the euro, the Japanese yen, the U. S. dollar, and the British pound. 
@ Special Drawing Rights (SDRs) are an artificial currency whose value is determined by the value of a basket of four currencies: the euro, the Japanese yen, the U. S. dollar, and the British pound. 
*a. as an artificial currency. 
b. as letters of credit. 
c. instead of open accounts. 
d. as equivalents to a U. S. dollar. 
e. for money-market hedging purposes. 

10. The mathematical expression Ft + 1(et) = S(et + 1) represents what theory of exchange rate determination?
~ The correct answer is forward rate as unbiased predictor of spot rate. 
@ The correct answer is forward rate as unbiased predictor of spot rate. 
a. Interest Rate Parity. 
b. Fisher effect. 
c. Purchasing Power Parity. 
d. Big Mac Index. 
*e. Forward Rate as a predictor of the spot rate. 

11. The mathematical representation (1 + real interest rate) x (1 + inflation rate) = 1 + nominal interest rate represents what theory of exchange rate determination?
~ Interest Rate Parity and Purchasing Power Parity are alternate theories of exchange rate determination. The Fisher effect determines that a countrys nominal interest rate comprises both the inflation rate in that country and the real interest rate that borrowers are paying. 
@ ~ Interest Rate Parity and Purchasing Power Parity are alternate theories of exchange rate determination. The Fisher effect determines that a countrys nominal interest rate comprises both the inflation rate in that country and the real interest rate that borrowers are paying. 
a. Interest Rate Parity. 
*b. Fisher effect. 
c. Purchasing Power Parity. 
d. Big Mac Index. 
e. Forward Rate as a predictor of the spot rate. 

12. Historical exchange rate data can easily be obtained from 
~ Historical exchange rate data can be obtained for any currency from the Federal Reserve System, Bank of Canada and the Pacific Exchange Rate Service at the University of British Columbia. 
@ Historical exchange rate data can be obtained for any currency from the Federal Reserve System, Bank of Canada and the Pacific Exchange Rate Service at the University of British Columbia. 
a. the Friday Wall Street Journal. 
*b. the Federal Reserve System. 
c. the Sunday New York Times. 
d. the January edition of Forbes. 
e. the weekly edition of the Financial Times. 

13. International exchange rates began to float
~ The gold standard ended in 1971 and exchange rates began to float. Prior to that time, the IMF oversaw the fixed exchange rate system. 
@ The gold standard ended in 1971 and exchange rates began to float. Prior to that time, the IMF oversaw the fixed exchange rate system. 
a. after the Great Depression, in 1932. 
*b. at the end of the gold standard, in 1971. 
c. When the International Monetary Fund was created, in 1944. 
d. when the European Union was formed, in 1958. 
e. when the Federal Reserve was created, in 1913. 

14. SWIFT stands for 
~ SWIFT is the Society for Worldwide Interbank Financial Telecommunications. 
@ SWIFT is the Society for Worldwide Interbank Financial Telecommunications. 
a. Southwestern International Fund Transfers. 
b. Sales World Institutional Financial Telecommunications. 
c. Serving-the-World Institutional Financial Transactions. 
d. Society for Worldwide Institutional Transfers. 
*e. Society for Worldwide Interbank Financial Telecommunication

15. The International Bank for Reconstruction
~ The International Bank for Reconstruction is known as the World Bank and was founded after the Bretton Woods Conference to help countries rebuild their infrastructures after WWII. The Bank for International Settlements was designed to manage Germanys World War I reparations. 
@ The International Bank for Reconstruction is known as the World Bank and was founded after the Bretton Woods Conference to help countries rebuild their infrastructures after WWII. The Bank for International Settlements was designed to manage Germanys World War I reparations. 
a. is called the Bretton Woods Bank. 
b. was developed to manage Germanys World War I reparations. 
*c. is also known as the World Bank. 
d. is the formal name of the Ex-Im Bank. 
e. fulfills internationally the same role as the Federal Reserve System plays domestically. 

16. In its absolute form, the exchange rate determination theory of Purchasing Power Parity
~ All options relate to Purchasing Power Parity. 
@ All options relate to Purchasing Power Parity. 
a. says that exchange rates should reflect the price differences of each and every product between countries. 
b. says that the exchange rate should equalize price differences of similar products between countries. 
c. is impossible to achieve. 
d. is rarely noticeable, even for identical products sold worldwide. 
*e. all answers in this response set are observations that are related to the PPP theory. 

17. The risk resulting from possible fluctuations in currency exchange rates is called
~ Hedging is a method for reducing risk, and direct quote and floating are not not risks from possible currency exchange rate fluctuations. Transaction exposure is risk a company is exposed to in an international transaction when it agrees to use a foreign currency, due to possible fluctuations in the currency exchange rates. 
@ Hedging is a method for reducing risk, and direct quote and floating are not not risks from possible currency exchange rate fluctuations. Transaction exposure is risk a company is exposed to in an international transaction when it agrees to use a foreign currency, due to possible fluctuations in the currency exchange rates. 
a. hedging. 
*b. transaction exposure. 
c. the direct quote. 
d. floating. 
e. currency exposure 

18. When a company is engaged in an international transaction and agrees to use a foreign currency to conduct the transaction
~ A company is exposed to a certain amount of risk, due to possible fluctuations in the currency exchange rates, in an international transaction when it agrees to use a foreign currency. 
@ A company is exposed to a certain amount of risk, due to possible fluctuations in the currency exchange rates, in an international transaction when it agrees to use a foreign currency. 
a. it will use SDRs to mitigate its risks. 
*b. it is exposed to a certain amount of risk. 
c. it will use the services of the Ex-Im Bank. 
d. it must use a letter of credit. 
e. it pays hefty fees to its bank for the privilege. 

19. Which of the following companies are exposed to the risk of currency fluctuations?
~ All of these options are applicable. 
@ All of these options are applicable. 
a. firms that do not evaluate international currency transaction risks clearly. 
b. firms that do not follow a specific policy on currency exchange. 
c. firms that have management that is not well-versed in the intricacies of international trade. 
d. firms that do not hedge their foreign receivables. 
*e. all answers in this response set illustrate companies exposed to the risk of currency fluctuations. 

20. One strategy a company can follow to protect itself from currency fluctuations is use of
~ A letter of credit is not relevant, and risk retention is the opposite of protecting oneself from currency fluctuations. Forward market hedges can protect a company from currency fluctuations by selling forward a future receivable in a foreign currency, or purchasing forward the currency necessary to cover a foreign payable. Neither stock market hedges nor bond market hedges exist. 
@ A letter of credit is not relevant, and risk retention is the opposite of protecting oneself from currency fluctuations. Forward market hedges can protect a company from currency fluctuations by selling forward a future receivable in a foreign currency, or purchasing forward the currency necessary to cover a foreign payable. Neither stock market hedges nor bond market hedges exist. 
a. a letter of credit. 
b. risk retention. 
*c. forward market hedges. 
d. stock market hedges. 
e. bond market hedges. 


Type: F
1. The euro was first created as an artificial ____________________. 
a. currency

Type: F
2. As the Wall Street Journal quotes it, the exchange rate is the ____________________ between the bid and ask rates for exchanges of a value greater than $1,000,000 between banks. 
a. mid-point
b. midpoint
c. half point
d. mid point
e. halfway point

Type: F
3. The European Monetary System (EMS), which gave rise to the euro, was designed so that the currencies of member countries would have to stay within a few points of each others value.  This is an example of a floating ____________________. 
a. currency bloc
b. bloc

Type: F
4. Under the Interest Rate Parity theory of exchange rate determination, the forward exchange rate should be expressed as a ____________________ if the foreign country is experiencing higher nominal interest rates than the domestic country. 
a. discount

Type: F
5. The risk a company faces in a transaction that may have fluctuations in foreign currency exchange rates is called transaction ____________________. 
a. exposure

Type: F
6. A money market hedge consists of using the ____________________ system of the country of the currency in which the receivable or the payable is going to be paid. 
a. banking

Type: F
7. In the United States, the Federal Reserve System technically fulfills the role of being a ____________________. 
a. central bank

Type: F
8. SDR, an artificial currency, is designed to ____________________ the U. S. dollar in its role as the international currency. 
a. supplement
b. complement

Type: F
9. One of the functions of a nations central bank is that of a check ____________________. 
a. clearinghouse
b. clearing house

Type: F
10. A problem with market-based forecasting is that the wisdom of the market may be skewed by ____________________ who may include people motivated by entirely different motives than the actual purchase and delivery of a currency. 
a. speculators

Type: F
11. An exporter writing a quote for a customer located in a developed country can expect that several of his competitors will quote in the ____________________ currency. 
a. importers
b. buyer's
c. importers'
d. buyers'
e. buyers
f. importers

Type: F
12. If an exporter chooses to quote in his countrys currency, or quotes in the importers country currency and hedges with a money market hedge, it is to minimize his ____________________ risks. 
a. currency fluctuation
b. currency