Unit 7: International Financial Markets - Practice Quiz

1 What is the primary function of the foreign exchange market?

2 What is a spot foreign exchange transaction?

3 What does a forward foreign exchange contract allow a business to do?

4 In a foreign exchange quotation, what is the bid price?

5 What is the bid-ask spread in the foreign exchange market?

6 Under a fixed exchange rate arrangement, the currency's value is primarily maintained by whom?

7 Under a freely floating exchange rate arrangement, what mainly determines a currency's value?

8 What is a managed floating exchange rate arrangement?

9 What is meant by pegging a currency?

10 How can a central bank support its currency under a fixed exchange rate arrangement?

11 All else being equal, how can relatively high inflation affect a country's currency?

12 All else being equal, higher domestic interest rates may increase demand for a currency because they can attract what?

13 An increase in foreign demand for a country's exports usually increases demand for what?

14 When residents buy more imported goods, demand usually rises for what?

15 How does greater political stability often affect a country's currency?

16 What does appreciation of a currency mean?

17 What is a common effect of domestic currency appreciation on imported goods?

18 What is a common effect of domestic currency depreciation on exports?

19 How does domestic currency depreciation usually affect a business that imports raw materials?

20 What type of risk arises when exchange rate changes affect the value of an international payment?

21 A bank quotes the US dollar at ₹83.00/₹83.20. An Indian importer must purchase $100,000 to pay a supplier. How many rupees will the importer pay, excluding fees?

22 The market quotes $1.10 per euro and ¥150 per US dollar. What is the implied cross rate in yen per euro?

23 The spot exchange rate is 80 local currency units per US dollar, while the three-month forward rate is 82. What is the approximate annualized forward premium on the dollar?

24 A French exporter expects to receive $500,000 after 90 days and wants to eliminate uncertainty about the euro value of the receipt. Which transaction is most appropriate?

25 A dealer quotes the euro at 1.0810. A customer sells €100,000 to the dealer. How many dollars does the customer receive?

26 A central bank promises to maintain its currency at 6 units per US dollar. Market pressure would otherwise push the rate to 6.4 units per dollar. What action would most directly defend the fixed rate?

27 Which feature most clearly distinguishes a currency board from a conventional fixed exchange rate system?

28 A country adjusts its official exchange rate downward by 1% each month to reflect inflation differences with its trading partners. Which arrangement is it using?

29 A currency's value is mainly set by market demand and supply, but the central bank occasionally intervenes to reduce sharp fluctuations. Which arrangement best describes this system?

30 Country X maintains a fixed exchange rate but faces persistent capital outflows and falling foreign reserves. If it refuses to raise interest rates, which response is most consistent with preserving the peg in the short run?

31 Domestic inflation is expected to be 8%, while foreign inflation is expected to be 3%. Under relative purchasing power parity, what is the approximate expected change in the domestic currency?

32 A central bank unexpectedly raises interest rates while other countries leave their rates unchanged. Assuming risk and expectations remain stable, what is the likely immediate effect on its currency?

33 A country develops a persistent current account deficit that is not matched by stable capital inflows. What exchange rate pressure is most likely?

34 Investors suddenly expect a government to impose controls preventing future currency conversion. What is the most likely short-run market reaction before the controls take effect?

35 Country A experiences sustained productivity growth in its tradable-goods industries relative to its trading partners. Other factors remaining constant, what long-run currency effect is most plausible?

36 An Indian company has a fixed payment of $2 million due in three months and has not hedged it. If the rupee depreciates against the dollar before payment, what happens to the company's obligation?

37 A domestic manufacturer exports most of its output and pays nearly all costs in domestic currency. What is the likely immediate effect of a domestic currency depreciation, assuming foreign-currency selling prices do not change?

38 A country's currency depreciates, but its trade balance initially worsens because import contracts and quantities adjust slowly. Which concept explains this pattern?

39 A government has substantial debt denominated in US dollars, while most tax revenue is collected in domestic currency. What is the main fiscal effect of domestic currency depreciation?

40 After a 10% currency depreciation, domestic prices of imported goods rise by only 4%. What does this outcome indicate?

41 The interdealer market quotes EUR/USD at and USD/JPY at . Another dealer quotes EUR/JPY at . Ignoring transaction costs beyond these spreads, which strategy exploits the pricing inconsistency?

42 A dealer quotes EUR/USD at . A customer sells €1,000,000 for dollars and immediately uses all proceeds to repurchase euros from the same dealer. What is the customer's approximate loss?

43 The one-year spot rate is $1.10 per euro, while US and eurozone interest rates are 5% and 2%, respectively. The one-year forward rate is quoted at $1.15 per euro. Which covered arbitrage is appropriate?

44 A US firm owns euros today, needs the same nominal euro amount in three months, and wants dollar liquidity during the intervening period without retaining exchange-rate exposure. Which transaction best meets this objective?

45 Two banks settle a large USD/JPY transaction across different time zones. Which statement most accurately describes the protection provided by payment-versus-payment settlement through CLS?

46 Under a fixed exchange rate, persistent capital inflows arise because the domestic interest rate exceeds the foreign rate. The central bank buys foreign currency and fully sterilizes each purchase by selling domestic bonds. What is the most likely immediate consequence?

47 A country insists on unrestricted capital mobility and wants its central bank to set interest rates independently in response to domestic unemployment. Under the monetary-policy trilemma, which exchange-rate choice is sustainable?

48 A currency board holds foreign reserves equal to the monetary base and converts domestic currency at a legally fixed rate. During a banking panic, what is its key limitation relative to a conventional central bank?

49 A country operating a crawling peg has domestic inflation of 7% and anchor-country inflation of 2%. To keep the bilateral real exchange rate approximately constant, how should the domestic-currency price of the anchor currency change annually?

50 In a fully credible exchange-rate target zone, the currency approaches the weak edge of its permitted band. What stabilizing expectation is predicted by the target-zone model?

51 Let denote units of domestic currency per unit of foreign currency. Domestic inflation is 8% and foreign inflation is 3%. Under relative purchasing power parity, what is the predicted percentage change in ?

52 Define the real exchange rate as , where is domestic currency per foreign currency. Over a year, rises by 10%, the foreign price level rises by 2%, and the domestic price level rises by 6%. What happens to ?

53 In the Dornbusch overshooting model, a permanent unanticipated monetary expansion occurs while goods prices adjust slowly and asset markets adjust rapidly. Which exchange-rate path is predicted?

54 Current domestic and foreign policy rates are unchanged, but markets receive credible news that domestic monetary policy will become substantially tighter next year. Under a forward-looking asset-market model, what can happen immediately?

55 Productivity in a country's tradable sector rises much faster than abroad, while nontradable productivity is unchanged. Under the Balassa-Samuelson mechanism, which outcome is most likely?

56 A country's currency depreciates sharply, and the Marshall-Lerner condition holds for long-run trade elasticities. Nevertheless, its trade balance initially deteriorates. Which explanation best fits the J-curve effect?

57 A Japanese exporter fixes its US sales price in dollars for one year. The yen appreciates unexpectedly against the dollar, while production costs remain yen-denominated. What is the most likely short-run effect?

58 A firm in an emerging economy earns mainly domestic currency but has substantial unhedged US-dollar debt. Its domestic currency depreciates by 25%. Which balance-sheet effect can offset the competitiveness benefit of depreciation?

59 A US company will receive €10 million from customers and pay €6 million to suppliers on the same date. Assuming both flows are certain and there are no basis differences, what forward position fully hedges its net transaction exposure?

60 A US parent consolidates a euro-functional-currency subsidiary. The euro depreciates by 10%, but the subsidiary's local sales, assets, and operations are unchanged, and no funds are remitted. Which consequence is most accurate?