Chapter 10The Foreign Exchange Market True / False Questions 1. What happens in the foreign exchange market does not directly impact the sales, profits, and strategy of a multinational enterprise. True False 2. The foreign exchange market is a market for converting the currency of one country into that of another country. True False 3. The currency of Argonia falls sharply in value against the currency of Palladia. This exchange rate movement will boost Palladia's exports to Argonia. True False 4. The foreign exchange market offers complete insurance against foreign exchange risk. True False 5. Foreign exchange risk refers to the risk of not getting paid for a product that is exported from one country to another. True False 6. The euro/dollar exchange rate is €1 = $1.20. If it costs $36 to buy a European product, the stated price of the product would be €36. True False 7. The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as countertrade. True False 10-1© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.8. Companies engage in currency speculation to get minimal but assured returns from idle cash. True False 9. Carry trade is a kind of speculation whose success is based upon a belief that there will be no adverse movement in exchange rates. True False 10. The forward exchange rate refers to the rate at which a foreign exchange dealer converts one currency into another currency on a particular day. True False 11. For most major currencies, forward exchange rates are quoted for 30 days, 90 days, and 180 days into the future. True False 12. Spot exchange rates and the 30-day forward rates are the same. True False 13. Assume that current dollar/yen spot exchange rate is $1 = ¥110. If the 30-day forward exchange is $1 = ¥105, we say the dollar is selling at a premium on the 30-day forward market. True False 14. When a firm enters into a spot exchange contract, it is taking out insurance against adverse future exchange rate movements. True False 15. Currency swaps are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk. True False 16. A common kind of currency swap is spot against forward. True False 17. When companies wish to convert currencies, they typically enter the foreign exchange market directly. True False 10-2© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.18. The integration of financial centers implies there can be no significant difference in exchange rates quoted in the foreign exchange trading centers. True False 19. Although a foreign exchange transaction can involve any two currencies, most transactions involve dollars on one side. True False 20. London has lost its leading position in the global foreign exchange market due to the diminishing importance of the British pound. True False 21. If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices. True False 22. In the context of The Economist's "Big Mac Index," assume that the average price of a Big Mac in South Korea is $2.98 at the prevailing won/dollar exchange rate. The average price of a Big Mac in the United States is $3.58. This suggests that the Korean won is overvalued against the U.S. dollar. True False 23. Theoretically, a country in which price inflation is very high should expect to see its currency depreciate against that of countries in which inflation rates are lower. True False 24. Inflation occurs when the money supply in a country increases faster than output increases. True False 25. For price discrimination to work, arbitrage opportunities must be unlimited. True False 26. In countries where inflation is expected to be high, interest rates also will be high. True False 27. Unlike the purchasing power parity theory, the international Fisher effect is a good predictor of short-run changes in spot exchange rates. True False 10-3© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distributionin any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.28. Relative monetary growth, relative inflation rates, and nominal interest rate differentials are all moderately good predictors of long-run changes in exchange rates. True False 29. In terms of exchange rate forecasting, the efficient market school argues that companies should spend additional money trying to forecast short-run exchange rate movements. True False 30. Technical analysis, an approach to foreign exchange forecasting, does not rely on a consideration of economic fundamentals. True False 31. When residents and nonresidents rush to convert their holdings of domestic currency into a foreign currency, the phenomenon is generally referred to as capital flight. True False 32. Transaction exposure, a category of foreign exchange risk, refers to the impact of currency exchange rate changes on the reported financial statements of a company. True False 33. Since translation exposure, a category of foreign exchange risk, is concerned with thepresent measurement of past events, the resulting accounting gains or losses are said to be unrealized, and therefore unimportant. True False 34. Economic exposure, a category of foreign exchange risk, is distinct from transaction exposure, which is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months. True False 35. Leading and lagging strategies involve accelerating payments from weak-currency to strong-currency countries and