IBI101 - Foreign Exchange Market

The rate at which one currency is converted into another is known as the fluctuation rate.

• True

• False

When a tourist goes to a bank in a foreign country to convert money into the local

currency, the exchange rate used is the forward rate.

• True

• False

To minimize the risk of an unanticipated change in exchange rates, a company can

protect itself by entering into a forward exchange contract.

• True

• False

The _____ helps us to compare the relative prices of goods and services in different countries.

• interest rate

• exchange rate

• GDP growth rate

• tariff rate

The short-term movement of funds from one currency to another in the hopes of

profiting from shifts in exchange rates is known as:

• currency speculation

• currency arbitrage

• currency hedge

• currency risk mitigation

_____ are exchange rates governing some specific future date foreign exchange

transactions.

• spot exchange rates

• forward exchange rates

• future exchange rates

• currency swaps

The _____ states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

• rational price theory

• model of fair pricing

• principle of consistent price

• law of one price

Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60 in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming away transportation costs and trade barriers, this creates a profit- making opportunity called _____.

• currency swap

• carry trade

• arbitrage

• straddle

Which of the following occurs when the quantity of money in circulation in a country rises faster than the country's stock of goods and services?

• production surplus

• deflation

• inflation

• credit squeeze

The _____ states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries.

• purchasing power parity theory

• International Fisher effect

• efficient market theory

• law of one price