IBI101

What is the role of the foreign exchange market in the global economy?

• Facilitate international trade

• Global financial regulation

• Government budget management

• Control inflation rate

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

• exchange rate

• currency swap rate

• fluctuation rate

• carry over rate

 What are the two main functions of the foreign exchange market?

•  trading foreign company equities and converting currency

• reducing currency volatility and setting interest rates

• insuring companies against interest rate risk and enabling imports and exports

•  converting currency and providing some insurance against foreign exchange risk 

  
  

How do currency swaps protect a company from currency fluctuations?

•  By ensuring a fixed exchange rate throughout time

• By allowing the company to exchange currency when necessary

  
  

• By providing insurance against currency devaluation

  
  

• By completely eliminating the need for currency exchange

  
  

 What does it mean to “insure” against adverse fluctuations in exchange rates in the context of the foreign exchange market?

• Buy an actual insurance policy

  
  

• Ensure favorable exchange rates for future transactions

  
  

• Exchange one currency for another at the current exchange rate

  
  

• To protect against possible losses due to changes in currency values 
  

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.

• law of one price

• principle of consistent pricing

• model of fair pricing

•  rational price theory

 If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it, what will happen?

• The dollar will appreciate against the yen

• The dollar will depreciate against the yen

• The exchange rates will remain the same

• The yen will appreciate against the dollar

The purchasing power parity (PPP) theory argues that the exchange rate will

• increase if a country is experiencing inflation.

• change even if relative prices remain unchanged.

• increase if a country is experiencing deflation.

•  change if relative prices change.

Inflation occurs when

• the quantity of money in circulation rises faster than the stock of goods and services.

  
  

• the stock of goods and services increases and the quantity of money in circulation decreases.

  
  

•  output increases faster than the money supply.

• the money supply decreases and the output increases

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

  
  

• efficient market theory

• International Fisher Effect

• law of one price