Chapter 7 – Exchange Rates

Citizens of Poland were wise to take out foreign currency mortgages before the financial crisis in 2008.
1. True
2. False
Under fixed exchange rates, investors do not face exchange rate risk.
1. True
2. False
Under floating exchange rates, interest rate differences influence the movement of exchange rates.
1. True
2. False
The gold standard in operation between 1870 and 1914 provided a world-wide system of fixed exchange rates
1. True
2. False
Counter party risk increases when engaging in financial hedging of foreign exchange rate risk
1. True
2. False
The hypothesis that in the long run a basket of tradable goods would costs the same in all countries is called
1. Purchasing power parity hypothesis
2. Relative PPP hypothesis
3. Interest rate parity hypothesis
4. Monetary policy parity hypothesis
The 1-year forward rate for a currency can be estimated from
1. The spot market rate, and the 1-year monetary supply in both currency areas
2. The swap market rate, and the 1-year monetary supply in both currency areas
3. The swap market rate, and the 1-year interest rates in both currency areas
4. The spot market rate, and the 1-year interest rates in both currency areas
5. None of the above
Which transactions are recorded in the balance of payments?
1. Donations to charities based in another country
2. Payments of membership dues in international organizations
3. Transfers from citizens working abroad to their parents
4. All of the above
If a country has a ‘balance of payment deficit’, this means
1. It exports less goods than it imports
2. It exports less goods and services than it imports
3. Its transfers send abroad exceed the transfers received
4. The sum of its goods exports, service exports, and transfers received is less than the sum of is goods imports, service imports, and transfers send.
What was established in the “Bretton Woods agreement” of 1944?
1. The International Monetary Fund and the World Bank
2. The European Exchange Rate System and the European Central Bank
3. The United Nations
4. None of the above institutions
The relationship between European currencies and the US$ after 1973 can best be described as
1. A free float
2. A fixed exchange rate
3. A managed float
4. A currency board
A crawling band is a currency arrangement that
1. Allows no fluctuation of exchange rates
2. Allows free fluctuation of exchange rates
3. Allows fluctuation within certain limits that are fixed for a long time
4. Allows adjustments of an exchange rates at a pre-set rate
Which of the following activities would reduce a company’s exposure to exchange rate risk
1. Buying supplies in the country to which it exports
2. Invoicing for services in one’s own currency
3. Exporting to a wide range of different currency areas
4. All of the above measures reduce exchange rate risk
When Toyota decided to set up a plant in France rather than the UK to produce cars to be sold in the euro-zone,
1. This increased exposure to exchange rate risk
2. This reduced exposure to exchange rate risk
3. Had no effect on its exposure to exchange rate risk
4. It engaged in a form of financial hedging
Banks trading foreign exchange rates earn revenues from the spread which is
1. The difference between the spot rate and the forward rate
2. The difference between the spot rate and the bid rate
3. The difference between the offer rate and the forward rate
4. The difference between the offer rate and the bid rate

Chapter 7 – Exchange Rates

Quiz