Foreign Exchange Market Quiz
Question: ___ is not a bank characteristic important to customers in need of foreign exchange.
(a) Quote competitiveness
(b) Speed of execution
(c) Forecasting advice
(d) All of the above are important bank characteristics to customers in need of foreign exchange.
Answer. (d)
Question: When the foreign exchange market opens in the UK each morning, the opening exchange rate quotations will be based on the:
(a) closing prices in the U.S. during the previous day.
(b) closing prices in Canada during the previous day.
(c) prevailing prices in locations where the foreign exchange markets have been open.
(d) officially set by central banks before the U.S. market opens.
Answer. (c)
Question: Any event that reduces the euro area demand for Japanese yen should result in a(n) _______ in the value of the Japanese yen with respect to _______, other things being equal.
(a) increase; euro
(b) increase; non-euro currencies
(c) decrease; non-euro currencies
(d) decrease; euro
Answer. (d)
Question: A primary result of the Bretton Woods Agreement was:
(a) the establishment of the European Monetary System (EMS).
(b) establishing specific rules for when tariffs and quotas could be imposed by governments.
(c) establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
(d) establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).
Answer. (c)
Question: Due to _______, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
(a) forward realignment arbitrage
(b) covered interest arbitrage
(c) triangular arbitrage
(d) locational arbitrage
Answer. (c)
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Question: Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the UK interest rate, the:
(a) larger will be the forward discount of the foreign currency.
(b) larger will be the forward premium of the foreign currency.
(c) smaller will be the forward premium of the foreign currency.
(d) smaller will be the forward discount of the foreign currency.
Answer. (a)
Question: When the value of one currency falls relative to another currency, the exchange rate for the first currency has
(a) revalued.
(b) depreciated.
(c) appreciated.
(d) demanded.
Answer. (b)
Question: Which of the following institutions is the most important participant in foreign currency markets?
(a) A retail customer
(b) A commercial bank
(c) A foreign exchange broker
(d) A central bank
(e) None of the above.
Answer. (d)
Question: Which of the following is NOT one of the determinants of the gains of adopting a single currency?
(a) A well-synchronized business cycle involving all member countries
(b) The possibility of factors of production to freely move across borders
(c) The willingness and ability of member countries to design policies to address regional imbalances that may develop
(d) Widening the common market by allowing other countries to join
(e) None of the above.
Answer. (a)
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Question: Which of the following is not a forecasting technique mentioned in your text?
(a) accounting-based forecasting.
(b) fundamental forecasting.
(c) technical forecasting.
(d) market-based forecasting.
Answer. (a)
Question: If inflation in New Zealand suddenly increased while euro area inflation stayed the same, there would be:
(a) an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
(b) an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
(c) an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.
(d) an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.
Answer. (a)
Question: As foreign exchange activity has grown:
(a) central bank intervention has become more effective.
(b) central bank intervention has become more frequent.
(c) central bank intervention has become less effective.
(d) none of the above
Answer. (c)
Question: Covered interest rate parity occurs as the result of:
(a) the actions of market-makers.
(b) purchasing power parity
(c) interest rate arbitrage.
(d) stabilizing speculation.
Answer. (c)
Question: Under a fixed exchange standard, if the domestic demand for foreign exchange increases
(a) the central monetary authority must meet the demand out of its reserves.
(b) the central monetary authority must increase the supply of domestic money.
(c) the fixed exchange standard will break down.
(d) inflation will increase.
(e) the domestic currency must be depreciated.
Answer. (b)
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Question: If a particular currency is consistently declining substantially over time, then a market- based forecast will usually have:
(a) underestimated the future exchange rates over time.
(b) overestimated the future exchange rates over time.
(c) forecasted future exchange rates accurately.
(d) forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.
Answer. (b)
Question: _______ is not a bank characteristic important to customers in need of foreign exchange.
(a) Quote competitiveness
(b) Speed of execution
(c) Forecasting advice
(d) Advice about current market conditions
(e) All of the above are important bank characteristics to customers in need of foreign exchange.
Answer. (e)
Question: From 1944 to 1971, the exchange rate between any two currencies was typically:
(a) fixed within narrow boundaries.
(b) floating, but subject to central bank intervention.
(c) floating, and not subject to central bank intervention.
(d) nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.
Answer. (a)
Question: If a country experiences high inflation relative to the UK, its exports to the UK should _______, its imports should ______, and there is _______ pressure on its currency’s equilibrium value.
(a) decrease; increase; upward
(b) decrease; decrease; upward
(c) increase; decrease; downward
(d) decrease; increase; downward
(e) increase; decrease; upward
Answer. (c)
Question: If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:
(a) U.S. investors could possibly benefit from covered interest arbitrage.
(b) British investors could possibly benefit from covered interest arbitrage.
(c) neither U.S. nor British investors could benefit from covered interest arbitrage.
(d) A and B
Answer. (a)
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Question: Which of the following would NOT be a cause for an increased American demand for the euro?
(a) The United States has lower interest rates than the Euro Area
(b) Increased American demand for Euro Area goods
(c) The expectation by speculators that the value of the euro is edging up
(d) More economic expansion in the United States
(e) None of the above.
Answer.(b)
Question: Which of the following is not a method of forecasting exchange rate volatility?
(a) using the absolute forecast error as a percentage of the realized value.
(b) using the volatility of historical exchange rate movements as a forecast for the future.
(c) using a time series of volatile patterns in previous periods.
(d) deriving the exchange rate’s implied standard deviation from the currency option pricing model.
Answer. (a)
Question: Futures contracts are typically _______; forward contracts are typically _______.
(a) sold on an exchange; sold on an exchange
(b) offered by commercial banks; sold on an exchange
(c) sold on an exchange; offered by commercial banks
(d) offered by commercial banks; offered by commercial banks
Answer. (c)
Question: An increase in UK interest rates relative to euro interest rates is likely to ________ the UK demand for euros and _________ the supply of euros for sale.
(a) reduce; increase
(b) increase; reduce
(c) reduce; reduce
(d) increase; increase
Answer. (a)
Question: Arbitrageurs in foreign exchange markets:
(a) take advantage of the small inconsistencies that develop between markets.
(b) attempt to make profits by outguessing the market.
(c) make their profits through the spread between bid and offer rates of exchange.
(d) need foreign exchange in order to buy foreign goods.
Answer. (a)
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Question: The euro is:
(a) a currency, the value of which is determined by demand and supply.
(b) the currency of EU member countries.
(c) a weighted average of the currencies of EU member countries.
(d) a currency that is only traded offshore.
Answer. (a)
Question: Which of the following is true according to the text?
(a) Forecasts in recent years have been very accurate.
(b) Use of the absolute forecast error as a percent of the realized value is a good measure to use in detecting a forecast bias.
(c) Forecasting errors are smaller when focused on longer-term periods.
(d) None of the above.
Answer. (d)
Question: News of a potential surge in U.S. inflation and zero Chilean inflation places _____ pressure on the value of the Chilean peso. The pressure will occur _____.
(a) upward; only after the U.S. inflation surges
(b) downward; only after the U.S. inflation surges
(c) upward; immediately
(d) downward; immediately
Answer. (c)
Question: To force the value of the dollar to appreciate against the pound, the Federal Reserve should:
(a) sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
(b) sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
(c) sell dollars for pounds in the foreign exchange market and the Bank of England should not intervene.
(d) sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
Answer. (a)
Question: Under a gold standard, countries should
(a) keep the supply of their domestic money constant.
(b) keep the supply of their domestic money fixed in proportion to their gold holdings.
(c) keep the supply of foreign exchange less than their domestic money supply.
(d) restrict the demand for foreign goods.
(e) outlaw speculation.
Answer. (c)
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Question: The effect of a depreciation of the domestic currency on the trade balance is likely to
(a) increase it in the short and long run.
(b) decrease it in the short run and increase it in the long run.
(c) decrease it in the short and long run.
(d) increase it in the short run and decrease it in the long run.
(e) have little or no effect.
Answer. (b)
Question: The currency of country X is pegged to the currency of country Y. Assume that county Y’s currency depreciates against the currency of country Z. It is likely that country X will export ____ to country Z and import _____ from country Z.
(a) more; more
(b) more; less
(c) less; less
(d) less; more
Answer. (c)
Question: Which of the following are examples of currency controls?
(a) import restrictions.
(b) prohibition of remittance of funds.
(c) ceilings on granting credit to foreign firms.
(d) all of the above
Answer. (d)
Question: Which of the following forecasting techniques would best represent the use of today’s forward exchange rate to forecast the future exchange rate?
(a) fundamental forecasting.
(b) technical forecasting.
(c) market-based forecasting.
(d) mixed forecasting.
Answer. (b)
Question: In which case will locational arbitration most likely be feasible?
(a) One bank’s asking price for a currency is greater than another bank’s bid price for the currency.
(b) One bank’s bid price for a currency is greater than another bank’s asking price for the currency.
(c) One bank’s ask price for a currency is less than another bank’s ask price for the currency.
(d) One bank’s bid price for a currency is less than another bank’s bid price for the currency.
Answer. (b)
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Question: An increase in the U.S. demand for the euro
(a) causes a rise in the dollar exchange rate.
(b) causes the euro to appreciate.
(c) causes the dollar to depreciate.
(d) causes Euro Area goods to be relatively more expensive.
(e) All of the above.
Answer. (a)
