Hill12e Chapter 10 TB Answer Key PDF

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1 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the priorInternational Business, 12e (Hill)Chapter 10 The Foreign Exchange Market The foreign exchange market converts the currency of one country into that of another country. Answer: TRUE Explana...

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International Business, 12e (Hill) Chapter 10

The Foreign Exchange Market

1) The foreign exchange market converts the currency of one country into that of another country. Answer: TRUE Explanation: One function of the foreign exchange market is to convert the currency of one country into the currency of another country. Difficulty: 1 Easy Topic: The Main Instruments and Institutions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 2) When Krista traveled from the United States to England, she had to change her money from dollars into pounds. Krista was participating in the currency exchange market. Answer: TRUE Explanation: When a tourist changes one currency into another, she is participating in the foreign exchange market. Difficulty: 1 Easy Topic: The Main Instruments and Institutions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 3) Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the hope that she would make money based on the exchange rates. This demonstrates a carry trade. Answer: TRUE Difficulty: 1 Easy Topic: The Main Instruments and Institutions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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4) Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa. Answer: TRUE Explanation: Currency fluctuations can make seemingly profitable trade and investment deals unprofitable, and vice versa. Difficulty: 1 Easy Topic: The Main Instruments and Institutions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 5) Carry trade is nonspeculative in nature. Answer: FALSE Explanation: The speculative element of carry trade is that its success is based upon a belief that there will be no adverse movement in exchange rates (or interest rates for that matter) that will make the trade unprofitable. Difficulty: 1 Easy Topic: Functions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 6) The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. Answer: TRUE Explanation: The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies. Difficulty: 1 Easy Topic: The Influence of Exchange Rates Learning Objective: 10-02 Understand what is meant by spot exchange rates. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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7) If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated. Answer: FALSE Explanation: Each pound now buys fewer dollars than at the start of the day. The dollar has appreciated, and the pound has depreciated. Difficulty: 2 Medium Topic: Foreign Exchange Risks Learning Objective: 10-02 Understand what is meant by spot exchange rates. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 8) To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract. Answer: TRUE Explanation: When a firm enters into a forward exchange contract, it is taking out insurance against the possibility that future exchange rate movements will make a transaction unprofitable by the time that transaction has been executed. Difficulty: 1 Easy Topic: The Influence of Exchange Rates Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 9) If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a premium on the 30-day forward market. Answer: FALSE Explanation: If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates foreign exchange dealers expected the dollar to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a discount on the 30-day forward market. Difficulty: 2 Medium Topic: The Influence of Exchange Rates Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation

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10) If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a discount in the forward market. Answer: FALSE Explanation: In this case, the dollar is selling at a premium on the 30-day forward market. Difficulty: 2 Medium Topic: The Influence of Exchange Rates Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 11) A currency swap deal enables companies to insure themselves against foreign exchange risk. Answer: TRUE Explanation: A currency swap deal enables companies to insure themselves against foreign exchange risk. Difficulty: 1 Easy Topic: The Influence of Exchange Rates Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 12) The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney. Answer: FALSE Explanation: The most important trading centers are London (37 percent of activity), New York (18 percent of activity), and Zurich, Tokyo, and Singapore (all with around 5 to 6 percent of activity). Major secondary trading centers include Frankfurt, Paris, Hong Kong, and Sydney. Difficulty: 1 Easy Topic: The Main Instruments and Institutions of the Foreign Exchange Market Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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13) Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly. Answer: TRUE Explanation: Because foreign exchange dealers are always watching their computer screens for arbitrage opportunities, the few that arise tend to be small, and they disappear in minutes. Difficulty: 2 Medium Topic: The Role of Arbitrage in the Foreign Exchange Market Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring against foreign exchange risk. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 14) 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. Answer: TRUE Explanation: 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. Difficulty: 2 Medium Topic: Economic Theories of Exchange Rate Determination Learning Objective: 10-04 Understand the different theories explaining how currency exchange rates are determined and their relative merits. Bloom's: Apply AACSB: Knowledge Application Accessibility: Keyboard Navigation 15) There are many impediments to the free flow of goods and services in an efficient market. Answer: FALSE Explanation: An efficient market has no impediments to the free flow of goods and services, such as trade barriers. Difficulty: 1 Easy Topic: Economic Theories of Exchange Rate Determination Learning Objective: 10-04 Understand the different theories explaining how currency exchange rates are determined and their relative merits. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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16) The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less. Answer: FALSE Explanation: While PPP theory seems to yield relatively accurate predictions in the long run, it does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years or less. Difficulty: 2 Medium Topic: Economic Theories of Exchange Rate Determination Learning Objective: 10-04 Understand the different theories explaining how currency exchange rates are determined and their relative merits. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 17) The International Fisher Effect 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. Answer: TRUE Explanation: The International Fisher Effect 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. Difficulty: 1 Easy Topic: Economic Theories of Exchange Rate Determination Learning Objective: 10-04 Understand the different theories explaining how currency exchange rates are determined and their relative merits. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 18) There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates. Answer: FALSE Explanation: Evidence reveals that various psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates. Difficulty: 1 Easy Topic: Economic Theories of Exchange Rate Determination Learning Objective: 10-04 Understand the different theories explaining how currency exchange rates are determined and their relative merits. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation

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19) The efficient market school argues that investing in exchange rate forecasting services would be a waste of money. Answer: TRUE Explanation: The efficient market school argues that forward exchange rates do the best possible job of forecasting future spot exchange rates, and, therefore, investing in forecasting services would be a waste of money. Difficulty: 1 Easy Topic: Approaches to Exchange Rate Forecasting Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate forecasting. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 20) Governments allow convertibility to preserve their foreign exchange reserves. Answer: FALSE Explanation: Governments limit convertibility to preserve their foreign exchange reserves. Difficulty: 1 Easy Topic: Currency Management and Business Strategy in the Global Monetary System Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate forecasting. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 21) Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies. Answer: TRUE Explanation: Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values. Such exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies. Difficulty: 1 Easy Topic: Foreign Exchange Risks Learning Objective: 10-06 Compare and contrast the differences among translation, transaction, and economic exposure, and what managers can do to manage each type of exposure. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation

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22) The impact of currency exchange rates on the reported financial statements of a company is called economic exposure. Answer: FALSE Explanation: Economic exposure is the extent to which a firm's future international earning power is affected by changes in exchange rates. Difficulty: 2 Medium Topic: Foreign Exchange Risks Learning Objective: 10-06 Compare and contrast the differences among translation, transaction, and economic exposure, and what managers can do to manage each type of exposure. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation 23) The rate at which one currency is converted into another is known as the A) exchange rate. B) currency swap rate. C) fluctuation rate. D) carry over rate. Answer: A Explanation: An exchange rate is the rate at which one currency is converted into another. Difficulty: 1 Easy Topic: The Main Instruments and Institutions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 24) ________ arises from volatile changes in exchange rates. A) Translational exposure B) Foreign exchange risk C) Economic exposure D) Transactional exposure Answer: B Explanation: Foreign exchange risk refers to the adverse consequences of unpredictable changes in exchange rates. Difficulty: 1 Easy Topic: Functions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation

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25) Currency ________ typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. A) hedging B) risk mitigation C) speculation D) arbitrage Answer: C Explanation: Currency speculation typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. Difficulty: 1 Easy Topic: Functions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 26) What are the two main functions of the foreign exchange market? A) trading foreign company equities and converting currency B) reducing currency volatility and setting interest rates C) insuring companies against interest rate risk and enabling imports and exports D) converting currency and providing some insurance against foreign exchange risk Answer: D Explanation: The foreign exchange market serves two main functions. The first is to convert the currency of one country into the currency of another. The second is to provide some insurance against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates. Difficulty: 1 Easy Topic: Functions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Understand AACSB: Knowledge Application Accessibility: Keyboard Navigation

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27) A pair of shoes costs £40 in Britain. An identical pair costs $50 in the United States when the exchange rate is £1 = $1.50. Which of the following is correct? A) The United States offers a better deal. B) The deal is the same in both countries. C) Britain offers a better deal. D) A trader can make money by buying the shoes in Britain and selling in the United States at $50. Answer: A Explanation: All else being equal, at an exchange rate £1 = $1.50, the shoe should have cost $60 (40 × 1.5) in the United States. At $50 for a pair, the United States offers a better deal. Difficulty: 2 Medium Topic: Functions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation 28) An exchange rate of €1 = $1.30 indicates that A) $1 is worth 1.30 euros. B) one could get 1.30 euros for $1. C) one euro buys 1.30 dollars. D) one euro buys 0.77 dollars. Answer: C Explanation: The exchange rate is the rate at which the market converts one currency into another. An exchange rate of €1 = $1.30 indicates that every euro is worth 1.3 dollars. Difficulty: 2 Medium Topic: Functions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Apply AACSB: Reflective Thinking Accessibility: Keyboard Navigation

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29) The ________ helps consumers compare the relative prices of goods and services in different countries. A) interest rate B) GDP growth rate C) exchange rate D) tariff rate Answer: C Explanation: The exchange rate is the rate at which the market converts one currency into another. The exchange rate allows us to compare the relative prices of goods and services in different countries. Difficulty: 1 Easy Topic: The Influence of Exchange Rates Learning Objective: 10-01 Describe the functions of the foreign exchange market. Bloom's: Remember AACSB: Knowledge Application Accessibility: Keyboard Navigation 30) An American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment? A) The Hungarian forint rises in value against the dollar. B) Interest rates in the United States move down. C) Short-term interest rates in Hungarian money markets shoot up. D) The dollar appreciates against the Hungarian forint. Answer: D Explanation: If the dollar appreciates, it will mean that the company will get a lesser amount of dollars when it takes its investment back. Each Hungarian forint will buy fewer dollars than in the past. Difficulty: 2 Medium Topic: Functions of the Foreign Exchange Market Learning Objective: 10-01 Describe the functions of the foreign excha...