Chapter 5 - Chapter 5 The Foreign Exchange Market and...

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Chapter 5 The Foreign Exchange Market and Parity Conditions 1. The foreign exchange market is referred to as a market where one country's currency is exchanged for another currency. The currency exchange is usually made through the following methods . A. buyers and sellers of foreign exchange meet at a physical location. B. buyers and sellers of foreign exchange meet through a telephone network C. buyers and sellers of foreign exchange meet through computer communications D. A and B * E. B and C 2. Which of the following is not a function of a commercial bank in the foreign exchange market? A. they operate the payment mechanism * B. they determine exchange rates C. they extend credit D. they help reduce foreign exchange risk E. they buy and sell foreign exchange 3. Which of the following is not a characteristic of speculation . A. profit motive B. exchange rate fluctuation * C. hedging D. risk taking E. deliberate uncovered position 4. A cross rate is an exchange rate between ___ and ___. A. The US dollar and the Japanese yen * B. any two non-home currencies C. the Mexican peso and the euro D. the domestic currency and a foreign currency E. the euro and the Japanese yen 5. A US company is expected to receive £100,000 in 120 days. If the company wants to minimize the risk of foreign exchange, then it would . A. buy British pounds forward * B. sell British pounds forward C. buy British pounds 120 days from now D. sell British pounds 120 days from now E. sell British pounds in the current spot market
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6. Speculation in foreign exchange markets entails . A. covering in the forward market B. covering in the money market C. hedging in the option market * D. buying in the current spot market and selling in the future spot market E. covering in the futures market 7. Foreign exchange markets are efficient if . * A. good information is available at no or little cost B. you have inside information C. markets are highly regulated D. market information is secretive E. most foreign exchange dealers are speculators 8. The theory of purchasing power parity says that . A. the inflation rates in two countries are unrelated * B. the exchange rate will adjust to reflect changes in the price levels of two countries C. the inflation rate is greater than the interest rate D. the interest rate is greater than the inflation rate
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This note was uploaded on 02/16/2012 for the course FIN 7023 taught by Professor Wald during the Spring '12 term at The University of Texas at San Antonio- San Antonio.

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Chapter 5 - Chapter 5 The Foreign Exchange Market and...

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