-
Fundamentals of Multinational
Finance
, 3e (Moffett)
Chapter 7
Foreign Exchange Rate Determination and
Forecasting
7.1
Multiple Choice and
True/False Questions
1)
The important thing to
remember about foreign exchange rate determination
is that parity
conditions,
asset approach, and balance of payments approaches
are ________ theories
rather than
________ theories.
A)
competing; complementary
B)
competing; contemporary
C)
complementary; contiguous
D)
complementary; competing
Answer:
D
Topic:
Complementary Theories
Skill:
Recognition
2)
Which of the following
did NOT contribute to the exchange rate collapse
in emerging
markets in the
1990s?
A)
Infrastructure
weaknesses.
B)
Speculation on the part of market
participants.
C)
The sharp reduction of cross
-
border foreign direct
investment.
D)
All of the
above contributed to the emerging markets exchange
rate collapse of the
1990s.
Answer:
D
Topic:
Market
Collapse
Skill:
Recognition
3)
It is safe to say that
most determinants of the spot exchange rate are
also affected by changes
in
the spot rate. i.e., they are linked AND mutually
determined.
Answer:
TRUE
Topic:
Determinants of Spot Exchange Rates
Skill:
Conceptual
4)
A popular speculation in
the 1990s was
A)
U.S. investors investing in Japanese
securities to take advantage of Japan's higher
nominal and real interest
rates.
B)
Japanese investors
investing in the United States securities to take
advantage of the
higher
U.S. nominal and real interest rates.
C)
selling short the U.S.
dollar against the Russian Ruble.
D)
None of the above was a
popular speculation technique in the 1990s.
Answer:
B
Topic:
International Speculation
Skill:
Recognition
1
5)
The ________
provides a means to account for international cash
flows in a standardized and
systematic manner.
A)
parity conditions
B)
asset approach
C)
balance of
payments
D)
international Fisher effect
Answer:
C
Topic:
Balance
of payments
Skill:
Recognition
6)
Which of the following is NOT a current
account activity?
A)
Net import/export of goods (Balance of
Trade).
B)
Net
import/export of services.
C)
Net portfolio investment.
D)
All of the
above are activities of the current account.
Answer:
C
Topic:
Current Account
Skill:
Conceptual
7)
The ________ approach argues that
equilibrium exchange rates are achieved when the
net
inflow of foreign
exchange arising from current account activities
is equal to the net outflow
of foreign
exchange arising from financial account
activities.
A)
balance of
payments
B)
monetary
C)
asset market
D)
law of one price
Answer:
A
Topic:
Exchange
Rates
Skill:
Recognition
8)
The ________ approach
states that the exchange rate is determined by the
supply and
demand for
national currency stocks, as well as the expected
future levels and rates of
growth of
monetary stock
A)
balance of
payments
B)
monetary
C)
asset market
D)
law of one price
Answer:
B
Topic:
Exchange
Rates
Skill:
Recognition
9)
The ________ argues that
exchange rates are determined by the supply and
demand for a
wide variety
of financial assets
A)
balance of payments
B)
monetary
C)
asset market
D)
law of one price
Answer:
C
Topic:
Exchange Rates
Skill:
Recognition
2
10)
Technical analysis of
exchange rates developed in part due to the
forecasting inadequacies of
fundamental exchange rate theories.
Answer:
TRUE
Topic:
Exchange
Rates
Skill:
Conceptual
11)
The ________ approach to
the determination of spot exchange rates
hypothesizes that the
most
important factors are the relative real interest
rate and a country's outlook for economic
growth and profitability.
A)
balance of payments
B)
parity conditions
C)
managed float
D)
asset market
Answer:
D
Topic:
Asset Market
Skill:
Recognition
12)
The authors compromise as to the key
factors for exchange rate determination. They
conclude that ________ is
important in the short run, but that ________
determines long run
exchange rates.
A)
Fisher effect; PPP
B)
asset
markets, interest rates, and expectations; PPP
C)
PPP; Fisher
effect
D)
Fisher
effect; asset prices, interest rates, and
expectations
Answer:
B
Topic:
Key Factors for
Equilibrium in Foreign Exchange Markets
Skill:
Conceptual
13)
________, traditionally
referred to as chartists, focus on price and
volume data to determine
past trends that are expected to
continue into the future.
A)
Mappists
B)
Trappist Monks
C)
Filibusters
D)
Technical analysts
Answer:
D
Topic:
Technical Analysis
Skill:
Recognition
14)
The longer the time
horizon of the technical analyst the more accurate
the prediction of
foreign
exchange rates is likely to be.
Answer:
FALSE
Topic:
Technical Analysis
Skill:
Conceptual
3
15)
Short
-
term foreign exchange
forecasts are often motivated by such activities
as ________
whereas
long
-
term forecasts are more
likely motivated by ________.
A)
long
-
term investment;
long
-
term capital
appreciation
B)
long
-
term capital appreciation;
desire to hedge a receivable
C)
the desire to hedge a payable; the
desire for long
-
term investment
D)
the desire for
long
-
term
investment; the desire to hedge a payable
Answer:
C
Topic:
Key
Factors for Equilibrium in Foreign Exchange
Markets
Skill:
Recognition
16)
The more efficient the
foreign exchange market is, the more likely it is
that exchange rate
movements are random walks.
Answer:
TRUE
Topic:
Market
Efficiency
Skill:
Conceptual
17)
A major U.S. multinational firm has
forecast the euro/dollar rate to be euro1.10/$$ one
year
hence, and an exchange
rate of $$1.40 for the British pound (?) in the
same time period. What
does this imply
the company's expected rate for the euro per pound
to be in one year?
A)
euro
1.40/?
B)
?1.40?/euro
C)
?1.54/euro
D)
euro 1.54/?
Answer:
D
Topic:
Currency
Cross Rates
Skill:
Analytical
18)
The authors claim that theoretical and
empirical studies appear to show that fundamentals
do apply to the
long
-
term for foreign
exchange.
Answer:
TRUE
Topic:
Key Factors for Equilibrium in Foreign
Exchange Markets
Skill:
Recognition
19)
The authors claim that random events,
institutional frictions, and technical factors may
cause
currency values to
deviate significantly from their
long
-
term fundamental path.
Answer:
TRUE
Topic:
Key
Factors for Equilibrium in Foreign Exchange
Markets
Skill:
Recognition
20)
The authors claim that
the theories of international currency values hold
better for less liquid
and
poorly capitalized markets.
Answer:
FALSE
Topic:
Key Factors for
Equilibrium in Foreign Exchange Markets
Skill:
Recognition
4
21)
Which of
the following was not an international currency
crisis in the 1990s and early 2000s?
A)
The Asian Crisis
B)
The Russian
Crisis
C)
The
Argentine Crisis
D)
All of the above were currency crises
in the 1990s and 2000s.
Answer:
D
Topic:
International Currency Crises
Skill:
Recognition
22)
The Asian Currency
crisis appeared to begin in ________.
A)
South Korea
B)
Taiwan
C)
Thailand
D)
Japan
Answer:
C
Topic:
International Currency Crises
Skill:
Recognition
23)
Prior to July 2, 1997,
the Thai government
A)
allowed the Thai Bhat to float against
major currencies.
B)
fixed the Bhat's value against the
Korean won only.
C)
fixed the Bhat's value against major
currencies especially the U.S. dollar.
D)
None of the above.
Answer:
C
Topic:
International Currency Crises
Skill:
Recognition
24)
The
A)
run on the market
B)
speculation
C)
contrary
investing
D)
contagion
Answer:
D
Topic:
International Currency Crises
Skill:
Recognition
25)
The authors did not
identify which of the following as a root of the
Asian currency crisis?
A)
The collapse of some Asian currencies.
B)
The rate of
inflation in the United States.
C)
Corporate socialism.
D)
Banking
stability and management.
Answer:
B
Topic:
International Currency Crises
Skill:
Conceptual
5