Question

One function of the foreign exchange market is to

Multiple Choice

• provide some insurance against foreign exchange risk.

• protect short-term cash flow from adverse changes in exchange rates.

• eliminate volatile changes in exchange rates.

• reduce the economic exposure of a firm.

• enable companies to engage in capital flight when countertrade is not possible.

• Rhonda tells Kevin that he will receive 0.86 euro for every U.S. dollar he wants to convert. Rhonda is referring to

  Multiple Choice

• the exchange rate.

• arbitration.

• a forward exchange.

• countertrade.

• a balance-of-trade equilibrium.

• Countertrade is defined as

  Multiple Choice

• a short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

• the exchange rate at which a foreign exchange dealer will convert one currency into another that particular day.

• simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

• the purchase of securities in one market for immediate resale in another to profit from a price discrepancy.

• a range of barter-like agreements by which goods and services can be exchanged for other goods and services.

• ________ draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements.

  Multiple Choice

• Technical analysis

• Purchasing power parity

• The Sullivan principles

• Fundamental analysis

• The Treaty of Lisbon

• is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months.

  Multiple Choice

• Purchasing power parity

• Transaction exposure

• Economic exposure

• Translation exposure

• Currency speculation

Answer 1

Q1. provide some insurance against foreign exchange risk

One function of the foreign exchange market is to provide some insurance against foreign exchange risk

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Q2. the exchange rate

exchange rate is the value of one currency vs another. In this case, Rhonda is referring to the exchange rate, because she is telling the value of a Euro in terms of US dollar, which is 0.86 Euro per US dollar.

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Q3. a range of barter-like agreements by which goods and services can be exchanged for other goods and services.

Above is a simple definition of countertrade. It is a way to deal with the  problem of nonconvertibility of currency. A currency is nonconvertible when both residents and non residents are restricted from converting their holdings of the currency into another currency.

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Q4. Fundamental analysis

Variables of the fundamental analysis include inflation rates, interest rates and growth rates of money supply

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Q5. Transaction exposure

Transaction exposure is concerned with individual transactions over short term. It is different from economic exposure in the sense that economic exposure is concerned with the effect of exchange rates on a firm's future international earning power. For example, fluctuations in USD-INR exchange rates is an economic exposure for Indian Software and services companies, whose earnings are in US dollars and expenses are in INR.