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foreign exchange MCQs

Practise focused foreign exchange questions with marked answers for exam preparation and subject revision.

foreign exchange Mcqs
1. Under a system of floating exchange rates there is a general tendency for ?
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A. the currencies of relatively low inflation countries to depreciate

B. the currencies of relatively high-inflation countries to depreciate

C. exchange rates to be insensitive to the differential rates of inflation between countries

D. the currencies of relatively high inflation countries to appreciate

2. Suppose that a Swiss television set that costs 400 francs in Switzerland cost $200 in the United States. The exchange rate between the franc and the dollar is ?
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A. $3 per franc

B. 1 franc per dollar

C. $2 per franc

D. 2 francs per dollar
3. The J-curve effect refers to the observation that ?
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A. GDP usually decreases before it increases after a currency depreciation

B. GDP usually decreases before it increases after a currency appreciation

C. the trade balance usually gets worse before it improves after a currency depreciation

D. the trade balance usually gets better before it gets worse after a currency appreciation

4. If Swedens currency depreciates relative to Norways currency ?
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A. Swedens export goods become cheaper to Norways residents

B. Swedens export goods become cheaper to Swedens residents

C. Norways export goods become more expensive to Norways residents

D. Norways exports goods become cheaper to Swedens residents

5. Under a system of floating exchange rates the pound would depreciate in value if there occurs ?
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A. Price inflation in the United States

B. an increase in U.S real income

C. falling interest rates in Britain

D. a decrease in the British money supply

6. A fiscal expansion in the UK ?
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A. tends to appreciate the pound sterling

B. has no predictable effect on the price of the pound sterling?

C. tends to depreciate the pound sterling

D. does not affect the price of the pound sterling

7. If the bank is selling francs for $0.45, then what is the implied franc price of the dollar ?
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A. 1.999

B. 2

C. 2.222

D. 2.323

8. The largest volume of foreign exchange trading takes place in ?
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A. Germany

B. USA

C. United Kingdom

D. China

9. An important feature of a _______ is that the holder has the right but not the obligation to buy or sell currency ?
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A. foreign exchange option

B. foreign exchange arbitrage

C. Swap

D. futures market contract

10. Expansionary monetary policy ?
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A. tends to lead to an appreciation of a nations currency

B. usually has no effect on a currencys exchange value

C. tends to lead to a depreciation of the currencies of other nations

D. tends to lead to a depreciation of a nations currency
11. The supply of foreign currency tends to be ?
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A. upward sloping

B. any of the above

C. downward sloping

D. vertical

12. Given the foreign currency market for the Swiss franc, the supply of franc slopes upward, because as the dollar price of the franc rises ?
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A. Switzerlands demand for American merchandise falls

B. Switzerlands demand for American merchandise rises

C. Americas demand for Swiss merchandise rises

D. Americas demand for Swiss merchandise falls

13. The agreements that were reached at the Bretton Woods conferences in 1944 established a system ?
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A. of essentially fixed exchange rates under which each country agreed to intervene in the foreign exchange market when necessary to maintain the agreed upon value of its currency

B. of floating exchange rates determined of the supply and demand of one nations currency relative to the currency of other nations

C. That prohibited governments from intervening in the foreign exchange markets

D. in which the value of currencies was fixed in terms of a specific number of ounces of gold, which in turn determined their values in international trading

14. All currencies other than the domestic currency of a given country are referred to as ?
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A. near monies

B. reserve currencies

C. foreign exchange

D. hard currency

15. Riskless transactions to take advantage of profit opportunities due to a price differential or a yield differential in excess of transaction costs are called ?
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A. forward transactions

B. cash transaction

C. differential actions

D. arbitrage
16. The essential feature of a _______ is that it immediately fixed the rate at which a specified amount of one currency is to be delivered in exchange for a specific amount of another at a future date ?
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A. forward contract

B. bid contract

C. spot contract

D. money contract

17. Which of the following is not a reason why Joe Smith (an American) might participate as a demander in the foreign exchange market ?
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A. his desire to travel to Europe

B. his desire to purchase Treasury bills issued by the British government

C. his desire to open a bank account in Japan

D. his desire to purchase an automobile produced domestically
18. In 1971, most countries ?
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A. gave up trying to fix exchange rates formally and began allowing them to be determined essentially by supply and demand

B. adopted a new system of fixed exchange rates

C. returned to the gold standard

D. adopted single internationally accepted currency whose use is limited to international transactions

19. Speculators in foreign exchange markets do all of the following except ?
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A. attempt to buy currency at a low price and later resell that currency at a higher price

B. bear risk as they attempt to ____ beat the market||

C. attempt to profit by trading on expectations about future currency prices

D. Simultaneously buy a currency at a low price and sell that currency at a higher price, making a riskless profit
20. The difference between bid (buying) rates and ask (selling) rates is called the ?
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A. arbitrage

B. forward transaction

C. profit

D. spread
21. The exchange rate is kept the same across geographically separate markets by ?
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A. arbitrage

B. hedging

C. speculation

D. government regulation

22. 1. The most widely traded currency in the foreign exchange market is the ?
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A. British pound

B. Chinese Yuan

C. euro

D. U.S dollar
23. Exchange rates that are determined by the unregulated forces of supply and demand are ?
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A. pegged exchange rates

B. floating exchange rates

C. fixed exchange rates

D. managed exchange rates

24. A depreciation of the dollar will have its most pronounced impact on imports if the demand for imports is ?
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A. inelastic

B. Unitary elastic

C. constant

D. elastic
25. The price of one countrys currency in terms of another countrys currency is the ?
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A. exchange rate

B. currency valuation

C. terms of trade

D. balance of trade

26. Suppose that Boeing is to receive payment in euros in 6 month and wants to engage in hedging the firm would _______ euros on the 6-month forward market in order to protect itself from a/an of the euro?
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A. sell; appreciation

B. buy; depreciation

C. sell; depreciation

D. buy; appreciation

27. If the exchange rate is 11 Mexican pesos per U.S dollar, then it takes _______ to buy 1 peso?
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A. $0.0909

B. $1.10

C. $0.28

D. $0.10

28. Currency speculation is _____ if speculators bet against market forces that cause exchange fluctuations, thus moderating such fluctuations ?
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A. stabilizing

B. destabilizing

C. inflationary

D. deflationary

29. The theory of international exchange that holds that exchange rates adjust to offset differences in countries inflation rates in the ?
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A. purchasing power parity theory

B. J-curve theory

C. price feedback theory

D. trade feedback theory

30. If a nations interest rates are relatively low compared to those of other countries then the exchange value of its currency will tend to ?
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A. appreciate under a system of floating exchange rates

B. depreciate under a system of floating exchange rates

C. depreciate under a system of fixed exchange rates

D. appreciate under a system of floating fixed rates

31. The franc is said to be selling at a _______ if the spot dollar price is $0.48 and the nine-month forward rate is $0.42 ?
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A. forward spread

B. forward discount

C. None of these

D. forward premium

32. During the era of dollar appreciation from 1981 to 1985 a main reason why the dollar did not fall in value was ?
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A. rising price inflation in the United States

B. flows of foreign investment into the United States

C. a substantial increase in U.S exports

D. a substantial decrease in U.S imports

33. In a supply and demand diagram for Japanese yen, with the exchange rate in dollars per yen on the vertical axis, the demand schedule for yen is drawn sloping ?
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A. horizontal

B. upward

C. vertical

D. downward
34. If the Bank of England reduces the money supply to reduce inflation a floating exchange rate will aid the Bank of England in fighting inflation because ?
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A. as the money supply is decreased the interest rate will increase and the price of UK exports will rise and the Price of UK imports will fall

B. as the money supply is decreased the interest rate will increase, and the price of UK exports will fall and the price of UK imports will rise

C. as the money supply is decreased the interest rate will increase and the price of UK exports and UK imports will fall.

D. as the money supply is decreased the interest rate will increase and the price of both UK exports and UK imports will rise

35. The rise in value of one currency relative to another is ?
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A. An appreciation of a currency

B. A depreciation of a currency

C. a weakening of a currency

D. a debasement of a currency

36. The real effective exchange rate for the U.S dollar ?
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A. reflects only the influences of merchandise or real trade on the dollars exchange value

B. is the weighted average of the dollar exchange rate relative to the currencies of important U.S trading partners unadjusted for inflation?

C. reflects only transactions in the currency futures market

D. is the weighted average of the dollar exchange rate relative to the currencies of important U.S trading partners adjusted for inflation?
37. Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years ?
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A. foreign currency option

B. letter a credit

C. cable transfer

D. bill of exchange

38. Investor engage in _____ when they move funds into foreign currencies in order to take advantage to interest rates abroad that are higher than domestic interest rates ?
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A. long positions

B. short positions

C. currency arbitrage

D. interest arbitrage
39. Suppose there occurs an increase in the Canadian demand for Japanese computers This results in a (an) ?
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A. increase in the supply of yen

B. increase in the demand for yen

C. decrease in the Supply of yen

D. decrease in the demand for yen

40. The least common type of transaction in the foreign exchange is a ?
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A. None of the above

B. spot transaction

C. forward transaction

D. swap transaction

41. The fall in value of one currency relative to another is ?
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A. a floating of a currency

B. an appreciation of a currency

C. a strengthening of a currency

D. a depreciation of a currency
42. The reduction or covering of foreign exchange risk is called ?
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A. speculation

B. hedging

C. arbitrage

D. intervention

43. A difference between forward and futures contracts is that ?
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A. futures contracts have negotiable delivery dates

B. forward contracts can be tailored in amount and delivery date to the need of importers of exporters

C. futures contracts involve no brokerage fees or other transactions costs

D. forward contracts occur in a specific locations-for example, the Chicago Mercantile Exchange

44. In the early eighties, the Federal Reserve pursed a tight monetary policy. All else being equal. the impact of that policy was to interest rates in the United States relative to those in Europe and cause the dollar to _______ against European currencies?
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A. decrease; depreciate

B. increase; depreciate

C. decrease; appreciate

D. increase; appreciate