Test Bank for Global Business 4th Edition Mike Peng

Test Bank for Global Business 4th Edition Mike Peng

To download the complete and accurate content document, go to:

https://testbankbell.com/download/test-bank-for-global-business-4th-edition-mike-pen
g/

Visit TestBankBell.com to get complete for all chapters

Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

1. A foreign exchange rate refers to the price of buying and selling commodities for future delivery.
a. True
b. False
ANSWER: False

2. An appreciation is an increase in the value of the currency whereas a depreciation is a loss in the value of the currency.
a. True
b. False
ANSWER: True

3. Basic economic theory suggests that the price of a commodity is most fundamentally determined by its supply and
demand.
a. True
b. False
ANSWER: True

4. The foreign exchange markets are influenced only by economic factors and free from the effect of social or political
pressures.
a. True
b. False
ANSWER: False

5. The theory of purchasing power parity suggests that in the absence of trade barriers, the price for identical products sold
in different countries will be different.
a. True
b. False
ANSWER: False

6. If one country’s interest rate is high relative to other countries, the country will attract foreign funds.
a. True
b. False
ANSWER: True

7. The rise of a country's productivity is usually accompanied by increased demand for its home currency.
a. True
b. False
ANSWER: True

8. A country highly productive in manufacturing typically generates a merchandise trade deficit.

a. True
b. False
ANSWER: False

9. A country’s current account deficit can only be financed using its savings.
a. True
Copyright Cengage Learning. Powered by Cognero. Page 1
Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

b. False
ANSWER: False

10. Governments adopting the floating exchange rate policy tend to set the exchange rate of a currency relative to other
currencies.
a. True
b. False
ANSWER: False

11. Many countries with high inflation have pegged their currencies to the yuan in order to restrain domestic inflation.
a. True
b. False
ANSWER: False

12. Balance of payments and exchange rate policies usually determine long-run movements of a currency.
a. True
b. False
ANSWER: True

13. The effect of investors moving in the same direction at the same time leads to a bandwagon effect.
a. True
b. False
ANSWER: True

14. Under the gold standard, to be able to redeem its currency in gold at a fixed price, every central bank needed to
maintain gold reserves.
a. True
b. False
ANSWER: True

15. The Bretton Woods system was centered on the British pound as the new common denominator.
a. True
b. False
ANSWER: False

16. The Bretton Woods system used the gold standard as the common denominator for all currencies.
a. True
b. False
ANSWER: False

17. The Bretton Woods system had been built on the condition that the US inflation rate had to be continuously high.
a. True
b. False
ANSWER: False

Copyright Cengage Learning. Powered by Cognero. Page 2

Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

18. The International Monetary Fund offers free grants to countries depending on the stability and need of the borrower.
a. True
b. False
ANSWER: False

19. The foreign exchange market has no central physical location and is the largest and most active market in the world.
a. True
b. False
ANSWER: True

20. Forward transactions allow participants to buy and sell currencies now for future delivery.
a. True
b. False
ANSWER: True

21. Currency hedging is a popular way to minimize the foreign exchange risk inherent in all non-spot transactions.
a. True
b. False
ANSWER: True

22. Forward discount is a condition under which the forward rate of one currency relative to another currency is lower
than the spot rate.
a. True
b. False
ANSWER: False

23. The primary participants of the foreign exchange market are IMF and World Bank.
a. True
b. False
ANSWER: False

24. Strategic hedging means spreading out activities in a number of countries in different currency zones to offset the
currency losses in certain regions through gains in other regions.
a. True
b. False
ANSWER: True

25. Strategic hedging focuses on using forward contracts and swaps to contain currency risks.
a. True
b. False
ANSWER: False

26. Proponents of fixed exchange rates argue that fixed exchange rates impose monetary discipline by preventing
governments from engaging in inflationary monetary policies.
a. True
Copyright Cengage Learning. Powered by Cognero. Page 3
Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

b. False
ANSWER: True

27. Proponents of fixed exchange rates believe that market forces should take care of supply, demand, and price of any
currency.
a. True
b. False
ANSWER: False

28. A floating exchange rate allows each country to make its own monetary policy.
a. True
b. False
ANSWER: True

29. Floating exchange rates are less volatile than fixed rates.
a. True
b. False
ANSWER: False

30. The most extreme fixed rate policy is through a currency board.
a. True
b. False
ANSWER: True

31. In terms of international trade competitiveness, a strong dollar makes it easier for US firms to export and to compete
on price when combating imports.
a. True
b. False
ANSWER: False

32. A weak dollar makes it more expensive for US tourists when traveling abroad.
a. True
b. False
ANSWER: True

33. Majority of the largest US firms practice currency hedging.

a. True
b. False
ANSWER: False

34. Hedging protects firms from spot market unpredictability.

a. True
b. False
ANSWER: True

Copyright Cengage Learning. Powered by Cognero. Page 4

Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

35. Risk analysis of any country must include its currency risks.
a. True
b. False
ANSWER: True

36. A _____ is the price of one currency, such as the dollar, in terms of another, such as the euro.
a. stock exchange index
b. securities market rate
c. commodities exchange rate
d. foreign exchange rate
ANSWER: d

37. The _____ suggests the price for identical products in different countries would be the same, if trade barriers are
absent.
a. theory of purchasing power parity
b. fixed exchange rate policy
c. Penn effect
d. Bretton Woods system
ANSWER: a

38. Which of the following methods is directly derived from the theory of purchasing power parity (PPP)?
a. The floating exchange rate
b. The fixed exchange rate
c. The stock market index
d. The Big Mac index
ANSWER: d

39. Which of the following conditions will attract foreign funds into a country?
a. If the country has high trade deficits
b. If the country’s interest rate is relatively high compared to other countries
c. If the country’s currency is depreciated
d. If the country is experiencing high levels of inflation
ANSWER: b

40. Which of the following will cause a country’s currency to depreciate?

a. High interest rates on the currency
b. High inflation rates
c. High account surplus
d. High in-flow of foreign funds
ANSWER: b

41. Which of the following is true of quantitative easing?

a. It depreciates the currency that is being printed.
b. It appreciates the currency that is being printed.
Copyright Cengage Learning. Powered by Cognero. Page 5
Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

c. It increases the inflation rate in the country.
d. It increases the exchange value of the currency.
ANSWER: a

42. _____ is a country’s international transaction statement, which includes merchandise trade, service trade, and capital
movement.
a. Capital flight
b. Currency hedging
c. Purchasing power parity
d. Balance of payments
ANSWER: d

43. Which of the following characterizes a country's current account?

a. A country’s current account deficit has to be financed by both purchases and sales of assets.
b. A country experiencing a current account deficit will see its currency appreciate.
c. A country’s current account balance consists of exports plus imports of merchandise and services minus
income on the country’s assets abroad.
d. A country experiencing a current account surplus will see its currency depreciate.
ANSWER: a

44. A clean floating exchange rate policy is a government policy to _____.

a. set exchange rates purely on the basis of supply and demand
b. allow a currency’s value to fluctuate according to the foreign exchange rate
c. allow selective government intervention in determining the exchange rate
d. link the exchange rate of a currency to the gold standard
ANSWER: b

45. Which of the following types of exchange rate policies is apt for a pure free market economy?
a. Dirty float
b. Flexible float
c. Clean float
d. Target exchange rate
ANSWER: c

46. Which of the following best describes a rate where selective government intervention works hand-in-hand, allowing
markets the freedom to work themselves out?
a. Free float rate
b. Fixed rate
c. Dirty float rate
d. Target exchange rate
ANSWER: c

47. _____ have specified upper or lower bounds within which the exchange rate is allowed to fluctuate.
a. Fixed exchange rates

Copyright Cengage Learning. Powered by Cognero. Page 6

Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

b. Target exchange rates
c. Free float exchange rates
d. Dirty float exchange rates
ANSWER: b

48. The fixing of East and West Germany's currencies at a 1:1 ratio to each other during the German unification in 1990 is
an example of a _____.
a. managed float rate policy
b. floating rate policy
c. target exchange rate policy
d. fixed exchange rate policy
ANSWER: d

49. Which of the following characterizes the peg policy in foreign exchange rates?
a. It links a developed country’s currency to the gold standard.
b. It stabilizes the import and export prices for developing countries.
c. It is a type of floating exchange rate policy.
d. It is primarily used by developed countries to control inflation.
ANSWER: b

50. The bandwagon effect is an example of the way _____ directly affects foreign exchange rates.
a. exchange rate policy
b. investor psychology
c. purchasing power parity
d. balance of payments
ANSWER: b

51. In foreign exchange, a(n) _____ is said to have occurred when investors move in the same direction at the same time,
like a herd.
a. placebo effect
b. bandwagon effect
c. edge effect
d. positive correlation
ANSWER: b

52. Capital flight is a phenomenon in which a large number of individuals and companies exchange _____.
a. domestic goods for gold
b. gold for domestic goods
c. foreign currency for a domestic currency
d. domestic currency for a foreign currency
ANSWER: d

53. Between 1870 and 1914, the value of most major currencies was maintained by fixing their prices in terms of _____.
a. dollar
Copyright Cengage Learning. Powered by Cognero. Page 7
Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

b. yuan
c. gold
d. diamonds
ANSWER: c

54. Which of the following is one of the major reasons the gold standard was abandoned?
a. The increased flow of gold from the U.S. into foreign central banks.
b. The competitive devaluation of currencies during the Great Depression.
c. The strengthening of the U.S. dollar due to the rise in productivity levels in the United States.
d. The United States unilaterally announced that the dollar would not be convertible to gold.
ANSWER: b

55. Which of the following was true of the Bretton Woods system?
a. All currencies in the system had floating exchange rates.
b. All currencies were pegged at a fixed rate to the dollar.
c. All currencies were maintained by fixing their prices in terms of gold.
d. All currencies in the system were required to be gold convertible.
ANSWER: b

56. Which of the following resulted in the abandoning of the Bretton Woods system in the 1970s?
a. The inflation rates in the United States and other developed counties were low.
b. The United States was not running a trade deficit.
c. The dollar became inconvertible into gold.
d. Most countries wanted to return to the gold standard system.
ANSWER: c

57. The post-Bretton Woods system is a system of flexible exchange rate regimes with _____.
a. the Japanese yen as its common denominator
b. the American dollar as its common denominator
c. gold as its common denominator
d. no official common denominator
ANSWER: d

58. The weight a member country carries within the IMF, which determines the amount of its financial contribution, its
capacity to borrow from the IMF, and its voting power is referred to as a(n) _____.
a. grant
b. accommodation
c. quota
d. balance of payment
ANSWER: c

59. Which of the following is the funding source for the International Monetary Fund?
a. Member-country quota
b. Foreign direct investment
Copyright Cengage Learning. Powered by Cognero. Page 8
Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

c. Subsidiary investing
d. Currency trading
ANSWER: a

60. _____ allow participants to buy and sell currencies now for future delivery.
a. Currency Swaps
b. Direct transactions
c. Spot transactions
d. Forward transactions
ANSWER: d

61. Which of the following foreign exchange transactions provide protection to traders and investors from being exposed
to fluctuations of the spot rate?
a. Spot transactions
b. Forward transactions
c. Direct transactions
d. Currency swaps
ANSWER: b

62. If the forward rate of the euro per dollar is higher than the spot rate, the euro has a _____.
a. high spread
b. low spread
c. forward discount
d. forward premium
ANSWER: c

63. _____ is defined as the conversion of one currency into another at Time 1, with an agreement to revert it back to the
original currency at a specific Time 2 in the future.
a. Currency swap
b. Currency hedging
c. Spot transaction
d. Forward transaction
ANSWER: a

64. Which of the following is true of the bid rate in foreign exchange markets?
a. It is always higher than the offer rate.
b. It is always lower than the offer rate.
c. It is always equal to the offer rate.
d. It does not affect the spread of the exchange.
ANSWER: b

65. The ____ is defined as the difference between the offer price and the bid price in a foreign exchange.
a. cost to serve
b. spread
Copyright Cengage Learning. Powered by Cognero. Page 9
Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

c. forward discount
d. forward premium
ANSWER: b

66. _____ refers to non-financial companies spreading out its activities in different currency zones in order to offset the
currency losses in certain regions through gains in other regions.
a. Currency hedging
b. Currency pegging
c. Strategic hedging
d. Currency swapping
ANSWER: c

67. A currency board is a monetary authority that issues notes and coins convertible into a key foreign currency at a _____
exchange rate.
a. clean floating
b. dirty floating
c. fixed
d. target
ANSWER: c

68. Which of the following is an advantage of a strong US dollar?

a. US importers will find it easier to compete with low-cost imports.
b. US exporters will find it easier to compete on price abroad.
c. US firms will experience less competitive pressure to keep prices low.
d. US tourists will find it more expensive when traveling abroad.
ANSWER: b

69. Which of the following is an advantage of a weak US dollar?

a. US consumers benefit from low prices on imports.
b. US tourists enjoy lower prices abroad.
c. Foreign firms find it harder to acquire US targets.
d. Foreign tourists enjoy lower prices in the US.
ANSWER: d

70. A manager arguing against currency hedging would most likely argue that _____.
a. currency hedging eats into company profits
b. currency hedging leaves firms at the mercy of the spot market
c. currency hedging decreases stability of cash flows and earnings
d. currency hedging is mainly a practice of very large MNEs
ANSWER: a

71. List the five underlying building blocks that determine the supply and demand of foreign exchange.
ANSWER: The five underlying building blocks in foreign exchange are (1) relative price differences, (2) interest rates and
monetary supply, (3) productivity and balance of payments, (4) exchange rate policies, and (5) investor

Copyright Cengage Learning. Powered by Cognero. Page 10

Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

psychology.

72. Identify the difference between fixed and floating exchange rates. Provide an example of a situation where the fixed
and floating exchange rates were used.
ANSWER: There are two major exchange rate policies: (1) floating rate and (2) fixed rate. Governments adopting the
floating (or flexible) exchange rate policy tend to be free market believers, willing to let the demand-and-
supply conditions determine exchange rates—usually on a daily basis via the foreign exchange market.
Another major exchange rate policy is the fixed exchange rate policy—countries fix the exchange rate of their
currencies relative to other currencies. Both political and economic rationales may be at play. During the
German reunification in 1990, the West German government, for political considerations, fixed the exchange
rate between West and East German mark as 1:1. Economically, the East German mark was not worth that
much. Politically, this exchange rate reduced the feeling of alienation and resentment among East Germans,
thus facilitating a smoother unification process.

73. Describe what it means for a country to peg its currency to another, and give two benefits to adopting this policy.
ANSWER: Pegging is a stabilizing policy of linking a developing country’s currency to a key currency. When a country
pegs its currency to another, the value of the currency strengthens or weakens according to the currency it is
pegged to. Most countries that choose to peg their currency choose the US dollar.
A country that pegs its currency takes advantage of two benefits. First, a peg stabilizes the import and export
prices for developing countries. Second, many countries with high inflation have pegged their currencies to the
US dollar to restrain domestic inflation (given the fact that the US has relatively low inflation).

74. Briefly explain the cause for the fall of the Bretton Woods System.
ANSWER:
By the late 1960s and early 1970s, a combination of rising productivity elsewhere and US inflationary policies
led to the demise of the Bretton Woods system. First, (West) Germany and other countries caught up in
productivity and exported more, and the United States ran its first post-1945 trade deficit in 1971. Second, in
the 1960s, in order to finance both the Vietnam War and Great Society welfare programs, President Lyndon
Johnson increased government spending, not by additional taxation, but by increasing money supply. These
actions led to rising inflation levels and strong pressures for the dollar to depreciate. The Bretton Woods
system also became a pain in the neck for the United States, because the exchange rate of the dollar was not
allowed to unilaterally change. Consequently, there was a hemorrhage of US gold flowing into the coffers of
foreign central banks. In August 1971, in order to stop such hemorrhage, President Richard Nixon unilaterally
announced that the dollar was no longer convertible into gold. In retrospect, the Bretton Woods system had
been built on two conditions: (1) the US inflation rate had to be low and (2) the US could not run a trade
deficit. When both these conditions were violated, the demise of the system was inevitable.

75. Explain, with the help of examples, the three primary types of foreign exchange transactions.
ANSWER: There are three primary types of foreign exchange transactions: (1) spot transactions, (2) forward transactions,
and (3) swaps. Spot transactions are the classic single-shot exchange of one currency for another. For example,
Canadian tourists buying several thousand euros in Italy with Canadian dollars will get their euros from a bank
right away.
Forward transactions allow participants to buy and sell currencies now for future delivery, typically in 30, 90,
or 180 days, after the date of the transaction. The primary benefit of forward transactions is to protect traders
and investors from being exposed to the fluctuations of the spot rate, an act known as currency hedging.
Currency hedging is a way to minimize the foreign exchange risk inherent in all non-spot transactions, which
characterize most trade and FDI deals. Traders and investors expecting to make or receive payments in a
foreign currency in the future are concerned whether they will have to make a greater payment or receive less
in terms of the domestic currency, should the spot rate changes. For example, if the forward rate of the euro
(€/US$) is exactly the same as the spot rate, the euro is “flat.” If the forward rate of the euro per dollar is
Copyright Cengage Learning. Powered by Cognero. Page 11
Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

higher than the spot rate, the euro has a forward discount.
A third major type of foreign exchange transactions is swap. A currency swap is the conversion of one
currency into another in Time 1, with an agreement to revert it back to the original currency at a specific Time
2 in the future. Deutsche Bank may have an excess balance of British pounds but need dollars. At the same
time, Union Bank of Switzerland (UBS) may have more dollars than it needs at the moment but is looking for
more British pounds. They can negotiate a swap agreement in which Deutsche Bank agrees to exchange with
UBS pounds for dollars today and dollars for pounds at a specific point in the future.

76. Compare and contrast the three primary strategies companies use to cope with currency risks.
ANSWER: There are three primary strategies: (1) invoicing in their own currencies, (2) currency hedging (as discussed
earlier), and (3) strategic hedging. The most basic way is to invoice customers in your own currency. By
invoicing in dollars, many US firms have enjoyed such protection from unfavorable foreign exchange
movements.
Currency hedging is risky in case of wrong bets of currency movements. Strategic hedging means spreading
out activities in different currency zones in order to offset the currency losses in certain regions through gains
in other regions. Therefore, strategic hedging can be considered as currency diversification. It reduces
exposure to unfavorable foreign exchange movements. Strategic hedging is conceptually different from
currency hedging. Currency hedging focuses on using forward contracts and swaps to contain currency risks, a
financial management activity that can be performed by in-house financial specialists or outside experts (such
as currency traders). Strategic hedging refers to geographically dispersing operations—through sourcing or
FDI—in multiple currency zones. By definition, this is more strategic, involving managers from many
functional areas (such as production, marketing, and sourcing) in addition to those from finance.

77. Compare and contrast the advantages and disadvantages of a strong and a weak dollar.
ANSWER: A strong (appreciating) dollar:

Advantages:
• US consumers benefit from low prices on imports.
• Lower prices on foreign goods help keep US price level and inflation level low.
• US tourists enjoy lower prices abroad.
• US firms find it easier to acquire foreign targets.

Disadvantages:
• US exporters have a hard time to compete on price abroad.
• US firms in import-competing industries have a hard time competing with low-cost imports.
• Foreign tourists find it more expensive when visiting the US.

A weak (depreciating) dollar:

Advantages:
• US exporters find it easier to compete on price abroad.
• US firms face less competitive pressure to keep prices low.
• Foreign tourists enjoy lower prices in the US.
• Foreign firms find it easier to acquire US targets.
• The US can print more dollars to export its problems to the rest of the world.

Disadvantages:
• US consumers face higher prices on imports.
• Higher prices on imports contribute to higher price level and inflation level in the US.
• US tourists find it more expensive when traveling abroad.
• Governments, firms, and individuals outside the US holding dollar-denominated assets suffer from value loss
Copyright Cengage Learning. Powered by Cognero. Page 12
Test Bank for Global Business 4th Edition Mike Peng

Name: Class: Date:

Chapter 7—Dealing with Foreign Exchange

of their assets.

78. What determines the success and failure of currency management around the globe?
ANSWER: From an institution-based standpoint, the “rules of the game”—economic, political, and psychological—
enable or constrain firms. From a resource-based perspective, how firms develop valuable, unique, and hard-
to-imitate capabilities in currency management may make or break them. As a result, three implications for
action emerge. First, foreign exchange literacy must be fostered. Savvy managers need to not only pay
attention to the broad long-run movements informed by PPP, productivity changes, and balance of payments,
but also to the fickle short-run fluctuations triggered by interest rate changes and investor mood swings.
Second, risk analysis of any country must include its currency risks. Finally, a country’s high currency risks
do not necessarily suggest that this country needs to be totally avoided. Instead, they call for a prudent
currency risk management strategy—via currency hedging, strategic hedging, or both.

Copyright Cengage Learning. Powered by Cognero. Page 13

Visit TestBankBell.com to get complete for all chapters