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ibus 401 final exam questions and correct answers
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ibus 401 final exam questions and correct answers
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ibus 401 final exam questions andcorrect answers
Government intervenes through their ________ (Ex: Federal Reserve) CORRECT
ANSWERS Central Bank
Types of Exchange Rate Systems CORRECT ANSWERS 1. Fixed
2. Free Floating
3. Managed (Controlled) Float
4. Pegged
Fixed Exchange Rate System CORRECT ANSWERS Exchange rates are held at
narrow boundaries. Rates are held constant or allowed to fluctuate within narrow
boundaries.
Free Floating Exchange Rate System CORRECT ANSWERS Government lets the
market do the work. Most large currencies are somewhat free floating.
Managed (Controlled) (Dirty) Float Exchange Rate System CORRECT ANSWERS
Between fixed and free floating. Announced or implied range that government will let
rates change. If outside the range the government will intervene.
Pegged Exchange Rate System CORRECT ANSWERS Home currency is pegged to
another currency.
most famous pegged currency CORRECT ANSWERS Hong Kong dollar
Dollarization CORRECT ANSWERS Replacement of a foreign currency with the US
dollar.
Indirect Government Intervention CORRECT ANSWERS interest, income, expectations,
inflation
Direct Government Intervention CORRECT ANSWERS buying and selling a currency
Two types of reserves (in US) CORRECT ANSWERS 1. dollars
2. foreign currency
Want dollar to get stronger CORRECT ANSWERS buy dollars with foreign currency
(demand for dollar goes up, supply for other currency goes up - other currency gets
weaker)
,Want to make dollar weaker CORRECT ANSWERS Use dollars to buy foreign currency
(supply of dollars goes up, demand of other currencies goes up - other currencies get
stronger)
Non Sterile Intervention CORRECT ANSWERS leave it alone, let dollar quantity
increase
Sterile Intervention CORRECT ANSWERS 1. dollar stronger -> bought dollars -> dollar
supply goes up, so use excess dollars to pay off some debt (buy T-bills)
2. dollar weaker -> used dollars -> dollar supply goes down, so issue T-bills to get
dollars back
Types of Direct Government Intervention CORRECT ANSWERS 1. Weaken Currency
2. Strengthen Currency
3. Sterile vs. Non Sterile Intervention
Bad Economy CORRECT ANSWERS - high unemployment
- low exports and low imports
Want to make dollar weaker so increase exports and decrease imports -> heats up the
economy
Too Good Economy CORRECT ANSWERS - need for additional people
- wages increase rapidly
- Inflation
Want to make dollar stronger so decrease exports and increase imports - > cools the
economy
The threat of ______ is what makes the market work. CORRECT ANSWERS arbitrage
Types of Arbitrage CORRECT ANSWERS 1. Locational Arbitrage
2. Triangular Arbitrage
3.Covered Interest Arbitrage
Locational Arbitrage CORRECT ANSWERS keeps the bid/ask honest
Triangular Arbitrage CORRECT ANSWERS takes advantage of a problem in the cross
exchange rate. Makes cross exchange rates in the market work.
Covered Interest Arbitrage CORRECT ANSWERS taking advantage of differences in
interest. Threat of interest arbitrage makes quotes on forward market correct. Takes
advantage where interest rate parity does not exist in the forward market.
Interest Rate Parity CORRECT ANSWERS drives the prices on the forward market.
99% of the time, in the forward rate, interest rate parity exists.
,Interest Rate Parity Formula CORRECT ANSWERS Premium in Market P(d) = (1+
ihome)/(1+iforeign) -1
Absolute Form of Purchase Power Parity CORRECT ANSWERS prices of same basket
of products in two different countries should be equal when measured in common
currency
Relative Form of Purchase Power Parity CORRECT ANSWERS Due to market
imperfections, prices of the same basket of products in different countries will not
necessarily be the same, but the rate of change in prices should be similar when
measured in common currency
Purchasing Power Parity Formula CORRECT ANSWERS Exchange Rate ef = (1 +
Ihome)/(1 + Iforeign) -1
International Fischer Effect CORRECT ANSWERS no such thing as a difference in
interest rates. the difference is in inflation.
Why do we forecast Exchange Rates? CORRECT ANSWERS 1. Hedging
2. Short-term Investments
3. Capital Budgeting
4. Earnings Assessments
5. Long-term Financing
Hedging CORRECT ANSWERS guarding company against a problem on a receivable
or a payable.
_______ to decide whether to hedge or not. CORRECT ANSWERS forecast
Short-term investments CORRECT ANSWERS if have excess money, where do you
want to put it (or where do you want to borrow it)
Capital Budgeting CORRECT ANSWERS forecasting about most important thing you
can do. Assess whether to invest funds in a foreign project
Earnings Assessment CORRECT ANSWERS very important to MNC, and earnings
forecast
Long-term Financing CORRECT ANSWERS to issue bonds to secure long-term funds
How we forecast exchange rates CORRECT ANSWERS 1. Technical forecasting
2. Fundamental forecasting
3. Market-Based forecasting
4. Mixed forecasting
, Technical forecasting CORRECT ANSWERS looking at history to forecast a future
exchange rate.
Fundamental forecasting CORRECT ANSWERS based on fundamental relationships
between economic variables and exchange rates (inflation, income, interest rates,
government intervention)
Market-based forecasting CORRECT ANSWERS look at the market (spot rate today,
forward rate today and what is is telling you). Looking at forward rate works until the
interest rate changes)
Mixed forecasting CORRECT ANSWERS best way to go. Use mix of forecasting
techniques
What they do to forecast exchange rates CORRECT ANSWERS 1. put together a
forecasting team that meets quarterly
2. forecasts for each currency what they expect to happen and document why they
forecasted something
3. Corporate governance: everyone has to use it and it is updated every quarter
4. same group in next quarter reforests and looks back at what they forecasted and why
(analysis of forecast to the actual)
Corporate governance concerning forecasts CORRECT ANSWERS everyone has to
use it and it is updated every quarter
Are exchange rates important? CORRECT ANSWERS YES. Need to manage the
exchange exposure in your company. The larger the proportion of business is outside of
the US the more important it gets.
Measuring Transaction Exposure CORRECT ANSWERS 1. Exchange Volatility
2. Exchange Correlation
Exchange volatility CORRECT ANSWERS exchange rates are very volatile, expect all
of them to be volatile
Exchange correlation CORRECT ANSWERS some currencies are closely correlated to
other currencies, some are not correlated at all
Economic exposure CORRECT ANSWERS selling in one currency and costing in
another currency (also called operating exposure). Not easily hedgable, takes a long
time to fix.
Translation exposure CORRECT ANSWERS translating financial statements into the
currency of your corporation.
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