FORMATIVE ASSESSMENT 5
INTERNATIONAL BUSINESS AND TRADE
TRUE OR FALSE
______1. The foreign exchange market converts the currency of one country into that of another
country.
______2. Carry trade is nonspeculative in nature.
______3. The value of a currency is determined by the interaction between the demand and
supply of that currency relative to the demand and supply of other currencies.
______4. If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it
indicates the dollar is expected to depreciate against the yen in the next 30 days. When this
occurs, we say the dollar is selling at a premium on the 30-day forward market.
______5. A currency swap deal enables companies to insure themselves against foreign
exchange risk.
______6. The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong
Kong, and Sydney.
MULTIPLE CHOICE
_______7. ________ arises from volatile changes in exchange rates.
A) Translational exposure
B) Foreign exchange risk
C) Economic exposure
D) Transactional exposure
_______8. Currency ________ typically involves the short-term movement of funds from one
currency to another in the hopes of profiting from shifts in exchange rates.
A) hedging
B) risk mitigation
C) speculation
D) arbitrage
_______9. What are the two main functions of the foreign exchange market?
A) trading foreign company equities and converting currency
B) reducing currency volatility and setting interest rates
C) insuring companies against interest rate risk and enabling imports and exports
D) converting currency and providing some insurance against foreign exchange risk
_______10. A pair of shoes costs £40 in Britain. An identical pair costs $50 in the United States
when the exchange rate is £1 = $1.50. Which of the following is correct?
A) The United States offers a better deal.
B) The deal is the same in both countries.
C) Britain offers a better deal.
D) A trader can make money by buying the shoes in Britain and selling in the United States at
$50.