Use this free practice quiz with 20 questions to review 4 Exchange Rates and Currency Risk, test your knowledge, and prepare for your next test or exam.
All else equal, when a country's currency strengthens against other currencies, foreign goods tend to become less expensive for its domestic buyers, while its exports tend to become more expensive for overseas customers. True or false?
True
False
The price of one currency in terms of another is an .
A business agrees today to exchange specified amounts of two currencies at a set rate on a future date. What type of contract is this?
An FX option obligates its buyer to exchange currency at the specified rate, even if the buyer would prefer not to. True or false?
True
False
A currency quote rises from $1.10 per euro to $1.20 per euro. Which statement correctly describes the movement?
The dollar has appreciated against the euro, and the euro has depreciated against the dollar.
The euro has appreciated against the dollar, and the dollar has depreciated against the euro.
Both currencies have appreciated against each other.
Neither currency has changed in value relative to the other.
What type of currency exposure can affect a firm's competitiveness, sales, and value over time even when no specific foreign-currency invoice is awaiting payment?
Which description best fits a managed float?
Authorities maintain the currency at an exact target value at all times.
Authorities make no currency-market interventions.
Authorities may influence exchange-rate movements without maintaining a fixed target.
The rate changes only at scheduled intervals set by law.
Which factors can influence exchange rates? Select all that apply.
Trade and investment flows
Interest-rate expectations
The number of letters in a country's currency name
Inflation and economic outlook
Government or central-bank actions
Which situation is an example of translation exposure?
A firm owes a supplier a foreign-currency payment next month.
A parent company converts a foreign subsidiary's financial statements into the parent's reporting currency.
A company chooses whether to buy foreign equipment at today's spot rate.
A company receives a foreign-currency payment and exchanges it immediately.
A firm is choosing how to manage a foreign-currency exposure. Which considerations are relevant to choosing an appropriate approach? Select all that apply.
The size of the currency exposure
When the exposure is due
Whether the firm can predict the exact future exchange rate
The firm's ability to absorb losses
The costs and risks of the available hedges
Which statement describes a potential trade-off of a fixed or pegged exchange-rate system?
It removes all currency risk and requires no policy action.
It guarantees that exports remain competitively priced.
It can make trade prices more predictable, but defending it may require intervention and limit monetary-policy independence.
It ensures that the currency will always appreciate.
Exchange-rate arrangements fall into exactly two categories: fixed rates and floating rates, with no intermediate arrangements. True or false?
True
False
A multinational has foreign-currency receipts and payments across several subsidiaries. Explain how matching receipts with payments in the same currency or coordinating currency flows across subsidiaries could reduce currency risk. Also identify one reason these approaches may not remove all risk.
A country's currency is largely determined by market supply and demand, but its authorities sometimes buy or sell currencies to influence movements without defending a fixed target. Which exchange-rate arrangement best describes this?
A fixed peg, because the authorities maintain a set target value.
A managed float, because the authorities influence movements without maintaining a fixed target.
A free float, because authorities make no effort to influence movements.
An intermediate arrangement, because the rate must stay within a predetermined band.
A business needs a foreign currency for short-term funding and arranges to exchange currencies now, then reverse that exchange later. Which FX transaction best fits this need?
A spot transaction, because it exchanges currencies now with no later reversal.
A forward, because it agrees today to exchange currencies only on a future date.
An FX swap, because it exchanges currencies now and reverses the exchange later.
An option, because it gives the buyer a right, but not an obligation, to exchange currencies.
A company knows it must pay a foreign-currency invoice in three months and wants to plan its domestic-currency cost. Which action most directly locks in an exchange rate for that future payment?
Arrange a forward that sets the exchange rate for the future payment.
Wait until the payment date and make a spot transaction.
Use an FX swap to exchange currencies now and reverse the exchange later.
Buy an option that obligates the business to exchange at the specified rate.
A company wants protection against an unfavorable exchange-rate movement but also wants the possibility of benefiting if the rate moves in its favor. Which contract best suits that aim?
Use an option that gives the company the right, but not the obligation, to exchange at a specified rate.
Use a forward that requires the company to exchange at the agreed rate.
Use a spot transaction, which sets today's rate for an exchange on any future date.
Use an FX swap, which guarantees the company can benefit from any favorable rate movement.
What type of exposure arises when a parent company converts a foreign subsidiary's financial statements into the parent's reporting currency?
A U.S. company owes €80,000. The exchange rate rises from $1.25 per euro to $1.30 per euro before payment. By how much does the company's dollar cost increase? Enter the exact value in dollars.
A U.S. company has an unpaid euro invoice due next month. If the euro strengthens before payment, the company's dollar cost may rise. This future foreign-currency payment creates .