36 Questions
Which of the following is NOT a factor that affects portfolio performance in the foreign exchange market?
Domestic operations
What is the purpose of FX instruments?
To reduce risk
Which type of transaction accounts for the majority of daily turnover in the global FX market?
Outright forward contracts
What is the settlement period for most spot transactions?
T + 2
Which market has the largest daily turnover based on the information provided?
Foreign exchange market
What makes the foreign exchange market a key market for investors and market participants to understand?
All of the above
What would be impossible without the trade in currencies facilitated by the foreign exchange market?
International trade
Why does investment portfolio performance increasingly reflect global determinants?
All of the above
Which type of exchange rate transaction occurs with currency settlement longer than the usual T + 2 settlement for spot delivery?
Forward exchange rate
What are the two specifications required for a forward contract?
The exchange rate and the settlement date
What is the main difference between futures contracts and OTC forward contracts?
Futures contracts are traded on exchanges, while OTC forward contracts are traded over-the-counter
What is the combination of an offsetting spot transaction and a new forward contract referred to as?
FX swap
Which of the following statements about FX swaps is true?
FX swaps consist of a simultaneous spot and forward transaction
What is the cash flow on day 95 for the trader in the given scenario?
USD1,000,000
In an FX swap, what happens to the forward position?
The forward position is rolled over to a new future date
What are FX options used for?
Managing FX exposures
According to the text, what is the condition that guarantees that devaluations improve the trade balance?
The Lerner condition
What does a demand elasticity of 0.6 mean?
Quantity demanded increases by 6 percent if price declines by 10 percent
What is the equation for the change in expenditure (%ΔR) in terms of price change (%ΔP) and demand elasticity (ε)?
%ΔR = (1 - ε)%ΔP
What does it mean if demand is described as 'elastic'?
ε > 1
According to the Marshall-Lerner condition, when is it more likely that the trade balance will improve?
When the demand for imports is elastic
What is the classic Marshall-Lerner condition when trade is initially balanced?
εX + εM > 1
What is the formula for the Marshall-Lerner equation?
ωXεX + ωM(εM - 1)
What is the J-curve effect?
A pattern where the trade balance initially worsens after a currency depreciation
Which of the following is true about the absorption approach to the trade balance?
The trade balance is equal to the difference between income (GDP) and domestic expenditure.
What is the main mechanism by which depreciation of the currency reduces domestic expenditure relative to income?
Wealth effect
When can a devaluation/depreciation of the domestic currency improve the trade balance?
When there is excess capacity in the economy.
What happens to the trade balance if the economy is at full employment and domestic expenditure does not decline after a currency depreciation?
The trade balance worsens.
What is the equation for the trade balance according to the absorption approach?
Trade Balance = GDP - Domestic Expenditure
How does a devaluation/depreciation of the domestic currency affect income relative to expenditure?
It increases income relative to expenditure.
According to the text, the trade balance is equal to the country's saving minus its investment in new plants and equipment. Equivalently, it is equal to the difference between income (GDP) and domestic expenditure, or absorption.
The trade balance is equal to saving minus investment in new plants and equipment.
According to the text, how can a devaluation/depreciation of the domestic currency improve the trade balance?
By increasing income relative to expenditure.
According to the text, what happens to the trade balance when there is excess capacity in the economy?
The trade balance improves.
According to the text, in what situation can the trade balance not improve unless domestic expenditure declines?
When the economy is at full employment.
According to the text, what is the main mechanism through which depreciation of the currency reduces domestic expenditure relative to income?
A wealth effect.
According to the text, what happens to the trade balance when the stimulative effect of the exchange rate change is negated by the higher price level?
The trade balance reverts to its original level.
Test your understanding of the Generalized Marshall-Lerner Condition and its impact on trade balance. Learn how elastic demand for imports and exports influences trade outcomes. Take the quiz now!
Make Your Own Quizzes and Flashcards
Convert your notes into interactive study material.
Get started for free
