QUIZ 3 FINAL CHAPTER 10 & 13

TRUE OR FALSE

1. The convertible currency market converts the currency of one country into that of another country.
False
One function of the foreign exchange market is to convert the currency of one country into the currency of another
country.

2. Perla likes to gamble in the foreign exchange market, so she sometimes moves her funds from dollars to euros
hoping she will make money based on the exchange rates. This demonstrates a carry trade.
True
A kind of speculation that has become more common in recent years is known as the carry trade. The carry trade
involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another
currency where interest rates are high.

3. 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
discount on the 30-day forward market.
True
If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates foreign exchange
dealers expected the dollar to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is
selling at a discount on the 30-day forward market.

4. 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.
True
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.

5. Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed
prices and the borrowing or lending of funds in foreign currencies.
True
Transaction exposure is the extent to which the income from individual transactions is affected by fluctuations in
foreign exchange values. Such exposure includes obligations for the purchase or sale of goods and services at
previously agreed prices and the borrowing or lending of funds in foreign currencies.

CHAP 13

6. The amount of value a firm creates is measured by the difference between its costs of production and the quality
that consumers perceive in its products.
True
The amount of value a firm creates is measured by the difference between its costs of production and the quality
that consumers perceive in its products.

7. The strategy, operations, and organization of a firm must all be consistent with each other if the firm is to attain a
comparative advantage and achieve superior profitability.
FALSE
The strategy, operations, and organization of the firm must all be consistent with each other if it is to attain a
competitive advantage and garner superior profitability.

8. According to Porter, the way to create superior value is to drive down the cost structure of the business and/or
differentiate the product in some way so that consumers value it more.
True
Michael Porter has argued that low cost and differentiation are two basic strategies for creating value and attaining
a competitive advantage in an industry. According to Porter, superior profitability goes to those firms that can
create superior value, and the way to create superior value is to drive down the cost structure of the business
and/or differentiate the product in some way so that consumers value it more and are prepared to pay a premium
price.

9. Support activities are always less important than the primary activities in achieving a competitive advantage.
False
The support activities of the value chain provide inputs that allow the primary activities to occur. In terms of
attaining a competitive advantage, support activities can be as important as, if not more important than, the
“primary” activities of the firm.

10. The success of many multinational corporations is based not just upon the goods or services that they sell in
foreign nations, but also upon the core competencies that underlie the development, production, and marketing of
those goods or services.
True
The success of many multinational companies that expand in this manner is based not just upon the goods or
services that they sell in foreign nations, but also upon the core competencies that underlie the development,
production, and marketing of those goods or services.

MULTIPLE CHOICE

1. The rate at which one currency is converted into another is known as the
a. exchange rate.
b. currency swap rate.
c. fluctuation rate.
d. carry over rate.

ANS. A
An exchange rate is the rate at which one currency is converted into another.

2. What are the two main functions of the foreign exchange market?

a. trading foreign company equities and converting currency

ANS. D
The foreign exchange market serves two main functions. The first is to convert the currency of one country into the
currency of another. The second is to provide some insurance against foreign exchange risk, or the adverse
consequences of unpredictable changes in exchange rates.

3. What concept is concerned with the long-run effect of changes in exchange rates on future prices, sales, and
costs?

a. translation exposure
b. economic exposure
c. transaction exposure
d. trade exposure

ANS. B
Economic exposure is the extent to which a firm’s future international earning power is affected by changes in
exchange rates. Economic exposure is concerned with the long-run effect of changes in exchange rates on future
prices, sales, and costs.

4. The __________ states that in competitive markets free of transportation costs and barriers to trade, identical
products sold in different countries must sell for the same price when their price is expressed in terms of the same
currency.

a. law of one price

ANS. A
The law of one price states that in competitive markets free of transportation costs and barriers to trade (such as
tariffs), identical products sold in different countries must sell for the same price when their price is expressed in
terms of the same currency. It helps us to understand how prices are related to exchange rate movements.

5. __________ is used by international businesses and their banks to move out of one currency and into another for
a limited period without incurring foreign exchange risk.

a. An arbitrage
b. A carry trade
c. A spot exchange
d. A currency swap

ANS. D
A currency swap is the simultaneous purchase and sale of a given amount of foreign exchange for two different
value dates. Swaps are transacted between international businesses and their banks, between banks, and between
governments when it is desirable to move out of one currency into another for a limited period without incurring
foreign exchange risk.

6. Which term refers to all of the different positions that a firm can adopt with regard to adding value to the product
and low cost assuming that its internal operations are configured efficiently to support a particular position?

a. economies of scale
b. diminishing returns
c. efficiency frontier
d. value creation scale

ANS. C
The efficiency frontier is a convex curve that shows all of the different positions that a firm can adopt with regard to
adding value to the product (V) and low cost (C) assuming that its internal operations are configured efficiently to
support a particular position.

7. __________ include the design, creation, and delivery of a product.

a. Primary activities
b. Core competencies
c. Support activities
d. Universal needs

ANS. A
Primary activities have to do with the design, creation, and delivery of the product; its marketing; and its support
and after-sale service.
8. The basic strategy paradigm suggests that to maximize its profitability, a firm should

a. choose, according to strategy, any position on the efficiency frontier as all positions are viable.
b. pick a position on the efficiency frontier that is viable in the sense that there is a low product demand
anticipated.
c. configure its external operations so that they support the position of diminishing returns.
d. make sure that the right organization structure is in place to execute its strategy.

ANS. D
A central tenet of the basic strategy paradigm is that to maximize its profitability, a firm must do three things: (1)
pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that
choice; (2) configure its internal operations, such as manufacturing, marketing, logistics, information systems,
human resources, and so on, so that they support that position; and (3) make sure that the firm has the right
organization structure in place to execute its strategy.

9. __________ activities of the value chain provide inputs that allow the primary activities to occur.

a. Complementary
b. Basic
c. Core
d. Support

ANS. D
The support activities of the value chain provide inputs that allow the primary activities to occur.

10. A manufacturer of electric stand mixers wants to better compete in this highly competitive market. It decides to
offer its mixer in over 50 different colors so customers will be able to match the appliance to their kitchen décor.
What type of value creation strategy does this represent?

a. differentiation
b. low cost
c. standardization
d. localization

ANS. A
A strategy that focuses primarily on increasing the attractiveness of a product is known as a differentiation strategy.
Michael Porter has argued that low cost and differentiation are two basic strategies for creating value and attaining
a competitive advantage in an industry.