Which of the following statements are false:I. In free float currency regimes central banks may intervene into FX markets only to add up its official foreign currency reserves and to trade foreign currency for servicing government debt;II. If the speculator believes that the currency is underpriced, short position will be taken in FX market;III. Arbitrageurs exploit market inefficiencies by implementing risky-free strategies;IV. Cross-border trade transactions take place only in USD and REM.Question 6Select one:a.All of the statements are falseb.All of the statement are truec.Only I, II and IV are falsed.Only I and IV are falsee.Only I and III are falsef.Only II, III and IV are falseg.Only I, II and III are falseh.Only III and IV are false
Question
Which of the following statements are false:I. In free float currency regimes central banks may intervene into FX markets only to add up its official foreign currency reserves and to trade foreign currency for servicing government debt;II. If the speculator believes that the currency is underpriced, short position will be taken in FX market;III. Arbitrageurs exploit market inefficiencies by implementing risky-free strategies;IV. Cross-border trade transactions take place only in USD and REM.Question 6Select one:a.All of the statements are falseb.All of the statement are truec.Only I, II and IV are falsed.Only I and IV are falsee.Only I and III are falsef.Only II, III and IV are falseg.Only I, II and III are falseh.Only III and IV are false
Solution
The correct answer is d. Only I and IV are false.
Explanation:
I. Central banks in free float currency regimes can intervene in FX markets for reasons beyond just adding to their official foreign currency reserves or trading foreign currency for servicing government debt. They may also intervene to stabilize their currency or control inflation.
II. If a speculator believes that a currency is underpriced, they would take a long position, not a short position. A long position means buying the currency now to sell later when its price rises.
III. Arbitrageurs do exploit market inefficiencies by implementing risk-free strategies. They take advantage of price differences in different markets for the same asset.
IV. Cross-border trade transactions do not take place only in USD and REM. They can take place in any currency agreed upon by the trading parties.
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