Question 1

If the markets in two countries are in equilibrium, the parity conditions ensure which of the following?

Accepted Answer

A)  The forecasted inflation rate differential between the two countries is exactly equal to the interest rate differential between those same countries. 
B)  The currency of the country with the higher inflation rate will sell at a discount to the other currency. 
C)  The forward discount will exactly cancel out the forecasted inflation differential. 
D)  If the information about future inflation is unbiased and the markets are in equilibrium, then the forward rate will be an unbiased predictor of the expected future spot rate. 
E)  All of the above conditions are ensured by the parity conditions. 
A)  The forecasted inflation rate differential between the two countries is exactly equal to the interest rate differential between those same countries. 
B)  The currency of the country with the higher inflation rate will sell at a discount to the other currency. 
C)  The forward discount will exactly cancel out the forecasted inflation differential. 
D)  If the information about future inflation is unbiased and the markets are in equilibrium, then the forward rate will be an unbiased predictor of the expected future spot rate. 
E)  All of the above conditions are ensured by the parity conditions. E

Question 2

If one euro can purchase 1.27 U.S. dollars, how many euros can one U.S. dollar buy?

Accepted Answer

A)  0.721 
B)  0.787 
C)  0.843 
D)  1.277 
E)  2.544 
A)  0.721 
B)  0.787 
C)  0.843 
D)  1.277 
E)  2.544 B

Question 3

Maria Elena Sanchez, a young accountant in Madrid, is about to take the trip of a lifetime to Tahiti. She is trying to plan her expenses carefully so that she can afford to buy some exotic black pearls while she is there, so she needs to know how many French Polynesian francs she can buy with her euros. The euro spot rate in the newspaper today is $1.2115/€. She called a friend at a bank who told her that the franc was selling at a rate of XPF92.15/$. What is the exchange rate of francs per euro?

Accepted Answer

A)  XPF76.06/€ 
B)  XPF92.35/€ 
C)  XPF111.64/€ 
D)  XPF121.22/€ 
E)  XPF130.73/€ 
A)  XPF76.06/€ 
B)  XPF92.35/€ 
C)  XPF111.64/€ 
D)  XPF121.22/€ 
E)  XPF130.73/€ C

Question 4

A particular tennis racquet costs $160 in the United States. The same racquet currently costs ¥17,500 in Japan. In addition, an investor has observed that 3-month interest rates in the United States and Japan are currently 2.00 percent and 0.40 percent, respectively. If purchasing power and interest rate parity both hold, what do these data imply about the 3-month forward rate between yen and U.S. dollars expressed in American terms?

Accepted Answer

Purchasing power parity tells us the spo

Question 5

Which of the following statements is most correct?

Accepted Answer

A)  If one knows how many U.S. dollars it takes to buy one euro, and how many euros it takes to buy 100 Japanese yen, then it is easy to calculate the exchange rate between the dollar and the yen. 
B)  If the currency market is in equilibrium, and if you know how many dollars it takes to buy one euro, then it is easy to calculate the number of euros it takes to buy one dollar. 
C)  "European terms" means the number of units of any currency it takes to buy one U.S. dollar. 
D)  All of the statements above are correct. 
E)  Only statements a and b are correct. 
A)  If one knows how many U.S. dollars it takes to buy one euro, and how many euros it takes to buy 100 Japanese yen, then it is easy to calculate the exchange rate between the dollar and the yen. 
B)  If the currency market is in equilibrium, and if you know how many dollars it takes to buy one euro, then it is easy to calculate the number of euros it takes to buy one dollar. 
C)  "European terms" means the number of units of any currency it takes to buy one U.S. dollar. 
D)  All of the statements above are correct. 
E)  Only statements a and b are correct.

Question 6

Tahia Meyers, the chief accountant of the Black Pearl Jewelry Company in Moorea, French Polynesia, expects that the company will need to borrow money in six months to finance new inventory before the start of the main tourist season. Her main bank is unwilling to hazard a guess about the interest rate she will have to pay at that time, but she knows several other pieces of information. The current spot exchange rate is XPF92.15/$ and the Minister of Finance was recently quoted as forecasting the exchange rate in six months to depreciate to XPF95.00/$. She also knows that the risk-free interest rate in the U.S. is 6.5 percent per annum, or 3.25 percent for six months. According to interest rate parity, what is the forecasted equilibrium value for rRF in French Polynesia in six months?

Accepted Answer

A)  19.588% per annum 
B)  17.357% per annum 
C)  15.936% per annum 
D)  14.187% per annum 
E)  12.887% per annum 
A)  19.588% per annum 
B)  17.357% per annum 
C)  15.936% per annum 
D)  14.187% per annum 
E)  12.887% per annum

Question 7

The balance of payments report is recorded using the rules of double-entry accounting and most closely resembles a(n) ______________.

Accepted Answer

A)  Income statement. 
B)  Balance sheet. 
C)  Flow of funds statement. 
D)  Statement of retained earnings. 
E)  Bank statement. 
A)  Income statement. 
B)  Balance sheet. 
C)  Flow of funds statement. 
D)  Statement of retained earnings. 
E)  Bank statement.

Question 8

A computer costs $1,100 in the United States. The same computer costs 1,265 euros in France. Assuming that purchasing power parity (PPP) strictly holds, what is the spot exchange rate between the dollar and the euro?

Accepted Answer

A)  $3.75 = 1 euro 
B)  $1.00 = 2.50 euros 
C)  $1.00 = 0.869565 euro 
D)  $1.15 = 1 euro 
E)  $1.00 = 1.15 euros 
A)  $3.75 = 1 euro 
B)  $1.00 = 2.50 euros 
C)  $1.00 = 0.869565 euro 
D)  $1.15 = 1 euro 
E)  $1.00 = 1.15 euros

Question 9

The Chinese government's official position on the value of the yuan renminbi is that it is neither overvalued nor undervalued, so there is no expectation that the fixed exchange rate will change from its current value of CNY8.28/$ anytime soon. However, many Western currency traders believe that the Chinese government will soon be forced to revalue the yuan by at least 15 percent. What exchange rate would reflect a 15 percent revaluation of the yuan renminbi?

Accepted Answer

A)  CNY9.74/$ 
B)  CNY7.20/$ 
C)  CNY9.52/$ 
D)  CNY7.04/$ 
E)  None of the above. 
A)  CNY9.74/$ 
B)  CNY7.20/$ 
C)  CNY9.52/$ 
D)  CNY7.04/$ 
E)  None of the above.

Question 10

Explain how supply, demand, and the balance of payments report interact to help determine exchange rates

Accepted Answer

An exchange rate is simply the pr

Question 11

Explain why it is important to keep track of direct and indirect quotations when calculating percentage changes in exchange rates or forward premiums or discounts.

Accepted Answer

The equations given and used in the chap

Question 12

From a country's perspective, what is the significance of the balance of payments report?

Accepted Answer

Interpretation of the balance of payment

Question 13

If the bid rate is given as $1.270293/€ and the offer rate is $1.270294/€, then which of the following statements is correct?

Accepted Answer

A)  A person who wishes to buy euros for dollars will receive a rate of $1.270293/€. 
B)  A person who wishes to sell dollars for euros will receive a rate of $1.270293/€. 
C)  A person who wishes to sell euros for dollars will receive a rate of $1.270294/€. 
D)  A person who wishes to buy dollars for euros will receive a rate of $1.270293/€. 
E)  All of the statements above are correct. 
A)  A person who wishes to buy euros for dollars will receive a rate of $1.270293/€. 
B)  A person who wishes to sell dollars for euros will receive a rate of $1.270293/€. 
C)  A person who wishes to sell euros for dollars will receive a rate of $1.270294/€. 
D)  A person who wishes to buy dollars for euros will receive a rate of $1.270293/€. 
E)  All of the statements above are correct.

Question 14

A U.S. investor just received a foreign exchange rate quote for $0.7855/€. What kind of quote is this?

Accepted Answer

A)  European term quotation. 
B)  American term quotation. 
C)  Forward rate quotation. 
D)  Indirect quotation. 
E)  Cross rate quotation. 
A)  European term quotation. 
B)  American term quotation. 
C)  Forward rate quotation. 
D)  Indirect quotation. 
E)  Cross rate quotation.

Question 15

In the spot market, 1 U.S. dollar can be exchanged for 114 Japanese yen. In the 1-year forward market, 1 U.S. dollar can be exchanged for 119 Japanese yen. The 1-year, risk-free rate of interest is 5.2 percent in the United States. If interest rate parity holds, what is the yield today on 1-year, risk-free Japanese securities?

Accepted Answer

A)  1.83% 
B)  4.71% 
C)  5.37% 
D)  8.68% 
E)  9.81% 
A)  1.83% 
B)  4.71% 
C)  5.37% 
D)  8.68% 
E)  9.81%

Question 16

Which of the following statements is most correct?

Accepted Answer

A)  The Fisher equation demonstrates that the ratio of prices on identical products in two countries determines the exchange rate between two currencies. 
B)  Most theorists agree that the Fisher effect is valid and that liquidity premia, and not inflation, drive interest rate determination. 
C)  If the forward currency premium or discount is equal in sign and magnitude to the interest rate differential, the spot and forward rates are said to be "at interest rate parity." 
D)  According to the unbiased predictor condition, the forward rate is the best estimate of the future spot rate, which is equally likely to be higher or lower than the forward rate. 
E)  For the parity conditions to hold, it is imperative that the real risk-free rate (r*) be determined by the market and be allowed to fluctuate freely. 
A)  The Fisher equation demonstrates that the ratio of prices on identical products in two countries determines the exchange rate between two currencies. 
B)  Most theorists agree that the Fisher effect is valid and that liquidity premia, and not inflation, drive interest rate determination. 
C)  If the forward currency premium or discount is equal in sign and magnitude to the interest rate differential, the spot and forward rates are said to be "at interest rate parity." 
D)  According to the unbiased predictor condition, the forward rate is the best estimate of the future spot rate, which is equally likely to be higher or lower than the forward rate. 
E)  For the parity conditions to hold, it is imperative that the real risk-free rate (r*) be determined by the market and be allowed to fluctuate freely.

Question 17

Maria Elena Sanchez, a young accountant in Madrid, is about to take the trip of a lifetime to Tahiti. She is trying to plan her expenses carefully so that she can afford to buy some exotic black pearls while she is there. Her friend at a Madrid bank tells her that the spot exchange rate for the French Polynesian franc is XPF92.15/$, but there are no forward quotations. Maria Elena is not going for six months, so she is afraid that the exchange rate will change before she leaves. Her friend tells her that expected inflation in the U.S. for the next year is 3.5 percent (1.75 percent for six months), and for French Polynesia it is 8 percent (4.00 percent for six months). According to purchasing power parity, what is the future spot rate?

Accepted Answer

A)  XPF96.1565/$ 
B)  XPF94.1877/$ 
C)  XPF92.3506/$ 
D)  XPF90.1564/$ 
E)  XPF88.3104/$ 
A)  XPF96.1565/$ 
B)  XPF94.1877/$ 
C)  XPF92.3506/$ 
D)  XPF90.1564/$ 
E)  XPF88.3104/$

Question 18

Which of the following statements is not correct?

Accepted Answer

A)  A quotation in American terms can be a direct quotation. 
B)  A quotation in American terms can be an indirect quotation. 
C)  Most interbank quotations are given in American terms. 
D)  One does not have to designate a "home" currency to know if a quotation is in American terms or European terms. 
E)  If quotations for two currencies are given in European terms, it is easier to calculate the cross rate than if they are given in American terms. 
A)  A quotation in American terms can be a direct quotation. 
B)  A quotation in American terms can be an indirect quotation. 
C)  Most interbank quotations are given in American terms. 
D)  One does not have to designate a "home" currency to know if a quotation is in American terms or European terms. 
E)  If quotations for two currencies are given in European terms, it is easier to calculate the cross rate than if they are given in American terms.

Question 19

What is the common currency of the EMU?

Accepted Answer

A)  U.S. dollar. 
B)  British pound. 
C)  Euro. 
D)  French franc. 
E)  German deutsche mark. 
A)  U.S. dollar. 
B)  British pound. 
C)  Euro. 
D)  French franc. 
E)  German deutsche mark.

Question 20

Which of the following statements is most correct?

Accepted Answer

A)  Most interbank foreign exchange quotations are given in American terms. 
B)  Transactions in the capital account (section 
B)  of the balance of payments are usually not reversible. 
C)  If the real, risk-free interest rate is the same in two countries, then nominal interest rates in the two countries and the exchange rate for the two currencies are driven by the rate of inflation in the two countries. 
D)  Covered interest arbitrage is a technique for earning a riskless profit without having to commit one's own money when purchasing power parity does not hold. 
E)  All of the statements above are correct. 
A)  Most interbank foreign exchange quotations are given in American terms. 
B)  Transactions in the capital account (section 
B)  of the balance of payments are usually not reversible. 
C)  If the real, risk-free interest rate is the same in two countries, then nominal interest rates in the two countries and the exchange rate for the two currencies are driven by the rate of inflation in the two countries. 
D)  Covered interest arbitrage is a technique for earning a riskless profit without having to commit one's own money when purchasing power parity does not hold. 
E)  All of the statements above are correct.

If the markets in two countries are in equilibrium, the parity conditions ensure which of the following?

If one euro can purchase 1.27 U.S. dollars, how many euros can one U.S. dollar buy?

Which of the following statements is most correct?

The balance of payments report is recorded using the rules of double-entry accounting and most closely resembles a(n) ______________.

A computer costs $1,100 in the United States. The same computer costs 1,265 euros in France. Assuming that purchasing power parity (PPP) strictly holds, what is the spot exchange rate between the dollar and the euro?

Explain how supply, demand, and the balance of payments report interact to help determine exchange rates

Explain why it is important to keep track of direct and indirect quotations when calculating percentage changes in exchange rates or forward premiums or discounts.

From a country's perspective, what is the significance of the balance of payments report?

If the bid rate is given as $1.270293/€ and the offer rate is $1.270294/€, then which of the following statements is correct?

A U.S. investor just received a foreign exchange rate quote for $0.7855/€. What kind of quote is this?

Which of the following statements is most correct?

Which of the following statements is not correct?

What is the common currency of the EMU?

Which of the following statements is most correct?

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Translating and Consolidating Subsidiary Financial Statements

Debt Instruments and Markets

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Capital Structure and Distribution Policy

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

Filters

Exam 3: Exchange Rate Analysis

If the markets in two countries are in equilibrium, the parity conditions ensure which of the following?

If one euro can purchase 1.27 U.S. dollars, how many euros can one U.S. dollar buy?

Which of the following statements is most correct?

The balance of payments report is recorded using the rules of double-entry accounting and most closely resembles a(n) ______________.

A computer costs $1,100 in the United States. The same computer costs 1,265 euros in France. Assuming that purchasing power parity (PPP) strictly holds, what is the spot exchange rate between the dollar and the euro?

Explain how supply, demand, and the balance of payments report interact to help determine exchange rates

Explain why it is important to keep track of direct and indirect quotations when calculating percentage changes in exchange rates or forward premiums or discounts.

From a country's perspective, what is the significance of the balance of payments report?

If the bid rate is given as $1.270293/€ and the offer rate is $1.270294/€, then which of the following statements is correct?

A U.S. investor just received a foreign exchange rate quote for $0.7855/€. What kind of quote is this?

Which of the following statements is most correct?

Which of the following statements is not correct?

What is the common currency of the EMU?

Which of the following statements is most correct?

An Introduction to International Financial Management

The Global Financial Environment: Markets, Institutions, Interest Rates, and Exchange Rates

International Trade and Foreign Direct Investment

Risk and Return

Financial Statement Analysis

Translating and Consolidating Subsidiary Financial Statements

Debt Instruments and Markets

Stocks and Stock Markets

The Cost of Capital

Capital Budgeting: The Basics

Capital Budgeting: Risk Analysis and Real Options

Capital Structure and Distribution Policy

Working Capital Management and Global Cash Flow Integration

Derivatives and Risk Management

International Tax Planning

Filters