Question 1

Which statement about real exchange rates is not true?

Accepted Answer

A)  Real exchange rate changes are caused by changes in nominal exchange rates. 
B)  Real exchange rates measure deviations from PPP. 
C)  Real exchange rates are always unity. 
D)  Real exchange rates affect the international competitive positions of countries. 
A)  Real exchange rate changes are caused by changes in nominal exchange rates. 
B)  Real exchange rates measure deviations from PPP. 
C)  Real exchange rates are always unity. 
D)  Real exchange rates affect the international competitive positions of countries. C

Question 2

The 9-months inflation rate in Great Britain is expected to be 4% p.a.,and the 9-months inflation rate in Switzerland is predicted to be 6% p.a.Assume that the parity conditions hold.
a)By what percentage rate do you expect the Swiss franc to appreciate (depreciate)with respect to the British pound over the next nine months,based on purchasing power parity?
b)If the spot rate is pound 0.5/SF,what is the expected spot exchange rate between the Swiss franc and the British pound in nine months?

Accepted Answer

a)ef = (1.03/1.045)- 1 = -0.014 or a 1.4% depreciation of the Swiss franc
b)St + 1 = 0.5(1.03/1.045)= pound 0.4928/SF

Question 3

Canada's competitive position will:

Accepted Answer

A)  strengthen when the dollar appreciates more than is warranted by PPP. 
B)  not be affected when the dollar appreciates more than is warranted by PPP. 
C)  weaken when the dollar appreciates more than is warranted by PPP. 
D)  weaken when the dollar depreciates more than is warranted by PPP. 
A)  strengthen when the dollar appreciates more than is warranted by PPP. 
B)  not be affected when the dollar appreciates more than is warranted by PPP. 
C)  weaken when the dollar appreciates more than is warranted by PPP. 
D)  weaken when the dollar depreciates more than is warranted by PPP. C

Question 4

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€).
-The above mentioned scenario:

Accepted Answer

A)  is an example of covered interest arbitrage (CI
A) , and interest rate parity (IRP) holds. 
B)  is an example of covered interest arbitrage (CI
A) , and interest rate parity (IRP) does NOT hold. 
C)  is an example of Purchasing Power Parity (PPP), and hyperinflation. 
D)  none of these 
A)  is an example of covered interest arbitrage (CI
A) , and interest rate parity (IRP) holds. 
B)  is an example of covered interest arbitrage (CI
A) , and interest rate parity (IRP) does NOT hold. 
C)  is an example of Purchasing Power Parity (PPP), and hyperinflation. 
D)  none of these

Question 5

According to the fundamental approach,if all of the regression coefficients are already estimated,all of the following matters in the exchange rate determination except:

Accepted Answer

A)  The expected rate of growth of domestic money. 
B)  The expected rate of growth of foreign money. 
C)  The historical rate of growth of domestic money. 
D)  The expected rate of real economic growth in the domestic economy. 
A)  The expected rate of growth of domestic money. 
B)  The expected rate of growth of foreign money. 
C)  The historical rate of growth of domestic money. 
D)  The expected rate of real economic growth in the domestic economy.

Question 6

The main approaches to forecasting exchange rates are:

Accepted Answer

A)  Efficient market, Fundamental, and Technical approaches. 
B)  Efficient market and Non-Technical approaches. 
C)  Efficient market and Fundamental approaches only. 
D)  Fundamental and Non-Technical approaches. 
A)  Efficient market, Fundamental, and Technical approaches. 
B)  Efficient market and Non-Technical approaches. 
C)  Efficient market and Fundamental approaches only. 
D)  Fundamental and Non-Technical approaches.

Question 7

When Interest Rate Parity (IRP)holds between two different countries X and Y,your decision to invest your money will:

Accepted Answer

A)  be indifferent between country X and country Y. 
B)  not involve forward hedging. 
C)  depend on which country initiated the IRP. 
D)  not involve the foreign exchange rates. 
A)  be indifferent between country X and country Y. 
B)  not involve forward hedging. 
C)  depend on which country initiated the IRP. 
D)  not involve the foreign exchange rates.

Question 8

The 9-months inflation rate in Great Britain is expected to be 4% p.a.,and the 9-months inflation rate in Switzerland is predicted to be 6% p.a.The real interest rate is 3% in Great Britain.Assume that the parity conditions hold.
a)What is the nominal interest rate in Switzerland?
b)What is the nine-month forward rate of the Swiss franc with respect to the British pound?
c)If the inflation rates are expected to stay unchanged over the next two years,what is the expected spot exchange rate between the British pound and the Swiss franc in two years?

Accepted Answer

a)(1.03)(1.06)- 1 = 0.0918 or

Question 9

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€).
-If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,and the dollar depreciated against the pound by 3 percent,then the real exchange rate,assuming that PPP initially held,is:

Accepted Answer

A)  0.07. 
B)  0.98. 
C)  1.05. 
D)  1.20. 
A)  0.07. 
B)  0.98. 
C)  1.05. 
D)  1.20.

Question 10

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€).
-Covered interest arbitrage would not be possible if the forward rate would be:

Accepted Answer

A)  $1.1093/€. 
B)  $1.1248/€. 
C)  $1.1362/€. 
D)  $1.1611/€. 
A)  $1.1093/€. 
B)  $1.1248/€. 
C)  $1.1362/€. 
D)  $1.1611/€.

Question 11

The international Fisher effect is the same as the:

Accepted Answer

A)  uncovered interest rate parity. 
B)  covered interest rate parity. 
C)  purchasing power parity. 
D)  efficient Fisher effect. 
A)  uncovered interest rate parity. 
B)  covered interest rate parity. 
C)  purchasing power parity. 
D)  efficient Fisher effect.

Question 12

Suppose that the two-months interest rate is 8.0 percent per annum in the Canada and 7.0 percent per annum in France,and that the spot exchange rate is $1.50/€ and the forward exchange rate,with one-year maturity,is $1.50/€.Assume that an arbitrager can borrow up to $1,000,000 or €666,666.
a)What kind of arbitrage is possible?
b)Determine the arbitrage profit that can be made.
c)What would the French interest rate have to be so that there would be no arbitrage opportunity?

Accepted Answer

a)Covered interest rate arbitrage
b)Borr

Question 13

The forward expectations parity states that:

Accepted Answer

A)  any forward premium or discount is equal to the expected change in the exchange rate. 
B)  any forward rate is equal to the expected change in the exchange rate. 
C)  the forward premium or discount is equal to the expected change in the real exchange rates. 
D)  the forward premium or discount is equal to the expected change in purchasing power parity. 
A)  any forward premium or discount is equal to the expected change in the exchange rate. 
B)  any forward rate is equal to the expected change in the exchange rate. 
C)  the forward premium or discount is equal to the expected change in the real exchange rates. 
D)  the forward premium or discount is equal to the expected change in purchasing power parity.

Question 14

Suppose that the two-months interest rate is 6.0 percent per annum in the United States and 7.0 percent per annum in Germany,and that the spot exchange rate is $1.12/€ and the forward exchange rate,with two-months maturity,is $1.10/€.Assume that an arbitrager can borrow up to $1,000,000 or €892,857.
a)What kind of arbitrage is possible?
b)Determine the arbitrage profit that can be made.
c)What would the forward rate have to be so that there would be no arbitrage opportunity?

Accepted Answer

a)Covered interest rate arbitrage
b)Borr

Question 15

Interest Rate Parity (IRP)is best defined as:

Accepted Answer

A)  when a government brings its domestic interest rate in line with other major financial markets. 
B)  when the central bank of a country brings its domestic interest rate in line with its major trading partners. 
C)  a zero arbitrage condition that must hold when international financial markets are in equilibrium. 
D)  None of these 
A)  when a government brings its domestic interest rate in line with other major financial markets. 
B)  when the central bank of a country brings its domestic interest rate in line with its major trading partners. 
C)  a zero arbitrage condition that must hold when international financial markets are in equilibrium. 
D)  None of these

Question 16

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000 or €892,857 (which is the equivalent of $1,000,000 at the spot exchange rate of $1.12/€).
-The net cash flow in one year is

Accepted Answer

A)  $10,690. 
B)  $15,873. 
C)  $46,207. 
D)  $21,964. 
A)  $10,690. 
B)  $15,873. 
C)  $46,207. 
D)  $21,964.

Question 17

Purchasing Power Parity (PPP)theory states that:

Accepted Answer

A)  the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels. 
B)  as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will appreciate against stable currencies. 
C)  the prices of standard commodity baskets in two countries are not related. 
D)  the exchange rate between currencies of two countries will not be equal to the ratio of the countries' price levels. 
A)  the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels. 
B)  as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will appreciate against stable currencies. 
C)  the prices of standard commodity baskets in two countries are not related. 
D)  the exchange rate between currencies of two countries will not be equal to the ratio of the countries' price levels.

Question 18

Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates in US and UK are 4% and 6% respectively.Is there an arbitrage opportunity?

Accepted Answer

Direct investment of $s gives you 4%
Ind

Question 19

International Fisher Effect connects the expected depreciation or appreciation of the currency with:

Accepted Answer

A)  Nominal interest rates. 
B)  Real interest rates. 
C)  Inflation levels. 
D)  Forward exchange rate. 
A)  Nominal interest rates. 
B)  Real interest rates. 
C)  Inflation levels. 
D)  Forward exchange rate.

Question 20

PPP does not hold well because of the following except:

Accepted Answer

A)  barriers to international commodity arbitrage. 
B)  the existence of non-tradables. 
C)  commodity prices are different in different countries. 
D)  the CPI index is calculated using the same basket of goods. 
A)  barriers to international commodity arbitrage. 
B)  the existence of non-tradables. 
C)  commodity prices are different in different countries. 
D)  the CPI index is calculated using the same basket of goods.

Which statement about real exchange rates is not true?

Canada's competitive position will:

According to the fundamental approach,if all of the regression coefficients are already estimated,all of the following matters in the exchange rate determination except:

The main approaches to forecasting exchange rates are:

When Interest Rate Parity (IRP)holds between two different countries X and Y,your decision to invest your money will:

The international Fisher effect is the same as the:

The forward expectations parity states that:

Interest Rate Parity (IRP)is best defined as:

Purchasing Power Parity (PPP)theory states that:

Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates in US and UK are 4% and 6% respectively.Is there an arbitrage opportunity?

International Fisher Effect connects the expected depreciation or appreciation of the currency with:

PPP does not hold well because of the following except:

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

Interest Rate and Currency Swaps

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters

Exam 5: International Parity Relationships and Forecasting Foreign Exchange Rates

Which statement about real exchange rates is not true?

Canada's competitive position will:

According to the fundamental approach,if all of the regression coefficients are already estimated,all of the following matters in the exchange rate determination except:

The main approaches to forecasting exchange rates are:

When Interest Rate Parity (IRP)holds between two different countries X and Y,your decision to invest your money will:

The international Fisher effect is the same as the:

The forward expectations parity states that:

Interest Rate Parity (IRP)is best defined as:

Purchasing Power Parity (PPP)theory states that:

Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates in US and UK are 4% and 6% respectively.Is there an arbitrage opportunity?

International Fisher Effect connects the expected depreciation or appreciation of the currency with:

PPP does not hold well because of the following except:

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

The Market for Foreign Exchange

International Banking and Money Market

International Bond Market

International Equity Markets

Futures and Options on Foreign Exchange

Interest Rate and Currency Swaps

International Portfolio Investment

Management of Economic Exposure

Management of Transaction Exposure

Management of Translation Exposure

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

Exports and Imports

International Tax Environment

Corporate Governance Around the World

Filters