Question 1

Deviations from interest rate parity exist for all of the following reasons except:

Accepted Answer

A)  transaction costs. 
B)  spreads. 
C)  interest rate differentials. 
D)  capital controls. 
A)  transaction costs. 
B)  spreads. 
C)  interest rate differentials. 
D)  capital controls.

Question 2

Uncovered interest rate parity:

Accepted Answer

A)  is an arbitrage condition. 
B)  holds most of the time. 
C)  is based on expectations. 
D)  will provide guaranteed but small profits. 
A)  is an arbitrage condition. 
B)  holds most of the time. 
C)  is based on expectations. 
D)  will provide guaranteed but small profits.

Question 3

You have the following information:
 $\begin{array}{ll}
\text { today's spot } & \$ .6850 / \mathrm{CS} \
6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}
\end{array}$
expected inflation rate in the U.S.: $ 4 \% $ p.a.
 expected inflation rate in Canada: $ 2 \% $ p.a.
 nominal interest rate in the U.S: $ 6 \% $ p.a. You are asked to forecast the spot exchange rate between the Canadian dollar and the U.S.dollar in six months.
a)What is your forecast based on purchasing power parity?
b)What is your forecast based on the forward expectations parity?
c)Based on the Fisher effect,what should be the real interest rate in Canada?
d)Why are the two forecasts in a and b different?

Accepted Answer

a)0.685(1.02/1.01)= $0.6918/C$

Question 4

Germany has a higher rate of inflation than Japan.The nominal exchange rate is constant.In this scenario,which of the following statement is true?

Accepted Answer

A)  Germany experiences an increase in its real exchange rate. 
B)  Germany experiences a decrease in its real exchange rate. 
C)  Japan experiences an increase in its real exchange rate. 
D)  German goods are cheaper now. 
A)  Germany experiences an increase in its real exchange rate. 
B)  Germany experiences a decrease in its real exchange rate. 
C)  Japan experiences an increase in its real exchange rate. 
D)  German goods are cheaper now.

Question 5

If the PPP is satisfied then:

Accepted Answer

A)  the nominal exchange rate stays constant over time. 
B)  the nominal exchange rate may depreciate or appreciate over time but the rate of this depreciation/appreciation stays constant. 
C)  SP*/P = 1, where S = nominal exchange rate, P* = foreign country price level, P = home country price level. 
D)  SP*/P = constant (not necessary 1), where S = nominal exchange rate, P* = foreign country price level, P = home country price level. 
A)  the nominal exchange rate stays constant over time. 
B)  the nominal exchange rate may depreciate or appreciate over time but the rate of this depreciation/appreciation stays constant. 
C)  SP*/P = 1, where S = nominal exchange rate, P* = foreign country price level, P = home country price level. 
D)  SP*/P = constant (not necessary 1), where S = nominal exchange rate, P* = foreign country price level, P = home country price level.

Question 6

Covered Interest Arbitrage (CIA)activities will result in:

Accepted Answer

A)  unstable international financial markets. 
B)  restoration of equilibrium quite quickly. 
C)  disintermediation. 
D)  no changes in the markets. 
A)  unstable international financial markets. 
B)  restoration of equilibrium quite quickly. 
C)  disintermediation. 
D)  no changes in the markets.

Question 7

Assume the current $/£ exchange rate is 1.7 $/£ and 1-year forward exchange rate is 1.68$/£.The risk-free interest rates at which you can invest in US and UK are 4% and 6% respectively.However,since you do not have a very good credit rating,you can borrow funds only at higher rates.Namely,you can borrow $s at 5% and you can borrow £s at 7%.Is there an arbitrage opportunity?

Accepted Answer

Try both directions:
Direction 1: (borro

Question 8

When Interest Rate Parity (IRP)does not hold:

Accepted Answer

A)  there is a high degree of inflation. 
B)  the financial markets are in equilibrium. 
C)  there are opportunities for covered interest arbitrage. 
D)  there are no opportunities for arbitrage. 
A)  there is a high degree of inflation. 
B)  the financial markets are in equilibrium. 
C)  there are opportunities for covered interest arbitrage. 
D)  there are no opportunities for arbitrage.

Question 9

If foreign exchange markets are efficient,all of the following will hold except:

Accepted Answer

A)  Exchange rates change only when new information arrives. 
B)  Exchange rates change randomly. 
C)  Incremental changes of exchange rates depend on the current level of the exchange rate. 
D)  The current exchange rate reflects all relevant information. 
A)  Exchange rates change only when new information arrives. 
B)  Exchange rates change randomly. 
C)  Incremental changes of exchange rates depend on the current level of the exchange rate. 
D)  The current exchange rate reflects all relevant information.

Question 10

If U.S.nominal interest rate is lower than U.K.interest rate (assuming real interest rate stays same between the countries),you can say that:

Accepted Answer

A)  US$ is expected to depreciate. 
B)  US$ is expected to appreciate. 
C)  PPP is violated but RPPP may be satisfied. 
D)  RPPP is violated. 
A)  US$ is expected to depreciate. 
B)  US$ is expected to appreciate. 
C)  PPP is violated but RPPP may be satisfied. 
D)  RPPP is violated.

Deviations from interest rate parity exist for all of the following reasons except:

Uncovered interest rate parity:

Germany has a higher rate of inflation than Japan.The nominal exchange rate is constant.In this scenario,which of the following statement is true?

If the PPP is satisfied then:

Covered Interest Arbitrage (CIA)activities will result in:

When Interest Rate Parity (IRP)does not hold:

If foreign exchange markets are efficient,all of the following will hold except:

If U.S.nominal interest rate is lower than U.K.interest rate (assuming real interest rate stays same between the countries),you can say that:

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

Deviations from interest rate parity exist for all of the following reasons except:

Uncovered interest rate parity:

Germany has a higher rate of inflation than Japan.The nominal exchange rate is constant.In this scenario,which of the following statement is true?

If the PPP is satisfied then:

Covered Interest Arbitrage (CIA)activities will result in:

When Interest Rate Parity (IRP)does not hold:

If foreign exchange markets are efficient,all of the following will hold except:

If U.S.nominal interest rate is lower than U.K.interest rate (assuming real interest rate stays same between the countries),you can say that:

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