Question 1

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 depreciate against stable currencies. 
C) the prices of standard commodity baskets in two countries are not related. 
D) both a) and b) 
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 depreciate against stable currencies. 
C) the prices of standard commodity baskets in two countries are not related. 
D) both a) and b) D

Question 2

Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany,and that the spot exchange rate is $1.60/€ and the forward exchange rate,with one-year maturity,is $1.58/€.Assume that an arbitrager can borrow up to $1,000,000 or €625,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

Accepted Answer

A) $238.65 
B) $14,000 
C) $46,207 
D) $7,000 
A) $238.65 
B) $14,000 
C) $46,207 
D) $7,000 D

Question 3

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) An arbitrage condition that must hold when international financial markets are in equilibrium. 
D) None of the above 
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) An arbitrage condition that must hold when international financial markets are in equilibrium. 
D) None of the above C

Question 4

Will an arbitrageur facing the following prices be able to make money?

Accepted Answer

A) Yes, borrow $1,000 at 5%; Trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5%; Hedge this with a forward contract on €1,044.55 at $0.99 = €1.00; Receive $1.034.11. 
B) Yes, borrow €1,000 at 6%; Trade for $ at the bid spot rate $1.00 = €1.00; Invest $1,000 at 4.5%; Hedge this with a forward contract on €1,045 at $1.00 = €1.00. 
C) No; the transactions costs are too high. 
D) None of the above 
A) Yes, borrow $1,000 at 5%; Trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5%; Hedge this with a forward contract on €1,044.55 at $0.99 = €1.00; Receive $1.034.11. 
B) Yes, borrow €1,000 at 6%; Trade for $ at the bid spot rate $1.00 = €1.00; Invest $1,000 at 4.5%; Hedge this with a forward contract on €1,045 at $1.00 = €1.00. 
C) No; the transactions costs are too high. 
D) None of the above

Question 5

Assume that you are a retail customer   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward ASK exchange rate in $ per € that that satisfies IRP from the perspective of a customer.

Accepted Answer

The answer of Assume that you are a retail customer...

Question 6

In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,

Accepted Answer

A) it will hold only if the prices of the constituent commodities are equalized across countries in a given currency. 
B) it will hold only if the composition of the consumption basket is the same across countries. 
C) both a) and b) 
D) none of the above 
A) it will hold only if the prices of the constituent commodities are equalized across countries in a given currency. 
B) it will hold only if the composition of the consumption basket is the same across countries. 
C) both a) and b) 
D) none of the above

Question 7

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid).   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 8

Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of   Please note that your answers...

Question 9

Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i€ = 3%.

Accepted Answer

Question 10

According to the monetary approach,the exchange rate can be expressed as

Accepted Answer

A)    
B)    
C)    
D) none of the above 
A)    
B)    
C)    
D) none of the above

Question 11

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid).   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 12

As of today,the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

Accepted Answer

A) €1.00 = $1.6157 
B) €1.6157 = $1.00 
C) €1.00 = $1.5845 
D) $1.00 * 1.03 = €1.60 * 1.02 
A) €1.00 = $1.6157 
B) €1.6157 = $1.00 
C) €1.00 = $1.5845 
D) $1.00 * 1.03 = €1.60 * 1.02

Question 13

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i€ = 4%.

Accepted Answer

Question 14

Assume that you are a retail customer   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 15

How high does the lending rate in the euro zone have to be before an arbitrageur would NOT consider borrowing dollars,trading for euro at the spot,investing in the euro zone and hedging with a short position in the forward contract?

Accepted Answer

A) The bid-ask spreads are too wide for any profitable arbitrage when i€ > 0 
B) 3.48% 
C) -2.09% 
D) None of the above 
A) The bid-ask spreads are too wide for any profitable arbitrage when i€ > 0 
B) 3.48% 
C) -2.09% 
D) None of the above

Question 16

Suppose that the one-year 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 one-year forward exchange rate,is $1.16/€.Assume that an arbitrageur can borrow up to $1,000,000.

Accepted Answer

A) This is an example where interest rate parity holds. 
B) This is an example of an arbitrage opportunity; interest rate parity does NOT hold. 
C) This is an example of a Purchasing Power Parity violation and an arbitrage opportunity. 
D) None of the above 
A) This is an example where interest rate parity holds. 
B) This is an example of an arbitrage opportunity; interest rate parity does NOT hold. 
C) This is an example of a Purchasing Power Parity violation and an arbitrage opportunity. 
D) None of the above

Question 17

Assume that you are a retail customer   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward BID exchange rate in $ per € that that satisfies IRP from the perspective of a customer.

Accepted Answer

The answer of Assume that you are a retail customer...

Question 18

Which of the following is a true statement?

Accepted Answer

A) While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there is no theoretical reason why exchange rates should follow a pure random walk. 
B) While researchers found it easy to reject the random walk hypothesis for exchange rates on empirical grounds, there are strong theoretical reasons why exchange rates should follow a pure random walk. 
C) While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there are compelling theoretical reasons why exchange rates should follow a pure random walk. 
D) None of the above 
A) While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there is no theoretical reason why exchange rates should follow a pure random walk. 
B) While researchers found it easy to reject the random walk hypothesis for exchange rates on empirical grounds, there are strong theoretical reasons why exchange rates should follow a pure random walk. 
C) While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds, there are compelling theoretical reasons why exchange rates should follow a pure random walk. 
D) None of the above

Question 19

If the interest rate in the U.S.is i$ = 5 percent for the next year and interest rate in the U.K.is i£ = 8 percent for the next year,uncovered IRP suggests that

Accepted Answer

A) the pound is expected to depreciate against the dollar by about 3 percent. 
B) the pound is expected to appreciate against the dollar by about 3 percent. 
C) the dollar is expected to appreciate against the pound by about 3 percent. 
D) both a) and c) 
A) the pound is expected to depreciate against the dollar by about 3 percent. 
B) the pound is expected to appreciate against the dollar by about 3 percent. 
C) the dollar is expected to appreciate against the pound by about 3 percent. 
D) both a) and c)

Question 20

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Accepted Answer

A) €1.5291/$ 
B) $1.5291/€ 
C) €1.4714/$ 
D) $1.4714/€ 
A) €1.5291/$ 
B) $1.5291/€ 
C) €1.4714/$ 
D) $1.4714/€

Purchasing Power Parity (PPP)theory states that

Interest Rate Parity (IRP)is best defined as

Will an arbitrageur facing the following prices be able to make money?

In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

According to the monetary approach,the exchange rate can be expressed as

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

As of today,the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i_€ = 4%.

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

How high does the lending rate in the euro zone have to be before an arbitrageur would NOT consider borrowing dollars,trading for euro at the spot,investing in the euro zone and hedging with a short position in the forward contract?

Suppose that the one-year 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 one-year forward exchange rate,is $1.16/€.Assume that an arbitrageur can borrow up to $1,000,000.

Which of the following is a true statement?

If the interest rate in the U.S.is i_$ = 5 percent for the next year and interest rate in the U.K.is i_£ = 8 percent for the next year,uncovered IRP suggests that

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

Purchasing Power Parity (PPP)theory states that

Interest Rate Parity (IRP)is best defined as

Will an arbitrageur facing the following prices be able to make money?

In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

According to the monetary approach,the exchange rate can be expressed as

Assume that you are a retail customer (i.e. you buy at the ask and sell at the bid). Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

As of today,the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S.is 2% and 3% in the euro zone.What is the one-year forward rate that should prevail?

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i€ = 4%.

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

How high does the lending rate in the euro zone have to be before an arbitrageur would NOT consider borrowing dollars,trading for euro at the spot,investing in the euro zone and hedging with a short position in the forward contract?

Suppose that the one-year 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 one-year forward exchange rate,is $1.16/€.Assume that an arbitrageur can borrow up to $1,000,000.

Which of the following is a true statement?

If the interest rate in the U.S.is i$ = 5 percent for the next year and interest rate in the U.K.is i£ = 8 percent for the next year,uncovered IRP suggests that

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Globalization and the Multinational Firm

International Monetary System

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

Futures and Options on Foreign Exchange

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

USING YOUR PREVIOUS ANSWERS and a bit more work,find the 1-year forward exchange rate in $ per € that satisfies IRP from the perspective of a customer that borrowed $1m traded for € at the spot and invested at i_€ = 4%.

If the interest rate in the U.S.is i_$ = 5 percent for the next year and interest rate in the U.K.is i_£ = 8 percent for the next year,uncovered IRP suggests that