Question 1

If the exchange rate follows a random walk

Accepted Answer

A) the future exchange rate is unpredictable. 
B) the future exchange rate is expected to be the same as the current exchange rate, St = E(St+1). 
C) the best predictor of future exchange rates is the forward rate Ft = E(St+1|It). 
D) both b) and c) 
A) the future exchange rate is unpredictable. 
B) the future exchange rate is expected to be the same as the current exchange rate, St = E(St+1). 
C) the best predictor of future exchange rates is the forward rate Ft = E(St+1|It). 
D) both b) and c)

Question 2

Forward parity states that

Accepted Answer

A) any forward premium or discount is equal to the expected change in the exchange rate. 
B) any forward premium or discount is equal to the actual change in the exchange rate. 
C) the nominal interest rate differential reflects the expected change in the exchange rate. 
D) an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country. 
A) any forward premium or discount is equal to the expected change in the exchange rate. 
B) any forward premium or discount is equal to the actual change in the exchange rate. 
C) the nominal interest rate differential reflects the expected change in the exchange rate. 
D) an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country.

Question 3

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 4

An Italian currency dealer has good credit and can borrow €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain euro-denominated profit via covered interest arbitrage.

Accepted Answer

A) Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600. 
B) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400. 
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000. 
D) Both c) and b) 
A) Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00, gross proceeds = $1,017,600. 
B) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400. 
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot, invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000. 
D) Both c) and b)

Question 5

With regard to fundamental forecasting versus technical forecasting of exchange rates

Accepted Answer

A) the technicians tend to use "cause and effect" models. 
B) the fundamentalists tend to believe that "history will repeat itself" is the best model. 
C) both a) and b) 
D) none of the above 
A) the technicians tend to use "cause and effect" models. 
B) the fundamentalists tend to believe that "history will repeat itself" is the best model. 
C) both a) and b) 
D) none of the above

Question 6

Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward bid price at?

Accepted Answer

A) $1.4324/€ 
B) $1.4358/€ 
C) $1.4662/€ 
D) $1.4676/€ 
A) $1.4324/€ 
B) $1.4358/€ 
C) $1.4662/€ 
D) $1.4676/€

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 €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

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

Question 8

Assume that you are a retail customer   Please note that your answers are worth zero points if they do not include currency symbols ($, €)
-There is (at least)one profitable arbitrage at these prices.What is it?

Accepted Answer

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

Question 9

A higher U.S.interest rate (i$ $\uparrow$)will result in

Accepted Answer

A) a stronger dollar. 
B) a lower spot exchange rate (expressed as foreign currency per U.S.dollar). 
C) both a) and b) 
D) none of the above 
A) a stronger dollar. 
B) a lower spot exchange rate (expressed as foreign currency per U.S.dollar). 
C) both a) and b) 
D) none of the above

Question 10

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must one-year interest rate be in the euro zone to avoid arbitrage?

Accepted Answer

A) 5.0% 
B) 6.09% 
C) 8.62% 
D) None of the above 
A) 5.0% 
B) 6.09% 
C) 8.62% 
D) None of the above

Question 11

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

Accepted Answer

A) Yes, borrow €1,000,000 at 3.65%; Trade for $ at the bid spot rate $1.40 = €1.00; Invest at 4.1%; Hedge this with a long position in a forward contract. 
B) Yes, borrow $1,000,000 at 4.2%; Trade for € at the spot ask exchange rate $1.43 = €1.00; Invest €699,300.70 at 3.5%; Hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year).Cash flow in 1 year $237.76. 
C) No; the transactions costs are too high. 
D) None of the above 
A) Yes, borrow €1,000,000 at 3.65%; Trade for $ at the bid spot rate $1.40 = €1.00; Invest at 4.1%; Hedge this with a long position in a forward contract. 
B) Yes, borrow $1,000,000 at 4.2%; Trade for € at the spot ask exchange rate $1.43 = €1.00; Invest €699,300.70 at 3.5%; Hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year).Cash flow in 1 year $237.76. 
C) No; the transactions costs are too high. 
D) None of the above

Question 12

According to the research in the accuracy of paid exchange rate forecasters,

Accepted Answer

A) you can make more money selling forecasts than you can following forecasts. 
B) the average forecaster is better than average at forecasting. 
C) the forecasters do a better job of predicting the future exchange rates than the market does. 
D) none of the above. 
A) you can make more money selling forecasts than you can following forecasts. 
B) the average forecaster is better than average at forecasting. 
C) the forecasters do a better job of predicting the future exchange rates than the market does. 
D) none of the above.

Question 13

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 14

Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting?

Accepted Answer

A) One has to forecast a set of independent variables to forecast the exchange rates.Forecasting the former will certainly be subject to errors and may not be necessarily easier than forecasting the latter. 
B) The parameter values, that is the $\alpha$'s and $\beta$'s, that are estimated using historical data may change over time because of changes in government policies and/or the underlying structure of the economy.Either difficulty can diminish the accuracy of forecasts even if the model is correct. 
C) The model itself can be wrong. 
D) All of the above 
A) One has to forecast a set of independent variables to forecast the exchange rates.Forecasting the former will certainly be subject to errors and may not be necessarily easier than forecasting the latter. 
B) The parameter values, that is the $\alpha$'s and $\beta$'s, that are estimated using historical data may change over time because of changes in government policies and/or the underlying structure of the economy.Either difficulty can diminish the accuracy of forecasts even if the model is correct. 
C) The model itself can be wrong. 
D) All of the above

Question 15

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 16

Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward ask price at?

Accepted Answer

A) $1.4324/€ 
B) $1.4358/€ 
C) $1.4662/€ 
D) $1.4676/€ 
A) $1.4324/€ 
B) $1.4358/€ 
C) $1.4662/€ 
D) $1.4676/€

Question 17

Suppose you observe a spot exchange rate of $1.50/€.If interest rates are 3% APR in the U.S.and 5% 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/€

Question 18

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 had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

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

Question 19

One implication of the random walk hypothesis is

Accepted Answer

A) given the efficiency of foreign exchange markets, it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is not yet reflected in the current exchange rate. 
B) given the efficiency of foreign exchange markets, it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is already reflected in the current exchange rate. 
C) given the relative inefficiency of foreign exchange markets, it is difficult to outperform the technical forecasts unless the forecaster has access to private information that is not yet reflected in the current futures exchange rate. 
D) none of the above 
A) given the efficiency of foreign exchange markets, it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is not yet reflected in the current exchange rate. 
B) given the efficiency of foreign exchange markets, it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is already reflected in the current exchange rate. 
C) given the relative inefficiency of foreign exchange markets, it is difficult to outperform the technical forecasts unless the forecaster has access to private information that is not yet reflected in the current futures exchange rate. 
D) none of the above

Question 20

When Interest Rate Parity (IRP)does not hold

Accepted Answer

A) there is usually a high degree of inflation in at least one country. 
B) the financial markets are in equilibrium. 
C) there are opportunities for covered interest arbitrage. 
D) both b) and c) 
A) there is usually a high degree of inflation in at least one country. 
B) the financial markets are in equilibrium. 
C) there are opportunities for covered interest arbitrage. 
D) both b) and c)

If the exchange rate follows a random walk

Forward parity states that

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?

With regard to fundamental forecasting versus technical forecasting of exchange rates

Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward bid price at?

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 €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -There is (at least)one profitable arbitrage at these prices.What is it?

A higher U.S.interest rate (i_$ $\uparrow$ )will result in

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must one-year interest rate be in the euro zone to avoid arbitrage?

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

According to the research in the accuracy of paid exchange rate forecasters,

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?

Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting?

Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward ask price at?

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

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 had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

One implication of the random walk hypothesis is

When Interest Rate Parity (IRP)does not hold

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

If the exchange rate follows a random walk

Forward parity states that

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?

With regard to fundamental forecasting versus technical forecasting of exchange rates

Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward bid price at?

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 €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Assume that you are a retail customer Please note that your answers are worth zero points if they do not include currency symbols ($, €) -There is (at least)one profitable arbitrage at these prices.What is it?

A higher U.S.interest rate (i$ ↑\uparrow↑ )will result in

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must one-year interest rate be in the euro zone to avoid arbitrage?

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

According to the research in the accuracy of paid exchange rate forecasters,

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?

Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting?

Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward ask price at?

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

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 had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

One implication of the random walk hypothesis is

When Interest Rate Parity (IRP)does not hold

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

A higher U.S.interest rate (i_$ $\uparrow$ )will result in