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) the future exchange rate is expected to be the same as the current exchange rate,St = E(St + 1),and the best predictor of future exchange rates is the forward rate Ft = E(St + 1/It). 
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) the future exchange rate is expected to be the same as the current exchange rate,St = E(St + 1),and the best predictor of future exchange rates is the forward rate Ft = E(St + 1/It).

Question 2

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 α's and β'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) none of the options 
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 α's and β'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) none of the options

Question 3

A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year.The one-year interest rate in the U.S.is i$ = 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 dollar 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 is $2,400. 
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000. 
D) Borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.Alternatively,one could borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400. 
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 is $2,400. 
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000. 
D) Borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.Alternatively,one could borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400.

Question 4

Suppose that the one-year interest rate is 4.0 percent in Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must the one-year interest rate be in the United States?

Accepted Answer

A) 2% 
B) 2.7% 
C) 5.32% 
D) none of the options 
A) 2% 
B) 2.7% 
C) 5.32% 
D) none of the options

Question 5

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 options 
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 options

Question 6

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 options 
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 options

Question 7

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) it will hold only if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries. 
D) none of the options 
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) it will hold only if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries. 
D) none of the options

Question 8

Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Exchange Rate }} & \text { Interest Rate } & \text { APR } \
 S_{0}(\$ / €) & \$ 1.45= €1.00 &i \$  & 4\% \
F_{360}(\$ / €) & \$ 1.48= € 1.00& i € & 3\%
\end{array}$ 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 Use the information below to answer the...

Question 9

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) the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels,and as the purchasing power of a currency sharply declines (due to hyperinflation)that currency will depreciate against stable currencies. 
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) the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels,and as the purchasing power of a currency sharply declines (due to hyperinflation)that currency will depreciate against stable currencies.

Question 10

Will an arbitrageur facing the following prices be able to make money? $$\begin{array} { c c c c c } 
& \text { Borrowing } & \text { Lending } & \text { Bid } & \text { Ask } \
€ & 5 \% & 4.5 \% & \text { Spot } \$ 1.00 = € 1.00 & \$ 1.01 = € 1.00 \
€ & 6 \% & 5.5 \% & \text { Forward } \$ 0.99 = € 1.00 & \$ 1.00 = € 1.00
\end{array}$$

Accepted Answer

A) Yes,borrow $1,000 at 5 percent; trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5 percent; 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 percent; trade for $ at the bid spot rate $1.00 = €1.00; invest $1,000 at 4.5 percent; 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 options 
A) Yes,borrow $1,000 at 5 percent; trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5 percent; 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 percent; trade for $ at the bid spot rate $1.00 = €1.00; invest $1,000 at 4.5 percent; 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 options

Question 11

The Fisher effect 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 12

Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Exchange Rate }} & \text { Interest Rate } & \text { APR } \
 S_{0}(\$ / €) & \$ 1.45= €1.00 &i \$  & 4\% \
F_{360}(\$ / €) & \$ 1.48= € 1.00& i € & 3\%
\end{array}$ If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

€1,000,000

Question 13

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) the technicians tend to use "cause and effect" models and the fundamentalists tend to believe that "history will repeat itself" is the best model. 
D) none of the options 
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) the technicians tend to use "cause and effect" models and the fundamentalists tend to believe that "history will repeat itself" is the best model. 
D) none of the options

Question 14

Some commodities never enter into international trade.Examples include

Accepted Answer

A) nontradables. 
B) haircuts. 
C) housing. 
D) all of the options 
A) nontradables. 
B) haircuts. 
C) housing. 
D) all of the options

Question 15

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 16

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and the one-year forward exchange rate is $1.16/€.What must the spot exchange rate be?

Accepted Answer

A) $1.1768/€ 
B) $1.1434/€ 
C) $1.12/€ 
D) none of the options 
A) $1.1768/€ 
B) $1.1434/€ 
C) $1.12/€ 
D) none of the options

Question 17

Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Exchange Rate }} & \text { Interest Rate } & \text { APR } \
 S_{0}(\$ / €) & \$ 1.60= €1.00 &i \$  & 2 \% \
F_{360}(\$ / €) & \$ 1.58= € 1.00& i € & 4 \%
\end{array}$ If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

$1,000,000

Question 18

If IRP fails to hold,

Accepted Answer

A) pressure from arbitrageurs should bring exchange rates and interest rates back into line. 
B) it may fail to hold due to transactions costs. 
C) it may be due to government-imposed capital controls. 
D) all of the options 
A) pressure from arbitrageurs should bring exchange rates and interest rates back into line. 
B) it may fail to hold due to transactions costs. 
C) it may be due to government-imposed capital controls. 
D) all of the options

Question 19

The Efficient Markets Hypothesis states

Accepted Answer

A) markets tend to evolve to low transactions costs and speedy execution of orders. 
B) current asset prices (e.g.,exchange rates)fully reflect all the available and relevant information. 
C) current exchange rates cannot be explained by such fundamental forces as money supplies,inflation rates and so forth. 
D) none of the options 
A) markets tend to evolve to low transactions costs and speedy execution of orders. 
B) current asset prices (e.g.,exchange rates)fully reflect all the available and relevant information. 
C) current exchange rates cannot be explained by such fundamental forces as money supplies,inflation rates and so forth. 
D) none of the options

Question 20

Suppose you observe a spot exchange rate of $2.00/£.If interest rates are 5 percent APR in the U.S.and 2 percent APR in the U.K.,what is the no-arbitrage 1-year forward rate?

Accepted Answer

A) £2.0588/$ 
B) $2.0588/£ 
C) £1.9429/$ 
D) $1.9429/£ 
A) £2.0588/$ 
B) $2.0588/£ 
C) £1.9429/$ 
D) $1.9429/£

If the exchange rate follows a random walk

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

Suppose that the one-year interest rate is 4.0 percent in Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must the one-year interest rate be in the United States?

Which of the following is a true statement?

One implication of the random walk hypothesis is

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

Use the information below to answer the following question. Exchange Rate Interest Rate APR (\ /) \ 1.45=1.00 i\ 4\% (\ /) \ 1.48=1.00 i 3\% If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Purchasing Power Parity (PPP)theory states that

Will an arbitrageur facing the following prices be able to make money? Borrowing Lending Bid Ask 5\% 4.5\% Spot \ 1.00=1.00 \ 1.01=1.00 6\% 5.5\% Forward \ 0.99=1.00 \ 1.00=1.00

The Fisher effect states that

Use the information below to answer the following question. Exchange Rate Interest Rate APR (\ /) \ 1.45=1.00 i\ 4\% (\ /) \ 1.48=1.00 i 3\% 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

Some commodities never enter into international trade.Examples include

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

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and the one-year forward exchange rate is $1.16/€.What must the spot exchange rate be?

Use the information below to answer the following question. Exchange Rate Interest Rate APR (\ /) \ 1.60=1.00 i\ 2\% (\ /) \ 1.58=1.00 i 4\% If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

If IRP fails to hold,

The Efficient Markets Hypothesis states

Suppose you observe a spot exchange rate of $2.00/£.If interest rates are 5 percent APR in the U.S.and 2 percent APR in the U.K.,what is the no-arbitrage 1-year forward rate?

International Monetary System

Globalization and the Multinational Firm

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

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Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

If the exchange rate follows a random walk

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

Suppose that the one-year interest rate is 4.0 percent in Italy,the spot exchange rate is $1.60/€,and the one-year forward exchange rate is $1.58/€.What must the one-year interest rate be in the United States?

Which of the following is a true statement?

One implication of the random walk hypothesis is

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

Use the information below to answer the following question. Exchange Rate Interest Rate APR (\ /) \ 1.45=1.00 i\ 4\% (\ /) \ 1.48=1.00 i 3\% If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Purchasing Power Parity (PPP)theory states that

Will an arbitrageur facing the following prices be able to make money? Borrowing Lending Bid Ask 5\% 4.5\% Spot \ 1.00=1.00 \ 1.01=1.00 6\% 5.5\% Forward \ 0.99=1.00 \ 1.00=1.00

The Fisher effect states that

Use the information below to answer the following question. Exchange Rate Interest Rate APR (\ /) \ 1.45=1.00 i\ 4\% (\ /) \ 1.48=1.00 i 3\% 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

Some commodities never enter into international trade.Examples include

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

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and the one-year forward exchange rate is $1.16/€.What must the spot exchange rate be?

Use the information below to answer the following question. Exchange Rate Interest Rate APR (\ /) \ 1.60=1.00 i\ 2\% (\ /) \ 1.58=1.00 i 4\% If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

If IRP fails to hold,

The Efficient Markets Hypothesis states

Suppose you observe a spot exchange rate of $2.00/£.If interest rates are 5 percent APR in the U.S.and 2 percent APR in the U.K.,what is the no-arbitrage 1-year forward rate?

International Monetary System

Globalization and the Multinational Firm

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