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

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

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) 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 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) All of the above

Question 4

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

Accepted Answer

The answer of If you borrowed $1,000,000 for one year,...

Question 5

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

Accepted Answer

A) as a group, they do not do a better job of forecasting the exchange rate than the forward rate does. 
B) the average forecaster is better than average at forecasting. 
C) the forecasters do a better job of predicting the future exchange rate than the market does. 
D) none of the above 
A) as a group, they do not do a better job of forecasting the exchange rate than the forward rate does. 
B) the average forecaster is better than average at forecasting. 
C) the forecasters do a better job of predicting the future exchange rate than the market does. 
D) none of the above

Question 6

Academic studies tend to discredit the validity of technical analysis. Which of the following is true?

Accepted Answer

A) This can be viewed as support technical analysis. 
B) It can be rational for individual traders to use technical analysis-if enough traders use technical analysis the predictions based on it can become self-fulfilling to some extent, at least in the short-run. 
C) That can be explained by the difficulty professors may have in differentiating between technical analysis and fundamental analysis. 
D) None of the above 
A) This can be viewed as support technical analysis. 
B) It can be rational for individual traders to use technical analysis-if enough traders use technical analysis the predictions based on it can become self-fulfilling to some extent, at least in the short-run. 
C) That can be explained by the difficulty professors may have in differentiating between technical analysis and fundamental analysis. 
D) None of the above

Question 7

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 above 
A) $1.1768/€ 
B) $1.1434/€ 
C) $1.12/€ 
D) None of the above

Question 8

Although IRP tends to hold, it may not hold precisely all the time

Accepted Answer

A) due to transactions costs, like the bid ask spread. 
B) due to asymmetric information. 
C) due to capital controls imposed by governments. 
D) both a and c 
A) due to transactions costs, like the bid ask spread. 
B) due to asymmetric information. 
C) due to capital controls imposed by governments. 
D) both a and c

Question 9

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 If you had borrowed $1,000,000 and traded...

Question 10

Good, inexpensive, and fairly reliable predictors of future exchange rates include

Accepted Answer

A) today's exchange rate. 
B) current forward exchange rates (e.g. the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today). 
C) esoteric fundamental models that take an econometrician to use and no one can explain. 
D) both a and b 
A) today's exchange rate. 
B) current forward exchange rates (e.g. the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today). 
C) esoteric fundamental models that take an econometrician to use and no one can explain. 
D) both a and b

Question 11

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 12

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year interest rate in the U.S. is i$ = 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 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 13

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. If an astute trader finds an arbitrage, what is the net cash flow in one year?

Accepted Answer

A) $10,690 
B) $15,000 
C) $46,207 
D) $21,964.29 
A) $10,690 
B) $15,000 
C) $46,207 
D) $21,964.29

Question 14

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 If you had €1,000,000 and traded it...

Question 15

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 If you had €1,000,000 and traded it...

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

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 18

There is (at least) one profitable arbitrage at these prices. What is it?

Accepted Answer

The answer of There is (at least) one profitable arbitrage...

Question 19

Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5% APR in the U.S. and 2% 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/£

Question 20

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 If you had borrowed $1,000,000 and traded...

Purchasing Power Parity (PPP) theory states that

Forward parity states that

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

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

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

Academic studies tend to discredit the validity of technical analysis. Which of the following is true?

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?

Although IRP tends to hold, it may not hold precisely all the time

If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?

Good, inexpensive, and fairly reliable predictors of future exchange rates include

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

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

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

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

If the exchange rate follows a random walk

There is (at least) one profitable arbitrage at these prices. What is it?

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

If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?

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

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Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

Purchasing Power Parity (PPP) theory states that

Forward parity states that

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

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

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

Academic studies tend to discredit the validity of technical analysis. Which of the following is true?

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?

Although IRP tends to hold, it may not hold precisely all the time

If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?

Good, inexpensive, and fairly reliable predictors of future exchange rates include

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

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

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

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

If the exchange rate follows a random walk

There is (at least) one profitable arbitrage at these prices. What is it?

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

If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?

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