Question 1

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 2

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 3

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward BID exchange rate in $ per € that satisfies IRP from the perspective of a customer.

Accepted Answer

The answer of USING YOUR PREVIOUS ANSWERS and a bit...

Question 4

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m, traded for dollars at the spot rate and invested at i$ = 2%.

Accepted Answer

Question 5

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/€

Question 6

Generating exchange rate forecasts with the fundamental approach involves

Accepted Answer

A) looking at charts of the exchange rate and extrapolating the patterns into the future 
B) estimation of a structural model 
C) substituting the estimated values of the independent variables into the estimated structural model to generate the forecast 
D) both b and c 
A) looking at charts of the exchange rate and extrapolating the patterns into the future 
B) estimation of a structural model 
C) substituting the estimated values of the independent variables into the estimated structural model to generate the forecast 
D) both b and c

Question 7

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 8

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 9

If the annual inflation rate is 2.5 percent in the United States and 4 percent in the U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate, assuming that PPP initially held, is _____.

Accepted Answer

A) parity 
B) 0.9710 
C) -0.0198 
D) 4.5 
A) parity 
B) 0.9710 
C) -0.0198 
D) 4.5

Question 10

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 11

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 12

An arbitrage is best defined as

Accepted Answer

A) a legal condition imposed by the CFTC. 
B) the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. 
C) the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits. 
D) None of the above 
A) a legal condition imposed by the CFTC. 
B) the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. 
C) the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making guaranteed profits. 
D) None of the above

Question 13

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 14

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

Question 15

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 16

A formal statement of IRP is

Accepted Answer

A)    . 
B)    . 
C)    . 
D)    . 
A)    . 
B)    . 
C)    . 
D)    .

Question 17

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 USING YOUR PREVIOUS ANSWERS and a bit...

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 above 
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 above

Question 19

The price of a McDonald's Big Mac sandwich

Accepted Answer

A) is about the same in the 120 countries that McDonalds does business in. 
B) varies considerably across the world in dollar terms. 
C) supports PPP. 
D) none of the above. 
A) is about the same in the 120 countries that McDonalds does business in. 
B) varies considerably across the world in dollar terms. 
C) supports PPP. 
D) none of the above.

Question 20

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,...

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

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

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.

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward BID exchange rate in $ per € that satisfies IRP from the perspective of a customer.

USING YOUR PREVIOUS ANSWERS and a bit more work, find the 1-year forward exchange rate in $ per € that that satisfies IRP from the perspective of a customer who borrowed €1m, traded for dollars at the spot rate and invested at i$ = 2%.

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?

Generating exchange rate forecasts with the fundamental approach involves

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

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%.

If the annual inflation rate is 2.5 percent in the United States and 4 percent in the U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate, assuming that PPP initially held, is _____.

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?

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

An arbitrage is best defined as

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

Interest Rate Parity (IRP) is best defined as

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

A formal statement of IRP is

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.

If IRP fails to hold

The price of a McDonald's Big Mac sandwich

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

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 that satisfies IRP from the perspective of a customer who borrowed €1m, traded for dollars at the spot rate and invested at i_$ = 2%.

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%.