Deck 7: Speculation and Risk in the Foreign Exchange Market

Question 1

The ________ on an asset is the expected return on the asset in excess of the return on a risk-free asset.

A) risk premium
B) covariance
C) systematic risk
D) beta

Answer 1

A

Question 2

The peso problem got its name during the period 1955-1976 when the ________ authorities were attempting to peg the peso-dollar exchange rate.

A) Argentine
B) Brazilian
C) Mexican
D) Honduran

Answer 2

C

Question 3

Modern portfolio theory developed by William F.Sharpe is the foundation of ________.

A) currency market parity models
B) the balance sheet hedge
C) the capital asset pricing model
D) adjusted net present value model

Answer 3

C

Question 4

Multinational corporations most often hedge their transaction exchange rate risk using currency ________.

A) options
B) futures
C) spreads
D) forward contracts

Question 5

If market efficiency is identified with parity,currency markets that are ________ provide no opportunities for currency traders to earn profits.

A) not in parity
B) in parity
C) in interest rate parity only
D) in purchasing power parity

Question 6

Because systematic risk measures how much an asset's return co-moves with the market,it ________.

A) can be diversified away with the appropriate hedging
B) cannot be diversified away
C) is partially driven by idiosyncratic risk
D) can be completely eliminated using international securities

Question 7

What concept states that there is no systematic difference between the forward rate and the expected future spot rate,and that the expected forward market return is zero?

A) unbiased predictor
B) unbiasedness hypothesis
C) uncovered interest rate parity
D) unsystematic risk

Question 8

The risk that is associated with an asset's return arising from the covariance of the return with the return on a large,well-diversified portfolio is known as ________ risk.

A) business
B) exchange rate
C) market
D) systematic

Question 9

What is the name given to the risk associated with an asset's return arising from the covariance of the return on a large,well-diversified portfolio?

A) covariance
B) systematic risk
C) idiosyncratic risk
D) risk premium

Question 10

When the forward rate is equal to the expected future spot rate,the forward rate is said to be ________ the future spot rate.

A) an information signal for
B) an unbiased predictor of
C) a hedge for
D) in parity with the expected future spot rate

Question 11

What is the market portfolio?

A) the large, well-diversified portfolio that investors should hold according to finance theory
B) the large, well-diversified portfolio without international securities
C) the portfolio that represents a global portfolio
D) the portfolio with strictly domestic securities

Question 12

Regression tests of the unbiasedness hypothesis indicate that it is ________ with real life events.

A) an unbiased indicator of expected future exchange rates
B) very consistent
C) not consistent
D) has a strong correlation to the current account

Question 13

What does the "carry trade" term mean?

A) Borrow in the domestic currency to earn only the higher yield of the dollar implied by the regression.
B) Borrow in the foreign currency to earn only the expected capital appreciation of the dollar implied by the regression.
C) Borrow in the domestic currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the regression.
D) Borrow in the foreign currency to earn both the higher yield and the expected capital appreciation of the dollar implied by the regression.

Question 14

What problem occurred as the result of a monetary stabilization plan consisting of tiding two currencies to the same exchange rate?

A) Peso problem
B) Argentina 2000
C) Swedish problem
D) Survey data problem

Question 15

If there is no systematic difference between the forward rate and the expected future spot rate,then the expected forward market return should be ________.

A) zero
B) greater than one
C) equal to the stockholders' required rate of return
D) less than one but greater than zero

Question 16

If investors ________,we would assume that do not make systematic mistakes when forecasting exchange rates.

A) have rational expectations
B) have complete knowledge of all possible bid and ask quotes
C) know that interest rate differentials provide information about the intensity of devaluations
D) anticipate events that occur

Question 17

The ________ holds that it is the covariance of an asset's return with that of the market portfolio that determines the asset's risk premium.

A) Law of One Price
B) Law of Iterated Expectations
C) Capital Asset Pricing Model
D) Interest Rate Parity Model

Question 18

When the forward rate equals the expected future spot rate,the forward rate is said to be a(n)________ of the future spot rate.

A) unbiased predictor
B) forward market investment
C) forward market return
D) unsystematic risk

Question 19

Which one of the following would some say invalidates the unbiasedness hypothesis?

A) the Fisher Effect
B) the efficient market hypothesis
C) the Siegel paradox
D) the law of one price

Question 20

A phenomenon known as ________ arises when rational investors anticipate events that do not with the frequency that the investors expect.

A) interest rate parity
B) the peso problem
C) rational expectations
D) purchasing power parity

Question 21

To construct the uncertain yen-denominated return from investing one yen in the Swiss franc,what is your first step?

A) convert from yen into Swiss francs in the spot market
B) convert from Swiss francs into yen in the forward market
C) invest in the Swiss money market
D) convert from Swiss francs into yen at the future spot rate

Question 22

Why is it true that the hypothesis that the forward exchange rate is an unbiased predictor of the future spot exchange rate is equivalent to the hypothesis that the forward premium (or discount)on a foreign currency is an unbiased predictor of the rate of its appreciation (or depreciation)?

Question 23

If interest rate parity prevails,what is the return from a hedged foreign currency investment?

Question 24

Which one of the following would be an answer to why the forward exchange rate is an unbiased predictor of the future spot rate?

A) The forward rate is greater than the conditional expectation of the future spot rate.
B) The forward rate equals than the conditional expectation of the future spot rate.
C) The forward rate is less than the conditional expectation of the future spot rate.
D) The current spot rate is greater than the conditional expectation of the future spot rate.

Question 25

To determine the risk premium associated with an asset's expected return,two components of the return are usually cited,only the first,the covariance of the asset's return with the market portfolio,is used,because ________.

A) the risk associated with the asset depends on the market risk
B) it is the only part of the asset's expected return that has risk
C) the risk of the second component can be diversified away
D) the market risk is the most difficult to calculate

Question 26

Which one of the following is NOT a drawback when economists use survey data to examine the unbiasedness hypothesis?

A) Participants may not have an incentive to respond honestly.
B) Participants' investment actions are not consistent with their answers.
C) Selfish motives are generally not significant.
D) They don't know the marginal investor's expectations.

Question 27

If you were attempting to forecast the forward exchange rate for a particular horizon such as 90 days,how would the forward exchange rate be an unbiased predictor of the future spot exchange rate?

Question 28

Describe how you construct the uncertain ?-denominated return from investing 1 ? in the Swiss franc money market.

Question 29

Which one of the following is the only determinant of volatility in the forward currency markets?

A) interest rate parity
B) economic recovery
C) political turmoil
D) variance of the future exchange rates

Question 30

It is often argued that forward exchange rates should be unbiased predictors of future spot exchange rates.When the foreign exchange market is efficient,forward rates are not able to be an unbiased predictor.Is this true or false?

Question 31

What is the prediction of the CAPM for the relationship between the forward exchange rate and the expected future spot exchange rate?

Question 32

What is the main determinant of the volatility of forward market returns?