Question 1

Assume that a bank's bid rate on Swiss francs is &#163;0.25 and its ask rate is &#163;0.26. Its bid-ask percentage spread is:&#10;A)4.00%.&#10;B)about 3.85%.&#10;C)4.26%.&#10;D)about 4.17%.

Accepted Answer

4.26%.&#10;

Question 2

The value of the Australian dollar (A$) today is &#163;0.41. Yesterday, the value of the Australian dollar was &#163;0.38. The Australian dollar by _______%.&#10;A)depreciated; 7.90&#10;B)appreciated; 7.90&#10;C)depreciated; 7.30&#10;D)appreciated; 7.30

Accepted Answer

depreciated; 7.30&#10;

Question 3

Assume the following information regarding UK and European annualized interest rates: Currency Lending Rate Borrowing Rate UK pound (£) 6.73% 7.20% Euro (€) 6.80% 7.28% Milly Bank can borrow either £20 million or €20 million. The current spot rate of the euro is £0.75. Furthermore, Milly Bank expects the spot rate of the euro to be £0.76 in 90 days. What is Milly Bank's pound profit from speculating if the spot rate of the euro is indeed £0.76 in 90 days?

A)£251,200
B)£251,386
C)£541,324
D)£561,813

£251,200

Accepted Answer

Milly Bank should borrow €20 million at 7.28% for 90 days, convert to pounds at £0.75, invest in pounds at 6.73%, and convert back to euros at £0.76. The profit in pounds is calculated as follows: Borrow €20 million, convert to £15 million, invest to get £15,252,000, convert back to €20,068,421, repay €20,364,000, resulting in a profit of €295,579, which is £251,200 at £0.76.

Question 4

Assume the U.S. dollar is worth &#163;0.55, and the Canadian dollar is worth &#163;0.47. What is the value of the Canadian dollar in U.S. dollars to the nearest cent?&#10;A)1.54.&#10;B)0.42.&#10;C)0.15&#10;D)0.85

Accepted Answer

To find the value of the Canadian dollar in U.S. dollars, divide the value of the Canadian dollar in pounds (£0.47) by the value of the U.S. dollar in pounds (£0.55). This gives 0.47 / 0.55 = 0.8545, which rounds to $0.85.

Question 5

Arbitrageurs in foreign exchange markets:&#10;A)take advantage of the small inconsistencies that develop between markets.&#10;B)attempt to make profits by outguessing the market.&#10;C)make their profits through the spread between bid and offer rates of exchange.&#10;D)need foreign exchange in order to buy foreign goods.

Accepted Answer

Arbitrageurs exploit price discrepancies between markets to make risk-free profits, which aligns with choice A.

Question 6

Covered interest rate parity occurs as the result of:&#10;A)the actions of market-makers.&#10;B)purchasing power parity&#10;C)interest rate arbitrage.&#10;D)stabilising speculation.

Accepted Answer

Covered interest rate parity occurs due to interest rate arbitrage, where investors seek to profit from the difference in interest rates between two countries while hedging against currency risk.

Question 7

Given the following interest rates on different currencies, which of the following is true? Sterling 6 percent. Euro 3.5 percent. Dollar 6.25 percent. Yen 0.5 percent.&#10;A)The dollar must be at a forward premium to the yen because a very high percentage of world trade is carried out in dollars.&#10;B)The yen must be at a forward premium to the euro because one can borrow yen much more cheaply than euro.&#10;C)The euro must be at a forward premium to sterling because no one believes that the euro can continue to fall in value.&#10;D)The dollar must be at a forward premium to the yen because no one would be willing to hold yen at such a low rate of interest.

Accepted Answer

Interest rate parity theory suggests that currencies with lower interest rates will trade at a forward premium to compensate for the lower interest income. Since the yen has a significantly lower interest rate than the euro, it should be at a forward premium to the euro.

Question 8

Which of the following best explains the fact that interest rates on the euro are lower than those on the pound? Inflationary expectations are higher in the UK than in the eurozone.&#10;A)British markets are offshore from mainland Europe.&#10;B)Unemployment is higher in the eurozone than in the UK.&#10;C)Bond prices are lower in the UK than in the eurozone.&#10;D)The euro is a weaker currency than sterling.

Accepted Answer

British markets are offshore from mainland Europe, which means that they are not subject to the same regulations as the eurozone. This makes them more attractive to investors, who are willing to accept lower interest rates in exchange for the increased flexibility and freedom that comes with investing in an offshore market.

Question 9

The euro is:&#10;A)a currency, the value of which is determined by demand and supply.&#10;B)the currency of EU member countries.&#10;C)a weighted average of the currencies of EU member countries.&#10;D)a currency that is only traded offshore.

Accepted Answer

The euro is a currency whose value is determined by demand and supply in the foreign exchange market.

Question 10

Overshooting models of the exchange rate are an attempt to explain:&#10;A)why purchasing power parity plays no role in determining the value of a currency.&#10;B)why exchange rates are so volatile.&#10;C)why the foreign exchange market is never in equilibrium.&#10;D)why forward rates of exchange are not good predictors of future spot rates of exchange.

Accepted Answer

Overshooting models of the exchange rate, developed by economists such as Rudi Dornbusch, attempt to explain why exchange rates are more volatile than differences in national price levels or interest rates would suggest. These models suggest that in response to a change in monetary policy, exchange rates will initially "overshoot" their long-term equilibrium value before eventually settling at that value, contributing to their observed volatility.

Question 11

An increase in the U.S. demand for the euro&#10;A)causes a rise in the dollar exchange rate.&#10;B)causes the euro to appreciate.&#10;C)causes the dollar to depreciate.&#10;D)causes Euro Area goods to be relatively more expensive.

Accepted Answer

The answer of An increase in the U.S. demand for...

Question 12

Which of the following would NOT be a cause for an increased American demand for the euros?&#10;A)The United States having lower interest rates than the Euro Area&#10;B)Increased American demand for Euro Area goods&#10;C)The expectation by speculators that the value of the euro is edging up&#10;D)More economic expansion in the United States

Accepted Answer

The answer of Which of the following would NOT be...

Question 13

Which of the following examples definitely illustrates a depreciation of the U.S. dollar?&#10;A)The dollar exchanges for 1 pound and then exchanges for 1.2 pounds.&#10;B)The dollar exchanges for 250 yen and then exchanges for 275 francs.&#10;C)The dollar exchanges for 100 francs and then exchanges for 120 yen.&#10;D)The dollar exchanges for 120 francs and then exchanges for 100 francs

Accepted Answer

The answer of Which of the following examples definitely illustrates...

Question 14

If purchasing power parity were to hold even in the short run, then:&#10;A)quoted nominal exchange rates should be stable over time.&#10;B)real exchange rates should tend to increase over time;&#10;C)real exchange rates should tend to decrease over time;&#10;D)real exchange rates should be stable over time;

Accepted Answer

The answer of If purchasing power parity were to hold...

Deck 2: International Finance: Foreign Exchange and Currency Markets