Deck 14: Exchange Rates and the Foreign Exchange Market: an Asset Approach

Question 1

What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 50 dollars in New York and 100 Pounds in London?

A) 1.5 dollars per British pound
B) 0.5 dollars per British pound
C) 2.5 dollars per British pound
D) 3.5 dollars per British pound
E) 2 dollars per British pound

Answer 1

0.5 dollars per British pound

Question 2

The Japanese currency is called the

A) DM.
B) Yen.
C) Euro.
D) Dollar.
E) Pound.

Answer 2

Yen.

Question 3

Compute how many dollars it would cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds for the following exchange rates.

Answer 3

Question 4

Which one of the following statements is the MOST accurate?

A) A depreciation of a country's currency makes its goods cheaper for foreigners.
B) A depreciation of a country's currency makes its goods more expensive for foreigners.
C) A depreciation of a country's currency makes its goods cheaper for its own residents.
D) A depreciation of a country's currency makes its goods cheaper.
E) An appreciation of a country's currency makes its goods more expensive.

Question 5

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.60 dollars per British pound?

A) 38.125 British pounds
B) 28.125 British pounds
C) 48.125 British pounds
D) 58.125 British pounds
E) 18.125 British pounds

Question 6

Based on the case study, "Exchange Rates, Auto Prices, and Currency Wars," explain why exchange rates are of critical importance to firms in the automobile industry, and how Japan has benefited from changes in the value of the Yen.

Question 7

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 2.00 dollars per British pound?

A) 22.5 British pounds
B) 32.5 British pounds
C) 12.5 British pounds
D) 40 British pounds
E) 30 British pounds

Question 8

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.80 dollars per British pound?

A) 10 British pounds
B) 25 British pounds
C) 20 British pounds
D) 30 British pounds
E) 40 British pounds

Question 9

A(n) ________ of a nation's currency will cause imports to ________ and exports to ________, all other things held constant.

A) depreciation; increase; decrease
B) appreciation; decrease; increase
C) depreciation; decrease; increase
D) appreciation; increase; increase
E) depreciation; decrease; decrease

Question 10

In the year 2012, Shinzo Abe became prime minister of Japan, promising bold policies to improve Japan's economy. What was the focus of his policies and how did they affect Japan's trade position?

Question 11

If the goods' money prices do NOT change, a depreciation of the dollar against the pound

A) makes British sweaters cheaper in terms of American jeans.
B) makes British sweaters more expensive in terms of American jeans.
C) makes American jeans more expensive in terms of British sweaters.
D) doesn't change the relative price of sweaters and jeans.
E) makes British jeans more expensive in Britain.

Question 12

What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 60 dollars in New York and 30 Pounds in London?

A) 1.5 dollars per British pound
B) 0.5 dollars per British pound
C) 2.5 dollars per British pound
D) 3.5 dollars per British pound
E) 2 dollars per British pound

Question 13

How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.80 dollars per one British pound?

A) 40 dollars
B) 90 dollars
C) 50 dollars
D) 100 dollars
E) 95 dollars

Question 14

If the goods' money prices do NOT change, an appreciation of the dollar against the pound

A) makes British sweaters cheaper in terms of American jeans.
B) makes British sweaters more expensive in terms of American jeans.
C) doesn't change the relative price of sweaters and jeans.
D) makes American jeans cheaper in terms of British sweaters.
E) makes British jeans more expensive in Britain.

Question 15

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.50 dollars per British pound?

A) 10 British pounds
B) 20 British pounds
C) 30 British pounds
D) 35 British pounds
E) 25 British pounds

Question 16

An appreciation of a country's currency

A) decreases the relative price of its exports and lowers the relative price of its imports.
B) raises the relative price of its exports and raises the relative price of its imports.
C) lowers the relative price of its exports and raises the relative price of its imports.
D) raises the relative price of its exports and lowers the relative price of its imports.
E) raises the relative price of its exports and does not affect the relative price of its imports.

Question 17

When a country's currency depreciates

A) foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive.
B) foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper.
C) foreigners find that its exports are cheaper; however, domestic residents are not affected.
D) foreigners are not affected, but domestic residents find that imports from abroad are more expensive.
E) foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more expensive.

Question 18

How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.25 dollars per one British pound?

A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 62.5 dollars
E) 40 British pounds

Question 19

How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.50 dollars per one British pound?

A) 50 dollars
B) 60 dollars
C) 70 dollars
D) 80 dollars
E) 75 dollars

Question 20

Compute how many British pounds it would cost to buy a pair of American designer jeans costing $45.

Question 21

The action of arbitrage is

A) the process of buying a currency cheap and selling it dear.
B) the process of buying a currency dear and selling it cheap.
C) the process of buying and selling currency at the same price.
D) the process of selling currency at different prices in different markets.
E) the process of buying a currency and holding onto it to take it off the market.

Question 22

In 2013, about

A) 20 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.
B) 10 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.
C) 30 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.
D) 40 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.
E) 87 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

Question 23

The largest trading of foreign exchange occurs in

A) New York.
B) London.
C) Tokyo.
D) Frankfurt.
E) Singapore.

Question 24

Futures contracts differ from forward contracts in that

A) future contracts ensures you will receive a certain amount of foreign currency at a specified future date.
B) future contracts bind you into your end of the deal.
C) future contracts allow you to sell your contract on an organized futures exchange.
D) future contracts are a disadvantage if your views about the future spot exchange rate are to change.
E) futures contracts don't allow you to realize a profit or a loss right away.

Question 25

The following is an example of Radio Shack hedging its foreign currency risk:

A) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to buy yen.
B) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to sell yen.
C) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen at a spot-exchange 1 month from now.
D) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen at a spot-exchange 1 month from now.
E) needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen in a forward-exchange deal.

Question 26

A foreign exchange swap

A) is a spot sale of a currency.
B) is a forward repurchase of the currency.
C) is a spot sale of a currency combined with a forward repurchase of the currency.
D) is a spot sale of a currency combined with a forward sale of the currency.
E) make up a negligible proportion of all foreign exchange trading.

Question 27

Exxon Mobil wants to pay 160,000 to a German supplier. They get an exchange rate quotation from its own commercial bank and instructs it to debit their dollar account and pay 160,000 to the supplier's German account. If the exchange rate quoted is $1.2 per euro, how much is debited to Exxon Mobil's account?

A) $160,000
B) $172,000
C) $180,000
D) $192,000
E) $150,000

Question 28

Explain what is a "vehicle currency." Why is the U.S. dollar considered a vehicle currency?

Question 29

Which of the following statements is TRUE about a vehicle currency?

A) It is widely used to denominate contracts made by parties who reside in the country that issues the vehicle currency.
B) The dollar is sometimes called a vehicle currency because of its pivotal role in many foreign exchange deals.
C) There is much skepticism that the euro will ever evolve into a vehicle currency on par with the dollar.
D) The pound sterling, once second only to the dollar as a key international currency, is beginning to rise in importance.
E) Vehicle currencies include nondeliverable currencies like the renminbi.

Question 30

By April 2013

A) only about 10 percent of foreign exchange trades were against euros.
B) only about 24 percent of foreign exchange trades were against euros.
C) only about 33 percent of foreign exchange trades were against euros.
D) only about 42 percent of foreign exchange trades were against euros.
E) only about 60 percent of foreign exchange trades were against euros.

Question 31

Which of the following is NOT a major actor in the foreign exchange market?

A) corporations
B) central banks
C) commercial banks
D) non-bank financial institutions
E) tourists

Question 32

Which of the following is NOT an example of a financial derivative?

A) forwards
B) bonds
C) swaps
D) futures
E) options

Question 33

Find the exchange rate between the dollar and the British pounds for the following cases.

Question 34

Which of the following type of funds cater to wealthy individuals, are NOT bound by government regulations, and are actively traded in foreign exchange markets?

A) pension funds
B) mutual funds
C) hedge funds
D) exchange funds

Question 35

Who are the major participants in the foreign exchange market?

Question 36

Which major actor is at the center of the foreign exchange market?

A) corporations
B) central banks
C) commercial banks
D) non-bank financial institutions
E) individual firms

Question 37

Forward and spot exchange rates

A) are necessarily equal.
B) do not move closely together.
C) are always such that the forward exchange rate is higher.
D) move closely together and are equal on the value date.
E) are unrelated to the value date.

Question 38

Explain the purpose of the following figure.

Question 39

Which one of the following statements is the MOST accurate?

A) Spot exchange rates are always higher than forward exchange rates.
B) Spot exchange rates are always lower than forward exchange rates.
C) Spot exchange rates and forward exchange rates are always equal.
D) Spot exchange rates and forward exchange rates are equal when the value date and the date of the spot transaction are the same.
E) Spot exchange rates and forward exchange rates never move closely together.

Question 40

The future date on which the currencies are actually exchanged is called what?

A) the value date
B) the spot exchange date
C) the two-day window
D) the commitment date
E) the forward exchange rate

Question 41

Assume that the euro interest rate is constant at 5 percent, and that the expected exchange rate is 1.05 dollars per one euro. Find the expected dollar return on euro deposits for the following cases.

Question 42

If the dollar interest rate is 4 percent, the euro interest rate is 6 percent, then

A) an investor should invest only in dollars.
B) an investor should invest only in euros.
C) an investor should be indifferent between dollars and euros.
D) invest only in dollars if the exchange rate is expected to remain constant.
E) invest only in euros if the exchange rate is expected to remain constant.

Question 43

What are the three factors that affect the demand for foreign currency?

Question 44

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then an investor should

A) invest only in dollars.
B) invest only in euros.
C) be indifferent between dollars and euros.
D) invest only in dollars if the exchange rate is expected to remain constant.
E) invest only in euros if the exchange rate is expected to remain constant.

Question 45

What is the expected dollar rate of return on dollar deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%?

A) 10%
B) 11%
C) -1%
D) 0%
E) 15%

Question 46

What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.167 per euro, next year's expected exchange rate is $1.10 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%?

A) 10%
B) 11%
C) -1%
D) 0%

Question 47

Using the data in the table above, plot today's dollar/euro exchange rate against the expected dollar return on euro deposits.

Question 48

Explain risk and liquidity of assets.

Question 49

Determine for each, whether the interest parity condition holds or not, if = 1.10

Question 50

The dollar rate of return on euro deposits is

A) approximately the euro interest rate plus the rate of depreciation of the dollar against the euro.
B) approximately the euro interest rate minus the rate of depreciation of the dollar against the euro.
C) the euro interest rate minus the rate of inflation against the euro.
D) the rate of appreciation of the dollar against the euro.
E) the euro interest rate plus the rate of inflation against the euro.

Question 51

For the table below calculate the EXACT relationship.

Question 52

Which one of the following statements is the MOST accurate?

A) Since dollar and yen interest rates are measured in comparable terms, they can move quite differently over time.
B) Since dollar and yen interest rates are not measured in comparable terms, they can move quite differently over time.
C) Since dollar and yen interest rates are measured in comparable terms, they move quite the same over time.
D) Since dollar and yen interest rates are measured in comparable terms, they still move quite differently over time.
E) Since dollar and yen interest rates are so similar, they move quite the same way over time.

Question 53

What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%?

A) 10%
B) 11%
C) -1%
D) 0%
E) 15%

Question 54

For the following 15 cases, compare the dollar rates of return on dollar and euro deposits.

Question 55

If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, then

A) an investor should invest only in dollars if the expected dollar depreciation against the euro is 4 percent.
B) an investor should invest only in euros if the expected dollar depreciation against the euro is 4 percent.
C) an investor should be indifferent between dollars and euros if the expected dollar depreciation against the euro is 4 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.

Question 56

What is the interest parity condition?

Question 57

Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euro it is 4 percent. Under these assumptions

A) interest parity does not hold.
B) interest parity does hold.
C) it is hard to tell whether interest parity does or does not hold.
D) interest parity fluctuates.
E) Not enough information is given to answer the question.

Question 58

Explain the purpose of the following figure 14-2 from the text in the context of the interest rates on the dollar and the Japanese Yen between 1980 and 2010.

Question 59

If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, then

A) an investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.
B) an investor should invest only in euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.
C) an investor should be indifferent between dollars and euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.

Question 60

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then

A) an investor should invest only in dollars if the expected dollar depreciation against the euro is 8 percent.
B) an investor should invest only in euros if the expected dollar depreciation against the euro is 8 percent.
C) an investor should be indifferent between dollars and euros if the expected dollar depreciation against the euro is 8 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.

Question 61

Calculate the interest rate in the United States, if interest parity condition holds, for the following 15 cases.

Question 62

Assume the U.S. interest rate is 10 percent, and the interest rate on euro deposits is 5 percent. For the following exchange rates, find the forward exchange rates.

Question 63

Discuss the effects of a rise in the interest rate paid by euro deposits on the exchange rate.

Question 64

The covered interest rate parity condition can be stated as follows: The interest rate on dollar deposits equals the interest rate on euro deposits ________ the forward ________ on dollars against euros.

A) plus; premium
B) plus; discount
C) times; premium
D) minus; premium
E) minus; discount

Question 65

Show graphically a drop in the interest rate paid by euro deposits. What is the effect on the dollar?

Question 66

Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium.

Question 67

Explain why (holding interest rates constant), a rise in the expected depreciation in a country's currency leads to depreciation of that currency today.

Question 68

Discuss the effects of a rise in the dollar interest rate on the exchange rate.

Question 69

Which one of the following statements is the MOST accurate?

A) A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
B) A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.
C) A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.
D) For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
E) A rise in the interest rate offered by the dollar causes the euro to appreciate.

Question 70

Which one of the following statements is the MOST accurate?

A) For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the current exchange rate.
B) For a fixed interest rate, a rise in the expected future exchange rate causes a fall in the current exchange rate.
C) For a fixed interest rate, a rise in the expected future exchange rate does not cause a change in the current exchange rate.
D) For a given dollar interest rate and a constant expected exchange rate, a rise in the interest rate of the euro causes the dollar to depreciate.
E) For a fixed interest rate, a fall in the expected future exchange rate causes a rise in the current exchange rate.

Question 71

Calculate the Expected Dollar Depreciation Rate against the euro and the expected dollar return on euro deposits if the expected exchange rate is $1.10 per euro.

Question 72

Calculate the interest rate in the euro zone if interest parity condition holds, for the following 15 cases.

Question 73

The covered interest rate parity condition can be stated as follows: The interest rate on dollar deposits equals the interest rate on euro deposits ________ the forward ________ on euros against dollars.

A) plus; premium
B) minus; premium
C) plus; discount
D) minus; discount
E) times; premium