Question 1

Which of the following is the best deﬁnition of generalized Fisher effect (GFE).

Accepted Answer

The generalized Fisher effect (GFE) is a theory that real interest rates are equal across countries. Option A refers to British and Irish government securities, option B describes the interest rate parity condition, option D refers to a currency swap, and option E describes the forward exchange rate used in a forward trade.

Question 2

The theory that real interest rates across countries are equal is called ________________.

Accepted Answer

The theory that real interest rates across countries are equal is called the international Fisher effect. The other options refer to different theories or concepts related to exchange rates and interest rates.

Question 3

_____ explains the absolute level of the exchange rate.

Accepted Answer

Absolute purchasing power parity theory states that the exchange rate between two currencies will be equal to the ratio of the price levels in each country. Thus, it explains the absolute level of the exchange rate. The other options do not specifically address the absolute level of exchange rates.

Question 4

Which one of the following statements is correct concerning the net present value method of analyzing international capital budgeting projects?

Accepted Answer

The answer of Which one of the following statements is...

Question 5

The translation exposure to exchange rate risk is best described as:

Accepted Answer

Translation exposure refers to the accounting challenges faced by international firms when converting financial statements from foreign subsidiaries into the parent company's reporting currency.

Question 6

Assume that the Euro is selling in the spot market for $1.10. Simultaneously, in the 3-month forward market the Euro is selling for $1.12. Which one of the following statements correctly describes this
Situation?

Accepted Answer

The Euro is selling at a premium relative to the dollar. This is because in the forward market, the Euro is selling for a higher price (1.12 dollars) than in the spot market (1.10 dollars). This is indicative of investors expecting the Euro to appreciate in value relative to the dollar over the next 3 months.

Question 7

The condition that states the current forward exchange rate is an unbiased predictor of the future spot exchange rate is called:

Accepted Answer

The unbiased forward rates condition states that the current forward exchange rate, which is the expected future spot exchange rate, is an unbiased predictor of the actual future spot exchange rate. In other words, the forward rate should be an accurate reflection of the expected future exchange rate, without any bias. This condition is important in the foreign exchange market, as it helps investors and traders make informed decisions about buying and selling currencies.

Question 8

_____ holds because of the possibility of covered interest arbitrage.

Accepted Answer

Interest rate parity holds because it ensures that there is no opportunity for covered interest arbitrage, where investors can exploit currency and interest rate differentials to make riskless profits.

Question 9

If interest rate parity holds between two countries then it must be true that:

Accepted Answer

Interest rate parity is a theory that states that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate. This implies that the exchange rate adjusts to keep purchasing power constant across the two currencies. Option A is incorrect because interest rates can be different between the two countries, but the differential will be reflected in the exchange rates. Option B is incorrect because interest rate parity suggests that there are no arbitrage opportunities due to interest rate differentials. Option D is incorrect because interest rate parity does not make any predictions about future exchange rates or their unbiasedness.

Question 10

If the inﬂation rate in Canada is lower than in Mexico, then:

Accepted Answer

The answer of If the inﬂation rate in Canada is...

Question 11

Which of the following is the best deﬁnition of forward exchange rate.

Accepted Answer

The best definition of forward exchange rate is the agreed-on exchange rate to be used in a forward trade. This involves an agreement to exchange currency at some time in the future at a predetermined rate, known as the forward exchange rate. It is used by businesses and investors to manage their currency risk and lock in a favorable exchange rate.

Question 12

Which one of the following statements concerning forward trades is correct?

Accepted Answer

A forward trade involves setting the exchange rate at the time of the agreement, but the actual exchange of currencies occurs at a specified future date, such as 90 days later.

Question 13

The condition that relates interest rate differentials between countries to the percentage difference between their forward and spot exchange rates is called:

Accepted Answer

Interest rate parity is the condition that describes the relationship between the interest rate differentials of two countries and the percentage difference between the forward and spot exchange rates of their currencies. It holds that the difference in interest rates between two countries is equal to the difference between the forward and spot exchange rates, adjusted for the forward premium or discount. This principle helps in understanding how interest rates and exchange rates are interconnected in the global financial markets.

Question 14

Which of the following is the best deﬁnition of forward trade.

Accepted Answer

Forward trade refers to an agreement between two parties to exchange currency at a future date at an agreed-upon exchange rate. This allows businesses and individuals to hedge against currency fluctuations and manage their foreign exchange risk. Therefore, the best definition is option D.

Question 15

Which one of the following is a supplier of Canadian dollars in the foreign exchange market?

Accepted Answer

A Canadian importer of clothes from China needs to purchase Canadian dollars in order to pay their Chinese suppliers. This makes them a supplier of Canadian dollars in the foreign exchange market.

Question 16

Which of the following is the best deﬁnition of interest rate parity (IRP).

Accepted Answer

Interest rate parity (IRP) is a condition stating that the interest rate differential between two countries is equal to the difference between the forward exchange rate and the spot exchange rate. This means that investors should expect to receive the same return on investment in any currency, adjusted for the difference in interest rates between the two countries. IRP is an important concept in international finance and is used to determine the appropriate forward exchange rate for currency trades.

Question 17

The condition stating that the expected percentage change in the exchange rate is equal to the difference in interest rates between the two countries is called:

Accepted Answer

Uncovered interest rate parity states that the expected percentage change in the exchange rate is equal to the difference in interest rates between the two countries.

Question 18

________________ will tell you the price of agreeing today to take delivery of $1US 60 days from now.

Accepted Answer

The forward exchange rate is the rate at which two parties agree to exchange currencies at a future date, usually set at a fixed amount of time from the agreement date. Therefore, it is the rate that will tell you the price of agreeing today to take delivery of $1US 60 days from now.

Question 19

Which of the following is the best deﬁnition of Gilts.

Accepted Answer

The answer of Which of the following is the best...

Question 20

The notion that exchange rates adjust to keep the purchasing power of a currency constant across countries is called:

Accepted Answer

The answer of The notion that exchange rates adjust to...

Quiz 21: International Corporate Finance

Which of the following is the best deﬁnition of generalized Fisher effect (GFE) .