Question 1

An increase in the pound price of the dollar represents:&#10;A)an appreciation of the dollar&#10;B)a depreciation of the dollar&#10;C)an appreciation of the pound&#10;D)a devaluation of the dollar

Accepted Answer

When the pound price of the dollar increases, it means that it takes more pounds to buy a dollar, indicating that the dollar has appreciated in value relative to the pound.

Question 2

When the interest differential in favor of the foreign country is equal to the forward premium on the foreign currency,we:&#10;A)are at covered interest arbitrage parity&#10;B)are not at covered interest arbitrage parity&#10;C)may or may not be at covered interest arbitrage parity&#10;D)we cannot say without additional information

Accepted Answer

B

Question 3

Destabilizing speculation refers to the:&#10;A)sale of the foreign currency when the exchange rate falls or is low&#10;B)purchase of the foreign currency when the exchange rate falls or is low&#10;C)sale of the foreign currency when the exchange rate rises or is high&#10;D)all of the above

Accepted Answer

A

Question 4

Which is not a function of the foreign exchange market?&#10;A)to transfer funds from one nation to another&#10;B)to finance trade&#10;C)to diversify risks&#10;D)to provide the facilities for hedging

Accepted Answer

The foreign exchange market primarily facilitates the transfer of funds between nations, finances international trade, and provides facilities for hedging against currency fluctuations. Diversifying risks is a broader financial strategy not specific to the functions of the foreign exchange market.

Question 5

If SR=$1/&#8364;1 and the three-month FR=$0.99/&#8364;1:&#10;A)the euro is at a three-month forward discount of 1%&#10;B)the euro is at a forward discount of 1% per year&#10;C)the euro is at a three-month forward premium of 1%&#10;D)the dollar is at a three-month forward discount of 1%

Accepted Answer

The euro is at a three-month forward discount of 1% because the forward rate ($0.99/€1) is less than the spot rate ($1/€1), indicating that the euro is expected to weaken against the dollar.

Question 6

A change from $1=&#8364;1 to $2=&#8364;1 represents&#10;A)depreciation of the dollar&#10;B)an appreciation of the dollar&#10;C)a depreciation of the pound&#10;D)none of the above

Accepted Answer

This change means that now it takes $2 to buy what €1 could buy before, indicating that the value of the dollar has decreased relative to the euro, which is a depreciation of the dollar.

Question 7

A shortage of pounds under a flexible exchange rate system results in:&#10;A)a depreciation of the pound&#10;B)a depreciation of the dollar&#10;C)an appreciation of the dollar&#10;D)no change in the exchange rate

Accepted Answer

The answer of A shortage of pounds under a flexible...

Question 8

A capital outflow from New York to Frankfurt under covered interest arbitrage can take place if the interest differential in favor of Frankfurt is:&#10;A)smaller than the forward discount on the euro&#10;B)equal to the forward discount on the euro&#10;C)larger than the forward discount on the euro&#10;D)none of the above.

Accepted Answer

In covered interest arbitrage, an investor can borrow currency in a low-interest rate country and invest it in a high-interest rate country to earn a profit. However, this strategy only works if the expected return from the investment is greater than the cost of borrowing, which includes both the interest rate differential and the forward discount or premium on the currency.

If the interest differential in favor of Frankfurt is smaller than the forward discount on the euro, then the expected return from the investment would be lower than the cost of borrowing, making the strategy unprofitable.

If the interest differential is equal to the forward discount on the euro, then the investor's expected return will just cover the cost of borrowing, resulting in no profit.

Therefore, the only scenario in which a capital outflow from New York to Frankfurt can occur under covered interest arbitrage is if the interest differential in favor of Frankfurt is larger than the forward discount on the euro. This would create a profitable opportunity for investors to borrow in New York and invest in Frankfurt, generating a capital outflow from the former to the latter.

Question 9

The currency of the nation with the lower interest rate is usually at a&#10;A)forward premium&#10;B)forward discount&#10;C)covered interest arbitrage parity&#10;D)any of the above

Accepted Answer

When a country has a lower interest rate compared to another, its currency is often at a forward premium because investors expect it to appreciate in the future, compensating for the lower interest rate.

Question 10

Hedging refers to:&#10;A)the acceptance of a foreign exchange risk&#10;B)the covering of a foreign exchange risk&#10;C)foreign exchange speculation&#10;D)foreign exchange arbitrage

Accepted Answer

Hedging refers to covering or reducing the risk of foreign exchange movements by taking a position that will offset any potential losses. This can be done through various financial instruments such as futures, options, or swaps. Therefore, choice B, the covering of a foreign exchange risk, is the best answer. Choices A, C, and D are incorrect as they do not accurately describe hedging.

Question 11

An effective exchange rate is a:&#10;A)spot rate&#10;B)forward rate&#10;C)flexible exchange rates&#10;D)weighted average of the exchange rates between the domestic currency and

Accepted Answer

The answer of An effective exchange rate is a:&#10;A)spot rate&#10;B)forward...

Question 12

A U.S.importer scheduled to make a payment of &#8364;100,000 in three months can hedge his foreign exchange risk by:&#10;A)purchasing $100,000 in the forward market for delivery in three months&#10;B)selling &#8364;100,000 in the spot market for delivery in three months&#10;C)purchasing &#8364;100,000 in the forward market for delivery in three months&#10;D)selling &#8364;100,000 in the spot market for delivery in three months

Accepted Answer

The answer of A U.S.importer scheduled to make a payment...

Question 13

If the three-month FR=$1/&#8364;1 and a speculator anticipates that SR=$1.02/&#8364;1 in three months,he can earn a profit by:&#10;A)selling euros forward&#10;B)purchasing euros forward&#10;C)selling dollars forward&#10;D)purchasing dollars forward

Accepted Answer

The answer of If the three-month FR=$1/&#8364;1 and a speculator...

Question 14

The exchange rate is kept within narrow limits in different monetary centers by:&#10;A)hedging&#10;B)exchange arbitrage&#10;C)interest arbitrage&#10;D)speculation

Accepted Answer

The answer of The exchange rate is kept within narrow...

Question 15

According to the theory of covered interest arbitrage,if the interest differential in favor of the foreign country exceeds the forward discount on the foreign currency,there will be a:&#10;A)capital inflow under covered interest arbitrage&#10;B)capital outflow under covered interest arbitrage&#10;C)no capital flow under a covered interest arbitrage&#10;D)any of the above

Accepted Answer

The answer of According to the theory of covered interest...

Deck 14: Foreign Exchange Markets and Exchange Rates