Question 1

Interest Rate Parity (IRP)is best defined as&#10;A)occurring when a government brings its domestic interest rate in line with other major financial markets.&#10;B)occurring when the central bank of a country brings its domestic interest rate in line with its major trading partners.&#10;C)an arbitrage condition that must hold when international financial markets are in equilibrium.&#10;D)none of the options

Accepted Answer

Interest Rate Parity (IRP) is primarily an arbitrage condition that must hold when international financial markets are in equilibrium. It assumes that the expected returns from hypothetical investments in two different currencies would be the same, and any deviation from this condition would provide an opportunity for arbitrage. Therefore, IRP represents the equilibrium relationship between the interest rates, exchange rate, and inflation rates of two different currencies. Options A and B are inaccurate as they do not entirely capture the concept of IRP.

Question 2

Suppose you observe a spot exchange rate of $1.0500/&#8364;.If interest rates are 5% APR in the U.S.and 3% APR in the euro zone,what is the no-arbitrage 1-year forward rate?&#10;A)&#8364;1.0704/$&#10;B)$1.0704/&#8364;&#10;C)&#8364;1.0300/$&#10;D)$1.0300/&#8364;

Accepted Answer

To calculate the no-arbitrage 1-year forward rate, we use the following formula:

(1 + rU.S) = (F/S) x (1 + rEuro)

where rU.S and rEuro are the respective interest rates, S is the spot exchange rate, and F is the forward exchange rate.

Plugging in the given values, we get:

(1 + 0.05) = (F/1.0500) x (1 + 0.03)

Solving for F, we get:

F = 1.0704

Since we want to find the euro-denominated forward rate, the answer is $1.0704/€.

Question 3

Covered Interest Arbitrage (CIA)activities will result in&#10;A)unstable international financial markets.&#10;B)restoring equilibrium prices quickly.&#10;C)a disintermediation.&#10;D)no effect on the market.

Accepted Answer

Covered Interest Arbitrage (CIA) activities involve taking advantage of temporary differences in interest rates between different currencies to make profit through buying and selling of currency. This process helps to restore equilibrium prices quickly by narrowing the spread between the interest rates of the two currencies. Therefore, choice B is the best answer. CIA activities may also lead to a reduction in the volatility of international financial markets as arbitrageurs tend to exploit mispricing and restore market efficiency.

Question 4

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must the one-year interest rate be in the euro zone to avoid arbitrage?

A)5.0%
B)6.09%
C)8.62%
D)none of the options

Accepted Answer

According to Interest rate parity (IRP), the forward exchange rate is calculated as follows:

Forward exchange rate = spot exchange rate x (1 + domestic interest rate) / (1 + foreign interest rate)

Given:
Spot exchange rate (S) = $1.60/€
Forward exchange rate (F) = $1.58/€
Domestic interest rate (id) = 4.0% (in Italy)
Foreign interest rate (if) = ?

Substituting the values in the formula, we get:

$1.58/€ = $1.60/€ x (1 + 0.04) / (1 + if)
1.58 / 1.60 = 1.04 / (1 + if)

Solving for foreign interest rate (if), we get:

if = 0.027 or 2.7%

Therefore, the one-year interest rate in the United States must be 2.7% to maintain interest rate parity. Hence, the correct answer is option B) 2.7%.

Question 5

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must the one-year interest rate be in the euro zone to avoid arbitrage?

A)5.0%
B)6.09%
C)8.62%
D)none of the options

Accepted Answer

Using the interest rate parity formula: (1 + i_US) = (1 + i_Italy) * (Forward Rate / Spot Rate). Plugging in the values: (1 + i_US) = (1 + 0.03) * (1.18 / 1.20), we find i_US ≈ 0.012833 or 1.2833%.

Question 6

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain profit via covered interest arbitrage.

A)Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i_€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00,gross proceeds = $1,017,600.
B)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400.
C)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000.
D)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400.Additionally,one may borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.

Accepted Answer

Option D provides two ways to generate profit. Firstly, borrowing €800,000 at i_€ = 6% and investing in the U.S. at i_$ = 2% for one year will yield a profit of $2,400 when the euro is converted back to dollars at a forward rate of $1.20 = €1.00. Additionally, one can borrow €800,000 at i_€ = 6%, invest in the U.S. at i_$ = 2% for one year, and convert back €850,000 into euro at the forward rate of $1.20 = €1.00 to make a profit of €2,000. Therefore, option D provides the best choice for covered interest arbitrage.

Question 7

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate,is $1.16/€.Assume that an arbitrageur can borrow up to $1,000,000.

A)This is an example where interest rate parity holds.
B)This is an example of an arbitrage opportunity; interest rate parity does not hold.
C)This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.
D)none of the options

Accepted Answer

To determine whether interest rate parity holds, we need to compare the expected returns from investing in each currency directly versus investing in the other currency through the forward markets.

In the US, investing $1,000,000 at 5.0% for one year would yield $1,050,000 at the end of the year.

In Germany, investing €892,857 (equivalent to $1,000,000/1.12) at 3.5% for one year would yield €924,107 at the end of the year, which could be exchanged for $1,075,610 at the spot rate of $1.16/€.

Thus, investing in the US directly would give a return of $50,000, while investing in Germany through the forward market would give a return of $75,610. This represents an arbitrage opportunity for the investor to borrow $1,000,000 at 5.0% in the US, exchange it for €892,857, invest it in Germany at 3.5%, and then exchange the proceeds at the one-year forward rate to receive $1,075,610, resulting in a risk-free profit of $25,610.

Therefore, choice B is correct as this is an example of an arbitrage opportunity where interest rate parity does not hold.

Question 8

Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany,and that the spot exchange rate is $1.60/€ and the forward exchange rate,with one-year maturity,is $1.58/€.Assume that an arbitrager can borrow up to $1,000,000 or €625,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

A)$238.65
B)$14,000
C)$46,207
D)$7,000

Accepted Answer

The net cash flow from the arbitrage can be calculated by taking advantage of the difference in interest rates and the forward exchange rate. The trader can borrow dollars at 5.0 percent, convert to euros at the spot rate, invest at the German interest rate of 3.5 percent, and then convert back to dollars at the forward rate. The calculation is as follows:1. Borrow $1,000,000 at 5.0% interest rate.2. Convert $1,000,000 to euros at the spot rate of $1.12/€, which gives $1,000,000 / 1.12 = €892,857.14.3. Invest €892,857.14 at 3.5% interest rate in Germany, which results in €892,857.14 * 1.035 = €924,206.89 after one year.4. Convert €924,206.89 back to dollars at the forward rate of $1.16/€, which gives €924,206.89 * 1.16 = $1,072,079.99.5. Repay the original loan plus interest in dollars, which is $1,000,000 * 1.05 = $1,050,000.The net cash flow is $1,072,079.99 - $1,050,000 = $22,079.99. However, since the closest answer provided is $21,964.29, it appears there might have been a slight miscalculation in the final step or rounding differences in the calculation process. The correct process leads to a conclusion closest to option D, acknowledging a minor discrepancy in the final calculation.

Question 9

An arbitrage is best defined as&#10;A)a legal condition imposed by the CFTC.&#10;B)the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits.&#10;C)the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain guaranteed profits.&#10;D)none of the options

Accepted Answer

Arbitrage involves the simultaneous purchase and sale of the same or equivalent assets or commodities in different markets or in derivative forms to exploit price differences for guaranteed profits. This strategy is predicated on the certainty of profit due to existing price discrepancies, rather than on speculation or risk-taking.

Question 10

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must the one-year interest rate be in the euro zone to avoid arbitrage?

A)5.0%
B)6.09%
C)8.62%
D)none of the options

Accepted Answer

To avoid arbitrage, the interest rate parity condition should hold. That means the following equation must hold:

(1 + US interest rate) = (1 + euro interest rate) * (forward exchange rate / spot exchange rate)

Plugging in the given values:

(1 + 0.05) = (1 + euro interest rate) * (1.16/1.20)

Solving for the euro interest rate:

1.05 = (1 + euro interest rate) * 0.9667
1.05 / 0.9667 = (1 + euro interest rate)
euro interest rate = 1.0862 - 1 = 0.0862 = 8.62%

Therefore, the one-year interest rate in the euro zone must be 8.62% to avoid arbitrage. So, the correct answer is option C.

Question 11

A formal statement of IRP is&#10;A) $\frac { F ( \$ / &#8364; ) } { S ( \$ / &#8364; ) }$ = $\frac { 1 + i _ { \$ } } { 1 + i _ { &#8364; } }$ .&#10;B) $\frac { F ( \$ / &#8364; ) } { S ( \$ / &#8364; ) }$ = $\frac { 1 + i } { 1 + i _ { \$ } }$ .&#10;C) $\frac { F ( \$ / &#8364; ) - S ( \$ / &#8364; ) } { S ( \$ / &#8364; ) }$ = $\frac { 1 + i _ { \$ } } { 1 + i _ { &#8364; } }$ .&#10;D)F($ / &#8364;)- S($ / &#8364;)= $i _ { \$ }$ - $i _ { \epsilon }$ .

Accepted Answer

The answer of A formal statement of IRP is&#10;A) \(\frac...

Question 12

Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany,and that the spot exchange rate is $1.60/€ and the forward exchange rate,with one-year maturity,is $1.58/€.Assume that an arbitrager can borrow up to $1,000,000 or €625,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

A)$238.65
B)$14,000
C)$46,207
D)$7,000

Accepted Answer

The answer of Suppose that the annual interest rate is...

Question 13

How high does the lending rate in the euro zone have to be before an arbitrageur would not consider borrowing dollars,trading for euro at the spot,investing in the euro zone and hedging with a short position in the forward contract? $\begin{array} { r c c c c } & \text { Bid } & \text { Ask } & \text { Borrowing } & \text { Lending } \\\boldsymbol { s } _ { 0 } ( \$ / € ) & \$ 1.40 - € 1.00 & \$ 1.43 - € 1.00 & \text { i\$ } 4.20 \% \mathrm { APR } & 4.10 \% \mathrm { APR } \\F _ { 360( \$ / € ) } & \$ 1.44 - € 1.00 & \$ 1.49 - € 1.00 & \text { i€ } &\end{array}$

A)The bid-ask spreads are too wide for any profitable arbitrage when i_€> 0
B)3.48%
C)?2.09%
D)none of the options

Accepted Answer

The answer of How high does the lending rate in...

Question 14

Suppose that you are the treasurer of IBM with an extra U.S.$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810 percent (that's a six month rate,not an annual rate by the way)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.The interest rate in Japan (on an investment of comparable risk)is 13 percent.What is your strategy?

A)Take $1m,invest in U.S.T-bills.
B)Take $1m,translate into yen at the spot,invest in Japan,and repatriate your yen earnings back into dollars at the spot rate prevailing in six months.
C)Take $1m,translate into yen at the spot,invest in Japan,hedge with a short position in the forward contract.
D)Take $1m,translate into yen at the forward rate,invest in Japan,hedge with a short position in the spot contract.

Accepted Answer

The answer of Suppose that you are the treasurer of...

Question 15

Suppose you observe a spot exchange rate of $2.00/&#163;.If interest rates are 5 percent APR in the U.S.and 2 percent APR in the U.K.,what is the no-arbitrage 1-year forward rate?&#10;A)&#163;2.0588/$&#10;B)$2.0588/&#163;&#10;C)&#163;1.9429/$&#10;D)$1.9429/&#163;

Accepted Answer

The answer of Suppose you observe a spot exchange rate...

Question 16

Suppose that you are the treasurer of IBM with an extra U.S.$1,000,000 to invest for six months.You are considering the purchase of U.S.T-bills that yield 1.810% (that's a six month rate,not an annual rate)and have a maturity of 26 weeks.The spot exchange rate is $1.00 = ¥100,and the six month forward rate is $1.00 = ¥110.What must the interest rate in Japan (on an investment of comparable risk)be before you are willing to consider investing there for six months?

A)1.991 percent
B)1.12 percent
C)7.45 percent
D)−7.45 percent

Accepted Answer

The answer of Suppose that you are the treasurer of...

Question 17

An Italian currency dealer has good credit and can borrow €800,000 for one year.The one-year interest rate in the U.S.is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain euro-denominated profit via covered interest arbitrage.

A)Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i_€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00,gross proceeds = $1,017,600.
B)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400.
C)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.
D)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.Alternatively,one could borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400.

Accepted Answer

The answer of An Italian currency dealer has good credit...

Question 18

Suppose you observe a spot exchange rate of $1.0500/&#8364;.If interest rates are 3 percent APR in the U.S.and 5 percent APR in the euro zone,what is the no-arbitrage 1-year forward rate?&#10;A)&#8364;1.0704/$&#10;B)$1.0704/&#8364;&#10;C)&#8364;1.0300/$&#10;D)$1.0300/&#8364;

Accepted Answer

The answer of Suppose you observe a spot exchange rate...

Question 19

A U.S.-based currency dealer has good credit and can borrow $1,000,000 for one year.The one-year interest rate in the U.S.is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain dollar profit via covered interest arbitrage.

A)Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i_€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00,gross proceeds = $1,017,600.
B)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400.
C)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.
D)Borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.Alternatively,one could borrow €800,000 at i_€ = 6%; translate to dollars at the spot,invest in the U.S.at i_$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400.

Accepted Answer

The answer of A U.S.-based currency dealer has good credit...

Question 20

When Interest Rate Parity (IRP)does not hold&#10;A)there is usually a high degree of inflation in at least one country.&#10;B)the financial markets are in equilibrium.&#10;C)there are opportunities for covered interest arbitrage.&#10;D)the financial markets are in equilibrium and there are opportunities for covered interest arbitrage.

Accepted Answer

The answer of When Interest Rate Parity (IRP)does not hold&#10;A)there...

Question 21

The price of a McDonald's Big Mac sandwich&#10;A)is about the same in the 120 countries that McDonalds does business in.&#10;B)varies considerably across the world in dollar terms.&#10;C)supports PPP.&#10;D)none of the options.

Accepted Answer

The answer of The price of a McDonald's Big Mac...

Question 22

Purchasing Power Parity (PPP)theory states that&#10;A)the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels.&#10;B)as the purchasing power of a currency sharply declines (due to hyperinflation)that currency will depreciate against stable currencies.&#10;C)the prices of standard commodity baskets in two countries are not related.&#10;D)the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels,and as the purchasing power of a currency sharply declines (due to hyperinflation)that currency will depreciate against stable currencies.

Accepted Answer

The answer of Purchasing Power Parity (PPP)theory states that&#10;A)the exchange...

Question 23

Generally unfavorable evidence on PPP suggests that&#10;A)substantial barriers to international commodity arbitrage exist.&#10;B)tariffs and quotas imposed on international trade can explain at least some of the evidence.&#10;C)shipping costs can make it difficult to directly compare commodity prices.&#10;D)all of the options

Accepted Answer

The answer of Generally unfavorable evidence on PPP suggests that&#10;A)substantial...

Question 24

If a foreign county experiences a hyperinflation,&#10;A)its currency will depreciate against stable currencies.&#10;B)its currency may appreciate against stable currencies.&#10;C)its currency may be unaffected-it's difficult to say.&#10;D)none of the options

Accepted Answer

The answer of If a foreign county experiences a hyperinflation,&#10;A)its...

Question 25

If the annual inflation rate is 2.5 percent in the United States and 4 percent in the U.K.,and the dollar appreciated against the pound by 1.5 percent,then the real exchange rate,assuming that PPP initially held,is ________.

A)parity
B)0.9710
C)−0.0198
D)4.5

Accepted Answer

The answer of If the annual inflation rate is 2.5...

Question 26

Although IRP tends to hold,it may not hold precisely all the time&#10;A)due to transactions costs,like the bid-ask spread.&#10;B)due to asymmetric information.&#10;C)due to capital controls imposed by governments.&#10;D)due to transactions costs,like the bid-ask spread,as well as capital controls imposed by governments.

Accepted Answer

The answer of Although IRP tends to hold,it may not...

Question 27

Will an arbitrageur facing the following prices be able to make money? $\begin{array}{rcccccc}\hline & \text { Bid } & \text { Ask } & & \text { Borrowing } & \text { Lending } \\F_{0}(\$ / €) & \$ 1.40-€ 1.00 & \$ 1.43-€ 1.00 & & i \$ 4.20 \% \mathrm{APR} & 4.10 \% \mathrm{APR} \\F_{36}(\$) & \$ 1.44-€ 1.00 & \$ 1.49-€ 1.00 & & i € 3.65 \% \mathrm{APR} & 3.50 \% \mathrm{APR}\end{array}$

A)Yes,borrow €1,000,000 at 3.65 percent; trade for $ at the bid spot rate $1.40 = €1.00; invest at 4.1 percent; hedge this with a long position in a forward contract.
B)Yes,borrow $1,000,000 at 4.2 percent; trade for € at the spot ask exchange rate $1.43 = €1.00; invest €699,300.70 at 3.5 percent; hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year).Cash flow in 1 year $237.76.
C)No; the transactions costs are too high.
D)none of the options

Accepted Answer

The answer of Will an arbitrageur facing the following prices...

Question 28

Will an arbitrageur facing the following prices be able to make money? $\begin{array}{rcccccc}\hline & \text { Bid } & \text { Ask } & & \text { Borrowing } & \text { Lending } \\F_{0}(\$ / €) & \$ 1.40-€ 1.00 & \$ 1.43-€ 1.00 & & i \$ 4.20 \% \mathrm{APR} & 4.10 \% \mathrm{APR} \\F_{36}(\$) & \$ 1.44-€ 1.00 & \$ 1.49-€ 1.00 & & i € 3.65 \% \mathrm{APR} & 3.50 \% \mathrm{APR}\end{array}$

A)Yes,borrow €1,000,000 at 3.65 percent; trade for $ at the bid spot rate $1.40 = €1.00; invest at 4.1 percent; hedge this with a long position in a forward contract.
B)Yes,borrow $1,000,000 at 4.2 percent; trade for € at the spot ask exchange rate $1.43 = €1.00; invest €699,300.70 at 3.5 percent; hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year).Cash flow in 1 year $237.76.
C)No; the transactions costs are too high.
D)none of the options

Accepted Answer

The answer of Will an arbitrageur facing the following prices...

Question 29

Some commodities never enter into international trade.Examples include&#10;A)nontradables.&#10;B)haircuts.&#10;C)housing.&#10;D)all of the options

Accepted Answer

The answer of Some commodities never enter into international trade.Examples...

Question 30

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must the one-year interest rate be in the euro zone to avoid arbitrage?

A)5.0%
B)6.09%
C)8.62%
D)none of the options

Accepted Answer

The answer of Suppose that the one-year interest rate is...

Question 31

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i_$ = 2% and in the euro zone the one-year interest rate is i_€ = 6%.The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?

A)$1.2471 = €1.00
B)$1.20 = €1.00
C)$1.1547 = €1.00
D)none of the options

Accepted Answer

The answer of A currency dealer has good credit and...

Question 32

A higher U.S.interest rate (i_$ ↑)relative to interest rates abroad,ceteris paribus,will result in A)a stronger dollar. B)a lower spot exchange rate (expressed as foreign currency per U.S.dollar). C)a stronger dollar and a lower spot exchange rate (expressed as foreign currency per U.S.dollar). D)none of the options

Accepted Answer

The answer of A higher U.S.interest rate (i_$ ↑)relative to...

Question 33

As of today,the spot exchange rate is &#8364;1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?&#10;A)&#8364;1.00 = $1.2379&#10;B)&#8364;1.00 = $1.2623&#10;C)&#8364;1.00 = $0.9903&#10;D)$1.00 = &#8364;1.2623

Accepted Answer

The answer of As of today,the spot exchange rate is...

Question 34

The interest rate at which the arbitrager borrows tends to be higher than the rate at which he lends,reflecting the&#10;A)transaction cost paradigm.&#10;B)midpoint.&#10;C)bid-ask spread.&#10;D)none of the options

Accepted Answer

The answer of The interest rate at which the arbitrager...

Question 35

Governments sometimes restrict capital flows,inbound and/or outbound.They achieve this objective by means of&#10;A)jawboning.&#10;B)imposing taxes.&#10;C)bans on cross-border capital movements.&#10;D)all of the options

Accepted Answer

The answer of Governments sometimes restrict capital flows,inbound and/or outbound.They...

Question 36

In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity basket,&#10;A)it will hold only if the prices of the constituent commodities are equalized across countries in a given currency.&#10;B)it will hold only if the composition of the consumption basket is the same across countries.&#10;C)it will hold only if the prices of the constituent commodities are equalized across countries in a given currency or if the composition of the consumption basket is the same across countries.&#10;D)none of the options

Accepted Answer

The answer of In view of the fact that PPP...

Question 37

As of today,the spot exchange rate is &#8364;1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?&#10;A)&#8364;1.00 = $1.6157&#10;B)&#8364;1.6157 = $1.00&#10;C)&#8364;1.00 = $1.5845&#10;D)$1.00 &#215; 1.03 = &#8364;1.60 &#215; 1.02

Accepted Answer

The answer of As of today,the spot exchange rate is...

Question 38

If the interest rate in the U.S.is i_$ = 5 percent for the next year and interest rate in the U.K.is i_£ = 8 percent for the next year,uncovered IRP suggests that A)the pound is expected to depreciate against the dollar by about 3 percent. B)the pound is expected to appreciate against the dollar by about 3 percent. C)the dollar is expected to appreciate against the pound by about 3 percent. D)the pound is expected to depreciate against the dollar by about 3 percent and the dollar is expected to appreciate against the pound by about 3 percent.

Accepted Answer

The answer of If the interest rate in the U.S.is...

Question 39

If IRP fails to hold,&#10;A)pressure from arbitrageurs should bring exchange rates and interest rates back into line.&#10;B)it may fail to hold due to transactions costs.&#10;C)it may be due to government-imposed capital controls.&#10;D)all of the options

Accepted Answer

The answer of If IRP fails to hold,&#10;A)pressure from arbitrageurs...

Question 40

If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,and the dollar depreciated against the pound by 3 percent,then the real exchange rate,assuming that PPP initially held,is

A)0.07.
B)0.9849.
C)−0.0198.
D)4.5.

Accepted Answer

The answer of If the annual inflation rate is 5.5...

Question 41

The random walk hypothesis suggests that&#10;A)the best predictor of the future exchange rate is the current exchange rate.&#10;B)the best predictor of the future exchange rate is the current forward rate.&#10;C)the best predictors of the future exchange rate are the current exchange rate and the current forward rate.&#10;D)none of the options

Accepted Answer

The answer of The random walk hypothesis suggests that&#10;A)the best...

Question 42

If the exchange rate follows a random walk A)the future exchange rate is unpredictable. B)the future exchange rate is expected to be the same as the current exchange rate,S_t = E(S_t+ 1). C)the best predictor of future exchange rates is the forward rate F_t = E(S_t+ 1/I_t). D)the future exchange rate is expected to be the same as the current exchange rate,S_t = E(S_t+ 1),and the best predictor of future exchange rates is the forward rate F_t = E(S_t+ 1/I_t).

Accepted Answer

The answer of If the exchange rate follows a random...

Question 43

One implication of the random walk hypothesis is&#10;A)given the efficiency of foreign exchange markets,it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is not yet reflected in the current exchange rate.&#10;B)given the efficiency of foreign exchange markets,it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is already reflected in the current exchange rate.&#10;C)given the relative inefficiency of foreign exchange markets,it is difficult to outperform the technical forecasts unless the forecaster has access to private information that is not yet reflected in the current futures exchange rate.&#10;D)none of the options

Accepted Answer

The answer of One implication of the random walk hypothesis...

Question 44

The Fisher effect can be written for the United States as: A.i_$ = ?_$ + E(?_$)+ ?_$ × E(?_$)B.?_$ = i_$ + E(?_$)+ i_$ × E(?_$)C.q = $\frac { 1 + \pi _ { \$ } } { ( 1 + e ) \left( 1 + \pi _ { £ } \right) }$ D. $\frac { F ( \$ / € ) } { S ( \$ / € ) }$ = $\frac { 1 + i _ { \$ } } { 1 + i _ { € } }$

A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of The Fisher effect can be written for...

Question 45

Good,inexpensive,and fairly reliable predictors of future exchange rates include&#10;A)today's exchange rate.&#10;B)current forward exchange rates (e.g.,the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today).&#10;C)esoteric fundamental models that take an econometrician to use and no one can explain.&#10;D)today's exchange rate,as well as current forward exchange rates (e.g.the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today).

Accepted Answer

The answer of Good,inexpensive,and fairly reliable predictors of future exchange...

Question 46

The International Fisher Effect suggests that&#10;A)any forward premium or discount is equal to the expected change in the exchange rate.&#10;B)any forward premium or discount is equal to the actual change in the exchange rate.&#10;C)the nominal interest rate differential reflects the expected change in the exchange rate.&#10;D)an increase (decrease)in the expected inflation rate in a country will cause a proportionate increase (decrease)in the interest rate in the country.

Accepted Answer

The answer of The International Fisher Effect suggests that&#10;A)any forward...

Question 47

Decision-making for multinational corporations formulating international sourcing,production,financing,and marketing strategies depends,primarily,on&#10;A)risk management techniques.&#10;B)expertise of staff attorneys.&#10;C)luck.&#10;D)forecasting exchange rates as accurately as possible.

Accepted Answer

The answer of Decision-making for multinational corporations formulating international sourcing,production,financing,and...

Question 48

Forward parity states that&#10;A)any forward premium or discount is equal to the expected change in the exchange rate.&#10;B)any forward premium or discount is equal to the actual change in the exchange rate.&#10;C)the nominal interest rate differential reflects the expected change in the exchange rate.&#10;D)an increase (decrease)in the expected inflation rate in a country will cause a proportionate increase (decrease)in the interest rate in the country.

Accepted Answer

The answer of Forward parity states that&#10;A)any forward premium or...

Question 49

Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting?&#10;A)One has to forecast a set of independent variables to forecast the exchange rates.Forecasting the former will certainly be subject to errors and may not be necessarily easier than forecasting the latter.&#10;B)The parameter values,that is the &#945;'s and &#946;'s,that are estimated using historical data may change over time because of changes in government policies and/or the underlying structure of the economy.Either difficulty can diminish the accuracy of forecasts even if the model is correct.&#10;C)The model itself can be wrong.&#10;D)none of the options

Accepted Answer

The answer of Which of the following issues are difficulties...

Question 50

The Fisher effect states that&#10;A)any forward premium or discount is equal to the expected change in the exchange rate.&#10;B)any forward premium or discount is equal to the actual change in the exchange rate.&#10;C)the nominal interest rate differential reflects the expected change in the exchange rate.&#10;D)an increase (decrease)in the expected inflation rate in a country will cause a proportionate increase (decrease)in the interest rate in the country.

Accepted Answer

The answer of The Fisher effect states that&#10;A)any forward premium...

Question 51

With regard to fundamental forecasting versus technical forecasting of exchange rates&#10;A)the technicians tend to use &#34;cause and effect&#34; models.&#10;B)the fundamentalists tend to believe that &#34;history will repeat itself&#34; is the best model.&#10;C)the technicians tend to use &#34;cause and effect&#34; models and the fundamentalists tend to believe that &#34;history will repeat itself&#34; is the best model.&#10;D)none of the options

Accepted Answer

The answer of With regard to fundamental forecasting versus technical...

Question 52

The Efficient Markets Hypothesis states&#10;A)markets tend to evolve to low transactions costs and speedy execution of orders.&#10;B)current asset prices (e.g.,exchange rates)fully reflect all the available and relevant information.&#10;C)current exchange rates cannot be explained by such fundamental forces as money supplies,inflation rates and so forth.&#10;D)none of the options

Accepted Answer

The answer of The Efficient Markets Hypothesis states&#10;A)markets tend to...

Question 53

Academic studies tend to discredit the validity of technical analysis.Which of the following is true?&#10;A)This can be viewed as support technical analysis.&#10;B)It can be rational for individual traders to use technical analysis-if enough traders use technical analysis the predictions based on it can become self-fulfilling to some extent,at least in the short-run.&#10;C)The statement can be explained by the difficulty professors may have in differentiating between technical analysis and fundamental analysis.&#10;D)none of the options

Accepted Answer

The answer of Academic studies tend to discredit the validity...

Question 54

The benefit to forecasting exchange rates&#10;A)are greatest during periods of fixed exchange rates.&#10;B)are nonexistent now that the euro and dollar are the biggest game in town.&#10;C)accrue to,and are a vital concern for,MNCs formulating international sourcing,production,financing,and marketing strategies.&#10;D)all of the options

Accepted Answer

The answer of The benefit to forecasting exchange rates&#10;A)are greatest...

Question 55

Researchers have found that the fundamental approach to exchange rate forecasting&#10;A)outperforms the efficient market approach.&#10;B)fails to more accurately forecast exchange rates than either the random walk model or the forward rate model.&#10;C)fails to more accurately forecast exchange rates than the random walk model but is better than the forward rate model.&#10;D)outperforms the random walk model,but fails to more accurately forecast exchange rates than the forward rate model.

Accepted Answer

The answer of Researchers have found that the fundamental approach...

Question 56

Which of the following is a true statement?&#10;A)While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds,there is no theoretical reason why exchange rates should follow a pure random walk.&#10;B)While researchers found it easy to reject the random walk hypothesis for exchange rates on empirical grounds,there are strong theoretical reasons why exchange rates should follow a pure random walk.&#10;C)While researchers found it difficult to reject the random walk hypothesis for exchange rates on empirical grounds,there are compelling theoretical reasons why exchange rates should follow a pure random walk.&#10;D)none of the options

Accepted Answer

The answer of Which of the following is a true...

Question 57

The moving average crossover rule&#10;A)is a fundamental approach to forecasting exchange rates.&#10;B)states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is appreciating.&#10;C)states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is depreciating.&#10;D)none of the options

Accepted Answer

The answer of The moving average crossover rule&#10;A)is a fundamental...

Question 58

Generating exchange rate forecasts with the fundamental approach involves&#10;A)looking at charts of the exchange rate and extrapolating the patterns into the future.&#10;B)estimation of a structural model.&#10;C)substituting the estimated values of the independent variables into the estimated structural model to generate the forecast.&#10;D)estimation of a structural model and substitution of the estimated values of the independent variables into the estimated structural model to generate the forecast.

Accepted Answer

The answer of Generating exchange rate forecasts with the fundamental...

Question 59

According to the technical approach,what matters in exchange rate determination&#10;A)is the past behavior of exchange rates.&#10;B)is the velocity of money.&#10;C)is the future behavior of exchange rates.&#10;D)is the beta.

Accepted Answer

The answer of According to the technical approach,what matters in...

Question 60

The main approaches to forecasting exchange rates are&#10;A)Efficient market,Fundamental,and Technical approaches.&#10;B)Efficient market and Technical approaches.&#10;C)Efficient market and Fundamental approaches.&#10;D)Fundamental and Technical approaches.

Accepted Answer

The answer of The main approaches to forecasting exchange rates...

Question 61

Assume that you are a retail customer (i.e.,you buy at the ask and sell at the bid).Use the information below to answer the following question.&#10;   If you had &#8364;1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 62

According to the monetary approach,the exchange rate can be expressed as&#10;A)S = $\frac { M _ { \$ } } { M _ { &#163; } }$ &#215; $\frac { V _ { \$ } } { V _ { &#163; } }$ &#215; $\frac { y _ { t } } { y _ { \$ } }$&#10;B) $P _ { \$ }$ = $\frac { M _ { \$ } V _ { \$ } } { y _ { \$ } }$&#10;C)S = $\frac { M _ { \$ } } { M _ { &#163; } }$ &#215; $\frac { V _ { \$ } } { V _ { &#163; } }$ &#215; $\frac { y _ { \$ } } { y _ { &#163; } }$&#10;D)none of the options

Accepted Answer

The answer of According to the monetary approach,the exchange rate...

Question 63

According to the research in the accuracy of paid exchange rate forecasters,&#10;A)you can make more money selling forecasts than you can following forecasts.&#10;B)the average forecaster is better than average at forecasting.&#10;C)the forecasters do a better job of predicting the future exchange rates than the market does.&#10;D)none of the above.

Accepted Answer

The answer of According to the research in the accuracy...

Question 64

Assume that you are a retail customer (i.e.,you buy at the ask and sell at the bid).Use the information below to answer the following question.&#10;   If you had borrowed $1,000,000 and traded for euro at the spot rate,how many &#8364; do you receive?

Accepted Answer

The answer of Assume that you are a retail customer...

Deck 6: International Parity Relationships and Forecasting Foreign Exchange Rates