Question 1

Assume that a bank's bid rate on Swiss francs is £0.25 and its ask rate is £0.26. Its bid-ask percentage spread is:

Accepted Answer

C

Question 2

The value of the Australian dollar (A$) today is £0.41. Yesterday, the value of the Australian dollar was £0.38. The Australian dollar by _______%.

Accepted Answer

C

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?

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 £0.55, and the Canadian dollar is worth £0.47. What is the value of the Canadian dollar in U.S. dollars to the nearest cent?

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:

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:

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.

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.

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:

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:

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

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?

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?

Accepted Answer

Depreciation of a currency means it loses value compared to another currency. In option D, the dollar exchanges for fewer francs over time, indicating it has depreciated in value against the franc.

Question 14

If purchasing power parity were to hold even in the short run, then:

Accepted Answer

Purchasing power parity (PPP) implies that the real exchange rate (which adjusts the nominal exchange rate for differences in price levels between countries) should be stable over time, as any differences in inflation rates should be offset by changes in the nominal exchange rate.

Quiz 2: International Finance: Foreign Exchange and Currency Markets