Question 1

If the exchange rate quotes in two different countries were out of line with each other,an enterprising trader could make a profit by buying in the market where the currency was cheaper and simultaneously selling it in the market where the currency was more expensive.Such a person would be known as a

Accepted Answer

An arbitrageur is a trader who takes advantage of price differences in different markets to make a profit. In this case, the trader would buy currency in the market where it is cheaper and sell it in the market where it is more expensive, making a profit from the difference in exchange rates.

Question 2

The current direct quote in New York is .01075 dollars per yen.Suppose the current direct quote in Tokyo is 91 yen per dollar.What is the appropriate indirect quote in New York? What will arbitrageurs do to eliminate the differential rates in these markets?

Accepted Answer

The answer of The current direct quote in New York...

Question 3

A bottle of German wine costs $21 euros in Berlin.According to the purchasing power parity theory,what would the bottle sell for in New York if it costs the New York company $1.25 per bottle to transport the wine to the United States? Assume the exchange rate is $1.32 per euro.

Accepted Answer

The purchasing power parity (PPP) theory suggests that in the absence of transportation costs and other barriers, identical goods should have the same price in different countries when prices are expressed in a common currency. The cost of the wine in euros is €21. With an exchange rate of $1.32 per euro, the cost in dollars before transportation is 21 * $1.32 = $27.72. Adding the transportation cost of $1.25 gives a total of $27.72 + $1.25 = $28.97.

Question 4

One theory that is useful states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.This theory is known as

Accepted Answer

This theory is commonly known as the interest rate parity theory. It states that the difference in interest rates between two countries should be offset by changes in the exchange rate to ensure that investors earn the same return regardless of which country they invest in. This is the foundation of covered interest arbitrage, where investors can exploit any deviations from interest rate parity to earn risk-free profits.

Question 5

Exceptions to purchase power parity exist if arbitrage opportunities are limited by characteristics such as perishability or high transportation costs.

Accepted Answer

This statement is true. Certain goods, such as fresh produce, have limited arbitrage opportunities due to their perishability and high transportation costs. As a result, their prices may vary across different countries, even when accounting for exchange rates, and violate the principles of purchasing power parity.

Question 6

Purchasing power parity suggests that interest rates in different countries will adjust so that each currency will have the same purchasing power.

Accepted Answer

Purchasing power parity (PPP) suggests that in the long run, exchange rates between currencies will adjust so that the same basket of goods will have the same price in different countries, not that interest rates will adjust for this purpose.

Question 7

The law of one price suggests that all of the following will have the same price in different countries EXCEPT

Accepted Answer

The law of one price suggests that identical goods should sell for the same price in different countries when prices are expressed in a common currency, assuming no transportation costs and no differential taxes. Fresh vegetables, however, are more likely to deviate from this law due to their perishability, transportation costs, and the impact of local agricultural conditions, making them an exception.

Question 8

Suppose the 360-day forward exchange rate is 1.657 dollars per British Pound,and the current spot rate is 1.625 dollars per British Pound.If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%,is the market in equilibrium according to the interest rate parity theory?

Accepted Answer

The forward premium on the pound is 2% (calculated as (1.657 - 1.625) / 1.625), which matches the interest rate differential between the US (5%) and Great Britain (3%). According to interest rate parity, this indicates equilibrium.

Question 9

What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?

Accepted Answer

The answer of What is arbitrage? Assume that the dollar...

Question 10

Why do currency exchange rates throughout the world trade within a very narrow range on any given day?

Accepted Answer

Currency exchange rates throughout the world trade within a very narrow range on any given day because of arbitrage. This refers to traders taking advantage of price differences in different markets to make a profit. As soon as there is a variance in the exchange rate between two countries, traders will begin to buy one currency and sell the other until the rates equalize. This reduces the margins for profit and ultimately leads to a narrowing of the range.

Question 11

The spot exchange rate in New York is 1.600 dollars per British pound.The 360-day forward exchange rate is 1.680 dollars per pound.The one-year interest rate in Great Britain is 2% while the one-year interest rate in the United States is 4%. 
a.If the interest rate in Great Britain remains at 2%,what should the interest rate be in the United States according to the interest rate parity theory? 
b.An American investor with $40,000 decides to take advantage of the differences in rates.Ignoring transaction costs,how can the American investor exploit the disequilibrium? Compare the amount of money the investor will have at the end of the year if he or she invests in one-year U.S.securities versus one-year British securities.

Accepted Answer

The answer of The spot exchange rate in New York...

Question 12

Interest rate parity theory states that the forward premium or discount should be equal and opposite in sign to the difference in the national interest rates for securities of the same maturity.

Accepted Answer

This is the correct definition of the interest rate parity theory.

Question 13

Assume that the British pound is worth 1.6242 U.S.dollars.If a new Jaguar costs $138,000,what is the cost in British pounds?

Accepted Answer

To find the cost in British pounds, we need to convert $138,000 to pounds. We can do this by multiplying $138,000 by the exchange rate of pounds per dollar:

$138,000 x 1 pound/1.6242 dollars = £84,964.88

Rounding to the nearest pound gives us the answer of £84,965, so the correct choice is B.

Question 14

Argentina experienced a period of extremely high inflation relative to its trading partners and Argentina's currency decreased in value.This is an example of purchasing power parity theory.

Accepted Answer

According to the purchasing power parity theory, currencies in countries with high inflation should depreciate relative to their trading partners in order to maintain the same purchasing power. In this case, Argentina experienced high inflation and their currency decreased in value relative to their trading partners, which is in line with the theory.

Question 15

A forward exchange contract

Accepted Answer

A forward exchange contract is an agreement between two parties to buy or sell a certain amount of currency at a specified future date at a predetermined exchange rate. It requires the delivery of one currency for a specified amount of another currency on a specified future date, making option C the most suitable answer. Option A refers to an option contract, while option B describes a daily settlement variation margin system used in futures contracts. Option D describes a spot transaction, which does not involve a specified future date.

Question 16

Suppose the current spot rate in New York is .0119 dollars per yen.Inflation for the coming year in the United States is expected to be 3%,while inflation for the coming year is Japan is expected to be only 1%.Using the purchasing power parity theory,what is the expected spot rate at the end of the year should be

Accepted Answer

The answer of Suppose the current spot rate in New...

Question 17

Money-market hedges and forward market hedges rely on the

Accepted Answer

Money-market hedges and forward market hedges rely on the interest rate parity theory, which states that the spot exchange rate between two currencies should be equal to the ratio of their respective interest rates. This theory is what allows for forward exchange rates to be determined and used for hedging purposes.

Question 18

You purchased 3,000,000 Indian rupees in London at an exchange rate of 54.86 to the dollar and simultaneously sold the rupees in Bahrain at an exchange rate of 55.12 to the dollar.What is the name for such a transaction?

Accepted Answer

This is an example of an arbitrage transaction, where an individual takes advantage of the difference in exchange rates in two different markets to make a profit. In this case, the individual purchased Indian rupees in London at a lower exchange rate and sold them in Bahrain at a higher exchange rate, profiting from the difference.

Question 19

Interest Rate Parity theory states that interest rates must be the same in all countries using floating exchange rates or else international markets will not be in equilibrium.

Accepted Answer

Interest Rate Parity theory actually states that the difference in interest rates between two countries is equal to the expected change in exchange rates between those countries' currencies. It does not imply that interest rates must be the same across countries.

Question 20

Except for the effects of small transaction costs,the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity.What is the name of this theory?

Accepted Answer

This is known as the interest rate parity theory, which suggests that the forward exchange rate should reflect the difference in interest rates between two countries for securities of the same maturity. The other options are not relevant in this context - purchasing power parity theory refers to the idea that exchange rates should adjust to reflect differences in price levels across countries, while the Bobby Fisher effect is not a recognized theory in finance. The law of one price refers to the idea that identical goods should have the same price in different markets.

Quiz 16: International Business Finance