Question 1

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

The theory described in the question is known as the interest rate parity theory, which states that the difference in national interest rates for securities of the same maturity should be equal and opposite in sign to the forward premium or discount. The other options listed (forward rate theory, exchange rate theory, and covered interest arbitrage theory) do not specifically describe this theory.

Question 2

You purchased 500,000 Swiss Francs in London at an exchange rate of 0.6705 to the dollar and simultaneously sold the francs in New York at an exchange rate of 0.6692 to the dollar.What is the name for such a transaction?

Accepted Answer

This transaction is an example of arbitrage, which involves taking advantage of price differences in different markets for the same asset. In this case, the trader bought Swiss Francs in London at a lower exchange rate and sold them in New York at a higher exchange rate, making a profit from the price difference.

Question 3

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 difference in interest rates between two countries will determine the exchange rate between their currencies.

Question 4

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 profits from the differences in exchange rates between two different countries. They buy in the market where the currency is cheaper and sell it in the market where the currency is more expensive, making a profit from the difference. Spot traders deal with the immediate delivery of currencies, cross traders deal with currency pairs not involving the US dollar, and being a capitalist is a broader term that refers to someone who owns assets or businesses in order to make a profit.

Question 5

Assume that the British pound is worth 1.6750 U.S.dollars.If a new Jaguar costs $120,000,what is the cost in British pounds?

Accepted Answer

To find the cost in British pounds, divide the cost in U.S. dollars by the exchange rate: $120,000 / 1.6750 = £71,641.79, which rounds to £71,642.

Question 6

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 theory is known as interest rate parity theory, which states that the forward premium or discount should reflect the difference in interest rates between two currencies for securities of the same maturity. The other options are not relevant to this concept.

Question 7

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 not be equalized across countries, leading to deviations from the PPP.

Question 8

A bottle of French wine costs $25 euros in Paris.According to the purchasing power parity theory,what would the bottle sell for in New York if it costs the New York company $2 per bottle to transport the wine to the United States? Assume the exchange rate is $1.50 per euro.

Accepted Answer

The answer of A bottle of French wine costs $25...

Question 9

Suppose the 360-day forward exchange rate is 1.936 dollars per British Pound,and the current spot rate is 1.900 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

According to interest rate parity, the forward premium or discount should offset the interest rate differential. Here, the forward premium on the pound is 2% (1.936/1.900 - 1), which matches the interest rate differential (5% - 3% = 2%). Thus, the market is in equilibrium.

Question 10

Suppose the current spot rate in New York is .0107 dollars per yen.Inflation for the coming year in the United States is expected to be 5%,while inflation for the coming year is Japan is expected to be only 2%.Using the purchasing power parity theory,what is the expected spot rate at the end of the year should be

Accepted Answer

The expected spot rate at the end of the year should be .0110147 dollars per yen. This is because the purchasing power parity theory states that the exchange rate between two currencies should be equal to the ratio of the price levels in the two countries. In this case, the inflation rate in the United States is expected to be 5%, while the inflation rate in Japan is expected to be only 2%. This means that the price level in the United States is expected to increase by 5% relative to the price level in Japan. As a result, the exchange rate between the dollar and the yen is expected to adjust so that the dollar will be worth more yen than it is today.

Question 11

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

Accepted Answer

Fresh vegetables are perishable and may have different prices in different countries due to transportation costs, local demand, and supply conditions.

Question 12

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 13

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 14

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 means that if a currency's exchange rate is too high in one location, investors can take advantage of the discrepancy by selling that currency in that location and buying it in another location where it is undervalued, essentially evening out the exchange rate. This arbitrage process helps keep exchange rates within a narrow range.

Question 15

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 16

A forward exchange contract

Accepted Answer

A forward exchange contract requires delivery, at a specified future date, of one currency for a specified amount of another currency. Choice A describes an option contract, choice B describes a futures contract, and choice D describes a spot transaction.

Question 17

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 purchasing power parity theory, exchange rates should adjust in order to reflect the differences in inflation rates between countries. Therefore, if Argentina experienced high inflation relative to its trading partners, its currency would be expected to decrease in value, which is what happened in this scenario.

Question 18

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

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.

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

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...

Quiz 17: International Business Finance

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

You purchased 500,000 Swiss Francs in London at an exchange rate of 0.6705 to the dollar and simultaneously sold the francs in New York at an exchange rate of 0.6692 to the dollar.What is the name for such a transaction?

Money-market hedges and forward market hedges rely on the

Assume that the British pound is worth 1.6750 U.S.dollars.If a new Jaguar costs $120,000,what is the cost in British pounds?

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?

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

A bottle of French wine costs $25 euros in Paris.According to the purchasing power parity theory,what would the bottle sell for in New York if it costs the New York company $2 per bottle to transport the wine to the United States? Assume the exchange rate is $1.50 per euro.

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

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?

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?

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

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

A forward exchange contract

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.

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.

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.