Question 1

If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true?

Accepted Answer

A)  The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now. 
B)  The distribution of possible actual spot rates in the future is centered on the forward rate. 
C)  The future spot rate will actually be equal to what the forward rate predicts. 
D)  All of the above are true. 
A)  The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now. 
B)  The distribution of possible actual spot rates in the future is centered on the forward rate. 
C)  The future spot rate will actually be equal to what the forward rate predicts. 
D)  All of the above are true. C

Question 2

The implied PPP rate of exchange of Mexican pesos per U.S. dollar is 8.58 according to the Big Mac Index. The current exchange rate is Peso 10.8/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is

Accepted Answer

A)  overvalued. 
B)  undervalued. 
C)  correctly valued. 
D)  There is not enough information to answer this question. 
A)  overvalued. 
B)  undervalued. 
C)  correctly valued. 
D)  There is not enough information to answer this question. B

Question 3

A ________ is an exchange rate quoted today for settlement at some time in the future.

Accepted Answer

A)  spot rate 
B)  forward rate 
C)  currency rate 
D)  yield curve 
A)  spot rate 
B)  forward rate 
C)  currency rate 
D)  yield curve B

Question 4

If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates.

Accepted Answer

A) True 
 B)False

Question 5

If a market basket of goods cost $100 in the US and 70 euros in France, then the PPP exchange rate would be $.70/euro.

Accepted Answer

A) True 
 B)False

Question 6

One-year interest rates are currently 2.50% in the United States and 3.70% in Great Britain. The current spot rate between the pound and dollar is $1.9000/£. What is the expected spot rate in one year if the international Fisher effect holds?

Accepted Answer

A)  $1.9000/£ 
B)  $1.9222/£ 
C)  $1.8780/£ 
D)  $1.8500/£ 
A)  $1.9000/£ 
B)  $1.9222/£ 
C)  $1.8780/£ 
D)  $1.8500/£

Question 7

A Macedonian homeowner deciding for a Euro-denominated, lower rate mortgage is

Accepted Answer

A)  effectively initiating long term covered interest arbitrage. 
B)  should start seeking US dollar salary to mitigate the risk of falling behind the payment schedule. 
C)  creating debt service FX exposure for the whole life of the loan. 
D)  remaining "uncovered" unless she has sub-lease contract denominated in Macedonian Denar. 
A)  effectively initiating long term covered interest arbitrage. 
B)  should start seeking US dollar salary to mitigate the risk of falling behind the payment schedule. 
C)  creating debt service FX exposure for the whole life of the loan. 
D)  remaining "uncovered" unless she has sub-lease contract denominated in Macedonian Denar.

Question 8

The authors describe an application of uncovered interest arbitrage (UIA) known as "yen carry trade." Define UIA and describe the example of yen carry trade. Why would an investor engage in the practice of yen carry trade and is there any risk of loss or lesser profit from this investment strategy?

Accepted Answer

UIA is the practice of investors borrowi

Question 9

If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product's price should be the same in both markets. This is known as

Accepted Answer

A)  relative purchasing power parity. 
B)  interest rate parity. 
C)  the law of one price. 
D)  equilibrium. 
A)  relative purchasing power parity. 
B)  interest rate parity. 
C)  the law of one price. 
D)  equilibrium.

Question 10

All that is required for a covered interest arbitrage profit is for interest rate parity to not hold.

Accepted Answer

A) True 
 B)False

Question 11

The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

Accepted Answer

A)  international Fisher Effect 
B)  absolute PPP 
C)  interest rate parity 
D)  the law of one price 
A)  international Fisher Effect 
B)  absolute PPP 
C)  interest rate parity 
D)  the law of one price

Question 12

The current U.S. dollar-yen spot rate is 85¥/$. If the 90-day forward exchange rate is 88 ¥/$ then the yen is at a forward premium.

Accepted Answer

A) True 
 B)False

Question 13

According to the theory of interest rate parity, the difference in national interest rates for securities of similar risk and maturity should be ________ and ________ sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

Accepted Answer

A)  equal to; of the same 
B)  less than; of the same 
C)  greater than; opposite in 
D)  equal to; opposite in 
A)  equal to; of the same 
B)  less than; of the same 
C)  greater than; opposite in 
D)  equal to; opposite in

Question 14

If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2010, and find that the U.S. dollar has changed to a value of 91.4, then from a competitive perspective the U.S. dollar is

Accepted Answer

A)  overvalued. 
B)  undervalued. 
C)  equally valued. 
D)  There is not enough information to answer this question. 
A)  overvalued. 
B)  undervalued. 
C)  equally valued. 
D)  There is not enough information to answer this question.

Question 15

Which of the following is NOT an assumption of market efficiency?

Accepted Answer

A)  Instruments denominated in other currencies are perfect substitutes for one another. 
B)  Transaction costs are low or nonexistent. 
C)  All relevant information is quickly reflected in both spot and forward exchange markets. 
D)  All of the above are true. 
A)  Instruments denominated in other currencies are perfect substitutes for one another. 
B)  Transaction costs are low or nonexistent. 
C)  All relevant information is quickly reflected in both spot and forward exchange markets. 
D)  All of the above are true.

Question 16

If the forward exchange rate is an unbiased predictor of future spot rates, then future spot rates will always be equal to current forward rates.

Accepted Answer

A) True 
 B)False

Question 17

________ states that the spot exchange rate is determined by the relative prices of similar baskets of goods.

Accepted Answer

A)  Absolute purchasing power parity 
B)  Relative purchasing power parity 
C)  Interest rate parity 
D)  The Fisher Effect 
A)  Absolute purchasing power parity 
B)  Relative purchasing power parity 
C)  Interest rate parity 
D)  The Fisher Effect

Question 18

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as

Accepted Answer

A)  absolute PPP. 
B)  the law of one price. 
C)  relative PPP. 
D)  the international Fisher Effect. 
A)  absolute PPP. 
B)  the law of one price. 
C)  relative PPP. 
D)  the international Fisher Effect.

Question 19

Covered interest arbitrage moves the market ________ equilibrium because ________.

Accepted Answer

A)  toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two 
B)  toward; investors are now more willing to invest in risky securities 
C)  away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the two 
D)  away from; demand for the stronger currency forces up interest rates on the weaker security 
A)  toward; purchasing a currency on the spot market and selling in the forward market narrows the differential between the two 
B)  toward; investors are now more willing to invest in risky securities 
C)  away from; purchasing a currency on the spot market and selling in the forward market increases the differential between the two 
D)  away from; demand for the stronger currency forces up interest rates on the weaker security

Question 20

Incomplete exchange rate pass-through refers to

Accepted Answer

A)  the rates at which domestic suppliers decrease its prices to accommodate foreign exchange volatility. 
B)  the degree of un-proportional change in prices of imports and exports relative to periodic changes in the exchange rate. 
C)  the fee charged by foreign exchange dealer when the exporter cancels the transaction. 
D)  the rate at which exporters increase prices when their home currency depreciates. 
A)  the rates at which domestic suppliers decrease its prices to accommodate foreign exchange volatility. 
B)  the degree of un-proportional change in prices of imports and exports relative to periodic changes in the exchange rate. 
C)  the fee charged by foreign exchange dealer when the exporter cancels the transaction. 
D)  the rate at which exporters increase prices when their home currency depreciates.

If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true?

The implied PPP rate of exchange of Mexican pesos per U.S. dollar is 8.58 according to the Big Mac Index. The current exchange rate is Peso 10.8/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is

A ________ is an exchange rate quoted today for settlement at some time in the future.

If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates.

If a market basket of goods cost $100 in the US and 70 euros in France, then the PPP exchange rate would be $.70/euro.

One-year interest rates are currently 2.50% in the United States and 3.70% in Great Britain. The current spot rate between the pound and dollar is $1.9000/£. What is the expected spot rate in one year if the international Fisher effect holds?

A Macedonian homeowner deciding for a Euro-denominated, lower rate mortgage is

The authors describe an application of uncovered interest arbitrage (UIA) known as "yen carry trade." Define UIA and describe the example of yen carry trade. Why would an investor engage in the practice of yen carry trade and is there any risk of loss or lesser profit from this investment strategy?

If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product's price should be the same in both markets. This is known as

All that is required for a covered interest arbitrage profit is for interest rate parity to not hold.

The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

The current U.S. dollar-yen spot rate is 85¥/$. If the 90-day forward exchange rate is 88 ¥/$ then the yen is at a forward premium.

According to the theory of interest rate parity, the difference in national interest rates for securities of similar risk and maturity should be and sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2010, and find that the U.S. dollar has changed to a value of 91.4, then from a competitive perspective the U.S. dollar is

Which of the following is NOT an assumption of market efficiency?

If the forward exchange rate is an unbiased predictor of future spot rates, then future spot rates will always be equal to current forward rates.

________ states that the spot exchange rate is determined by the relative prices of similar baskets of goods.

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as

Covered interest arbitrage moves the market equilibrium because .

Incomplete exchange rate pass-through refers to

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

Foreign Currency Derivatives and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

Exam 6: International Parity Conditions

If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true?

The implied PPP rate of exchange of Mexican pesos per U.S. dollar is 8.58 according to the Big Mac Index. The current exchange rate is Peso 10.8/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is

A ________ is an exchange rate quoted today for settlement at some time in the future.

If exchange markets were not efficient, it would pay for a firm to spend resources on forecasting exchange rates.

If a market basket of goods cost $100 in the US and 70 euros in France, then the PPP exchange rate would be $.70/euro.

One-year interest rates are currently 2.50% in the United States and 3.70% in Great Britain. The current spot rate between the pound and dollar is $1.9000/£. What is the expected spot rate in one year if the international Fisher effect holds?

A Macedonian homeowner deciding for a Euro-denominated, lower rate mortgage is

The authors describe an application of uncovered interest arbitrage (UIA) known as "yen carry trade." Define UIA and describe the example of yen carry trade. Why would an investor engage in the practice of yen carry trade and is there any risk of loss or lesser profit from this investment strategy?

If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product's price should be the same in both markets. This is known as

All that is required for a covered interest arbitrage profit is for interest rate parity to not hold.

The theory of ________ states that the difference in the national interest rates for securities of similar risk and maturity should be equal to but opposite in sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

The current U.S. dollar-yen spot rate is 85¥/$. If the 90-day forward exchange rate is 88 ¥/$ then the yen is at a forward premium.

According to the theory of interest rate parity, the difference in national interest rates for securities of similar risk and maturity should be ________ and ________ sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2010, and find that the U.S. dollar has changed to a value of 91.4, then from a competitive perspective the U.S. dollar is

Which of the following is NOT an assumption of market efficiency?

If the forward exchange rate is an unbiased predictor of future spot rates, then future spot rates will always be equal to current forward rates.

________ states that the spot exchange rate is determined by the relative prices of similar baskets of goods.

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as

Covered interest arbitrage moves the market ________ equilibrium because ________.

Incomplete exchange rate pass-through refers to

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

Foreign Currency Derivatives and Swaps

Foreign Exchange Rate Determination

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

According to the theory of interest rate parity, the difference in national interest rates for securities of similar risk and maturity should be and sign to the forward rate discount or premium for the foreign currency, except for transaction costs.

Covered interest arbitrage moves the market equilibrium because .