Question 1

If the forward exchange rate is unbiased predictor of future spot rates, the expected mean of the deviations from the forward rate is zero.

Accepted Answer

A) True 
 B)False

Question 2

Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.10% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?

Accepted Answer

A)  2.10% 
B)  2.05% 
C)  2.00% 
D)  1.90% 
A)  2.10% 
B)  2.05% 
C)  2.00% 
D)  1.90%

Question 3

The assumptions for absolute PPP are more rigid than the assumptions for relative PPP.

Accepted Answer

A) True 
 B)False

Question 4

A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP.

Accepted Answer

A)  overvalued 
B)  over compensating 
C)  undervalued 
D)  under compensating 
A)  overvalued 
B)  over compensating 
C)  undervalued 
D)  under compensating

Question 5

According to the Big Mac Index, the implied PPP exchange rate is Mexican Peso 8.58/$1 but the actual exchange rate is Peso 11.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.

Accepted Answer

A)  overvalued; approximately 21% 
B)  overvalued; approximately 27% 
C)  undervalued; approximately 21% 
D)  undervalued; approximately 27% 
A)  overvalued; approximately 21% 
B)  overvalued; approximately 27% 
C)  undervalued; approximately 21% 
D)  undervalued; approximately 27%

Question 6

The final component of the equation for the Fisher Effect, (r)(π), where r = the real rate of return and π = the expected rate of inflation, is often dropped from the equation because the number is simply too large for most Western economies.

Accepted Answer

A) True 
 B)False

Question 7

Generally speaking, the theory of absolute purchasing power parity works better for a market basket of goods than for a single good.

Accepted Answer

A) True 
 B)False

Question 8

With covered interest arbitrage,

Accepted Answer

A)  the market must be out of equilibrium. 
B)  a "riskless" arbitrage opportunity exists. 
C)  the arbitrageur trades in both the spot and future currency exchange markets. 
D)  all of the above 
A)  the market must be out of equilibrium. 
B)  a "riskless" arbitrage opportunity exists. 
C)  the arbitrageur trades in both the spot and future currency exchange markets. 
D)  all of the above

Question 9

If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is

Accepted Answer

A)  correctly priced. 
B)  under priced. 
C)  over priced. 
D)  There is not enough information to determine if the price is appropriate or not. 
A)  correctly priced. 
B)  under priced. 
C)  over priced. 
D)  There is not enough information to determine if the price is appropriate or not.

Question 10

Empirical tests fail to conclusively demonstrate that PPP is an accurate predictor of future exchange rates.

Accepted Answer

A) True 
 B)False

Question 11

Exchange rate pass-through may be defined as

Accepted Answer

A)  the bid/ask spread on currency exchange rate transactions. 
B)  the degree to which the prices of imported and exported goods change as a result of exchange rate changes. 
C)  the PPP of lesser-developed countries. 
D)  the practice by Great Britain of maintaining the relative strength of the currencies of the Commonwealth countries under the current floating exchange rate regime. 
A)  the bid/ask spread on currency exchange rate transactions. 
B)  the degree to which the prices of imported and exported goods change as a result of exchange rate changes. 
C)  the PPP of lesser-developed countries. 
D)  the practice by Great Britain of maintaining the relative strength of the currencies of the Commonwealth countries under the current floating exchange rate regime.

Question 12

According to the International Fisher effect, the differential between nominal 6 months interest rates is equal to but opposite in sign with the yearly forecast on the change in the spot rate.

Accepted Answer

A) True 
 B)False

Question 13

The Economist publishes annually the "Big Mac Index" by which they compare the prices of the McDonald's Corporation's Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $3.73 in the United States and 320 yen in Japan, what is the estimated exchange rate of yen per dollar as hypothesized by the Hamburger index?

Accepted Answer

A)  $0.015/¥ 
B)  87.2¥/$ 
C)  $0.00012/¥ 
D)  85.79¥/$ 
A)  $0.015/¥ 
B)  87.2¥/$ 
C)  $0.00012/¥ 
D)  85.79¥/$

Question 14

If according to the law of one price if the current exchange rate of dollars per British pound is $1.75/£, then at an exchange rate of $1.85/£, the dollar is

Accepted Answer

A)  overvalued. 
B)  undervalued. 
C)  correctly valued. 
D)  unknown relative valuation. 
A)  overvalued. 
B)  undervalued. 
C)  correctly valued. 
D)  unknown relative valuation.

Question 15

Other things equal, and assuming efficient markets, if a Honda Accord costs $21,375 in the U.S. then at an exchange rate of $1.63/£, the Honda Accord should cost ________ in Great Britain.

Accepted Answer

A)  £21,375 
B)  £18,365 
C)  £13,113 
D)  £42,322 
A)  £21,375 
B)  £18,365 
C)  £13,113 
D)  £42,322

Question 16

According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual interest rate of 6%, then the investor must be expecting the ________ to ________ at a rate of at least 1% per year over the next 5 years.

Accepted Answer

A)  British pound; appreciate 
B)  British pound; revalue 
C)  U.S. dollar; appreciate 
D)  U.S. dollar; depreciate 
A)  British pound; appreciate 
B)  British pound; revalue 
C)  U.S. dollar; appreciate 
D)  U.S. dollar; depreciate

Question 17

The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve. The currency of the country with the higher yield curve should be selling at a forward discount.

Accepted Answer

A) True 
 B)False

Question 18

What two general conclusions can be made from the empirical tests of purchasing power parity (PPP)?

Accepted Answer

A)  PPP holds up well over the short run but poorly for the long run and the theory holds better for countries with relatively low rates of inflation. 
B)  PPP holds up well over the short run but poorly for the long run and the theory holds better for countries with relatively high rates of inflation. 
C)  PPP holds up well over the long run but poorly for the short run and the theory holds better for countries with relatively low rates of inflation. 
D)  PPP holds up well over the long run but poorly for the short run and the theory holds better for countries with relatively high rates of inflation. 
A)  PPP holds up well over the short run but poorly for the long run and the theory holds better for countries with relatively low rates of inflation. 
B)  PPP holds up well over the short run but poorly for the long run and the theory holds better for countries with relatively high rates of inflation. 
C)  PPP holds up well over the long run but poorly for the short run and the theory holds better for countries with relatively low rates of inflation. 
D)  PPP holds up well over the long run but poorly for the short run and the theory holds better for countries with relatively high rates of inflation.

Question 19

If a country's real effective exchange rate index were to be less than 100, this would suggest an ________ currency.

Accepted Answer

A)  overvalued 
B)  over compensating 
C)  undervalued 
D)  under compensating 
A)  overvalued 
B)  over compensating 
C)  undervalued 
D)  under compensating

Question 20

If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is

Accepted Answer

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

If the forward exchange rate is unbiased predictor of future spot rates, the expected mean of the deviations from the forward rate is zero.

Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.10% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?

The assumptions for absolute PPP are more rigid than the assumptions for relative PPP.

A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP.

According to the Big Mac Index, the implied PPP exchange rate is Mexican Peso 8.58/$1 but the actual exchange rate is Peso 11.80/$1. Thus, at current exchange rates the peso appears to be by .

The final component of the equation for the Fisher Effect, (r)(π), where r = the real rate of return and π = the expected rate of inflation, is often dropped from the equation because the number is simply too large for most Western economies.

Generally speaking, the theory of absolute purchasing power parity works better for a market basket of goods than for a single good.

With covered interest arbitrage,

If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is

Empirical tests fail to conclusively demonstrate that PPP is an accurate predictor of future exchange rates.

Exchange rate pass-through may be defined as

According to the International Fisher effect, the differential between nominal 6 months interest rates is equal to but opposite in sign with the yearly forecast on the change in the spot rate.

If according to the law of one price if the current exchange rate of dollars per British pound is $1.75/£, then at an exchange rate of $1.85/£, the dollar is

Other things equal, and assuming efficient markets, if a Honda Accord costs $21,375 in the U.S. then at an exchange rate of $1.63/£, the Honda Accord should cost ________ in Great Britain.

The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve. The currency of the country with the higher yield curve should be selling at a forward discount.

What two general conclusions can be made from the empirical tests of purchasing power parity (PPP)?

If a country's real effective exchange rate index were to be less than 100, this would suggest an ________ currency.

If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is

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 exchange rate is unbiased predictor of future spot rates, the expected mean of the deviations from the forward rate is zero.

Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.10% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?

The assumptions for absolute PPP are more rigid than the assumptions for relative PPP.

A country's currency that strengthened relative to another country's currency by more than that justified by the differential in inflation is said to be ________ in terms of PPP.

According to the Big Mac Index, the implied PPP exchange rate is Mexican Peso 8.58/$1 but the actual exchange rate is Peso 11.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.

The final component of the equation for the Fisher Effect, (r)(π), where r = the real rate of return and π = the expected rate of inflation, is often dropped from the equation because the number is simply too large for most Western economies.

Generally speaking, the theory of absolute purchasing power parity works better for a market basket of goods than for a single good.

With covered interest arbitrage,

If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is

Empirical tests fail to conclusively demonstrate that PPP is an accurate predictor of future exchange rates.

Exchange rate pass-through may be defined as

According to the International Fisher effect, the differential between nominal 6 months interest rates is equal to but opposite in sign with the yearly forecast on the change in the spot rate.

If according to the law of one price if the current exchange rate of dollars per British pound is $1.75/£, then at an exchange rate of $1.85/£, the dollar is

Other things equal, and assuming efficient markets, if a Honda Accord costs $21,375 in the U.S. then at an exchange rate of $1.63/£, the Honda Accord should cost ________ in Great Britain.

The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve. The currency of the country with the higher yield curve should be selling at a forward discount.

What two general conclusions can be made from the empirical tests of purchasing power parity (PPP)?

If a country's real effective exchange rate index were to be less than 100, this would suggest an ________ currency.

If we set the real effective exchange rate index between Canada and the United States equal to 100 in 1998, and find that the U.S. dollar has risen to a value of 112.6, then from a competitive perspective the U.S. dollar is

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 Big Mac Index, the implied PPP exchange rate is Mexican Peso 8.58/$1 but the actual exchange rate is Peso 11.80/$1. Thus, at current exchange rates the peso appears to be by .