Question 1

Which is not a function of the foreign exchange market?

Accepted Answer

A)  to transfer funds from one nation to another 
B)  to finance trade 
C)  to diversify risks 
D)  to provide the facilities for hedging 
A)  to transfer funds from one nation to another 
B)  to finance trade 
C)  to diversify risks 
D)  to provide the facilities for hedging C

Question 2

The U.S.interest rate is 2%.The U.K.interest rate is 2.25% The spot rate is 2.01 $/£,and the forward rate (for a 12 month contract)is 1.96 $/£ .
Does the covered interest arbitrage condition hold? If not,in which country would you be better off investing? Show how you know.

Accepted Answer

The interest rate differential is -0.25%.The pound is trading at a -0.2% forward discount.You are better off investing in the UK.

Question 3

Carry trade refers to

Accepted Answer

A)  covered interest arbitrage in the spot and forward markets. 
B)  moving investment funds to countries in which there is less risk. 
C)  borrowing low-yielding currencies and lending high-yielding currencies. 
D)  exporting to one country and importing from another. 
A)  covered interest arbitrage in the spot and forward markets. 
B)  moving investment funds to countries in which there is less risk. 
C)  borrowing low-yielding currencies and lending high-yielding currencies. 
D)  exporting to one country and importing from another. C

Question 4

An increase in the pound price of the dollar represents:

Accepted Answer

A)  an appreciation of the dollar 
B)  a depreciation of the dollar 
C)  an appreciation of the pound 
D)  a devaluation of the dollar 
A)  an appreciation of the dollar 
B)  a depreciation of the dollar 
C)  an appreciation of the pound 
D)  a devaluation of the dollar

Question 5

The opposite of hedging is

Accepted Answer

A)  speculation 
B)  interest arbitrage 
C)  holding 
D)  none of the above 
A)  speculation 
B)  interest arbitrage 
C)  holding 
D)  none of the above

Question 6

Spot currency transactions must settle within

Accepted Answer

A)  two business days 
B)  one week 
C)  one month 
D)  one year 
A)  two business days 
B)  one week 
C)  one month 
D)  one year

Question 7

(a)If the positive interest rate differential in favor of a foreign monetary center is 3 percent per year and the foreign currency is at a forward discount of 1 percent per year,roughly how much would an interest arbitrageur earn from the purchase of foreign three-month treasury bills if he covers the foreign exchange risk?
(b)How much would an interest arbitrageur earn if the foreign currency were instead at a forward premium of 1 percent per year?
(c)What would happen if the foreign currency were at a forward discount of 3 percent per year?

Accepted Answer

(a)The interest arbitrageur will earn 2%

Question 8

Explain what carry trade is.

Accepted Answer

Carry trade refers to the borrowing of f

Question 9

According to the theory of covered interest arbitrage,if the interest differential in favor of the foreign country exceeds the forward discount on the foreign currency,there will be a:

Accepted Answer

A)  capital inflow under covered interest arbitrage 
B)  capital outflow under covered interest arbitrage 
C)  no capital flow under a covered interest arbitrage 
D)  any of the above 
A)  capital inflow under covered interest arbitrage 
B)  capital outflow under covered interest arbitrage 
C)  no capital flow under a covered interest arbitrage 
D)  any of the above

Question 10

Most activity in the foreign exchange market consists of

Accepted Answer

A)  spot transactions and foreign exchange swaps 
B)  currency swaps. 
C)  options. 
D)  futures. 
A)  spot transactions and foreign exchange swaps 
B)  currency swaps. 
C)  options. 
D)  futures.

Question 11

The spot sale of a currency combined with a forward repurchase of the same currency is a

Accepted Answer

A)  stop gap transaction 
B)  forward discount transaction 
C)  premium transaction 
D)  currency swap 
A)  stop gap transaction 
B)  forward discount transaction 
C)  premium transaction 
D)  currency swap

Question 12

The currency of the nation with the lower interest rate is usually at a

Accepted Answer

A)  forward premium 
B)  forward discount 
C)  covered interest arbitrage parity 
D)  any of the above 
A)  forward premium 
B)  forward discount 
C)  covered interest arbitrage parity 
D)  any of the above

Question 13

The exchange rate is kept within narrow limits in different monetary centers by:

Accepted Answer

A)  hedging 
B)  exchange arbitrage 
C)  interest arbitrage 
D)  speculation 
A)  hedging 
B)  exchange arbitrage 
C)  interest arbitrage 
D)  speculation

Question 14

A capital outflow from New York to Frankfurt under covered interest arbitrage can take place if the interest differential in favor of Frankfurt is:

Accepted Answer

A)  smaller than the forward discount on the euro 
B)  equal to the forward discount on the euro 
C)  larger than the forward discount on the euro 
D)  none of the above 
A)  smaller than the forward discount on the euro 
B)  equal to the forward discount on the euro 
C)  larger than the forward discount on the euro 
D)  none of the above

Question 15

Commercial bank deposits outside the country of their issue are commonly referred to as

Accepted Answer

A)  reserve deposits 
B)  Eurocurrency 
C)  foreign deposits 
D)  exchange deposits 
A)  reserve deposits 
B)  Eurocurrency 
C)  foreign deposits 
D)  exchange deposits

Question 16

Discuss the reasons for the existence and growth of Eurocurrency markets

Accepted Answer

The higher interest rates paid

Question 17

A change from $1=€1 to $2=€1 represents

Accepted Answer

A)  depreciation of the dollar 
B)  an appreciation of the dollar 
C)  a depreciation of the pound 
D)  none of the above 
A)  depreciation of the dollar 
B)  an appreciation of the dollar 
C)  a depreciation of the pound 
D)  none of the above

Question 18

What is the principle function of foreign exchange markets?

Accepted Answer

The principle function is to transfer pu

Question 19

Destabilizing speculation refers to the:

Accepted Answer

A)  sale of the foreign currency when the exchange rate falls or is low 
B)  purchase of the foreign currency when the exchange rate falls or is low 
C)  sale of the foreign currency when the exchange rate rises or is high 
D)  all of the above 
A)  sale of the foreign currency when the exchange rate falls or is low 
B)  purchase of the foreign currency when the exchange rate falls or is low 
C)  sale of the foreign currency when the exchange rate rises or is high 
D)  all of the above

Question 20

Which of the following is NOT a reason for the smaller interest rate spread in Eurocurrency markets

Accepted Answer

A)  the absence of legal reserve requirements 
B)  lack of competition for deposits 
C)  economies of scale 
D)  risk diversification 
A)  the absence of legal reserve requirements 
B)  lack of competition for deposits 
C)  economies of scale 
D)  risk diversification

Which is not a function of the foreign exchange market?

The U.S.interest rate is 2%.The U.K.interest rate is 2.25% The spot rate is 2.01 $/£,and the forward rate (for a 12 month contract)is 1.96 $/£ . Does the covered interest arbitrage condition hold? If not,in which country would you be better off investing? Show how you know.

Carry trade refers to

An increase in the pound price of the dollar represents:

The opposite of hedging is

Spot currency transactions must settle within

Explain what carry trade is.

According to the theory of covered interest arbitrage,if the interest differential in favor of the foreign country exceeds the forward discount on the foreign currency,there will be a:

Most activity in the foreign exchange market consists of

The spot sale of a currency combined with a forward repurchase of the same currency is a

The currency of the nation with the lower interest rate is usually at a

The exchange rate is kept within narrow limits in different monetary centers by:

A capital outflow from New York to Frankfurt under covered interest arbitrage can take place if the interest differential in favor of Frankfurt is:

Commercial bank deposits outside the country of their issue are commonly referred to as

Discuss the reasons for the existence and growth of Eurocurrency markets

A change from $1=€1 to $2=€1 represents

What is the principle function of foreign exchange markets?

Destabilizing speculation refers to the:

Which of the following is NOT a reason for the smaller interest rate spread in Eurocurrency markets

Introduction

The Law of Comparative Advantage

The Standard Theory of International Trade

Demand and Supply, offer Curves, and the Terms of Trade

Factor Endowments and the Heckscherohlin Theory

Economies of Scale, imperfect Competition, and International Trade

Economic Growth and International Trade

Trade Restrictions: Tariffs

Nontariff Trade Barriers and the New Protectionism

Economic Integration: Customs Unions and Free Trade Areas

International Trade and Economic Development

International Resource Movements and Multinational Corporations

Balance of Payments

Exchange Rate Determination

The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates

The Income Adjustment Mechanism and Synthesis of Automatic Adjustments

Open Economy Macroeconomics: Adjustment Policies

Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply

Flexible Versus Fixed Exchange Rates, the European Monetary System, and Macroeconomic Policy Coordination

The International Monetary System: Past, present, and Future Answers to Selected Problems on Web

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Exam 14: Foreign Exchange Markets and Exchange Rates

Which is not a function of the foreign exchange market?

The U.S.interest rate is 2%.The U.K.interest rate is 2.25% The spot rate is 2.01 $/£,and the forward rate (for a 12 month contract)is 1.96 $/£ . Does the covered interest arbitrage condition hold? If not,in which country would you be better off investing? Show how you know.

Carry trade refers to

An increase in the pound price of the dollar represents:

The opposite of hedging is

Spot currency transactions must settle within

Explain what carry trade is.

According to the theory of covered interest arbitrage,if the interest differential in favor of the foreign country exceeds the forward discount on the foreign currency,there will be a:

Most activity in the foreign exchange market consists of

The spot sale of a currency combined with a forward repurchase of the same currency is a

The currency of the nation with the lower interest rate is usually at a

The exchange rate is kept within narrow limits in different monetary centers by:

A capital outflow from New York to Frankfurt under covered interest arbitrage can take place if the interest differential in favor of Frankfurt is:

Commercial bank deposits outside the country of their issue are commonly referred to as

Discuss the reasons for the existence and growth of Eurocurrency markets

A change from $1=€1 to $2=€1 represents

What is the principle function of foreign exchange markets?

Destabilizing speculation refers to the:

Which of the following is NOT a reason for the smaller interest rate spread in Eurocurrency markets

Introduction

The Law of Comparative Advantage

The Standard Theory of International Trade

Demand and Supply, offer Curves, and the Terms of Trade

Factor Endowments and the Heckscherohlin Theory

Economies of Scale, imperfect Competition, and International Trade

Economic Growth and International Trade

Trade Restrictions: Tariffs

Nontariff Trade Barriers and the New Protectionism

Economic Integration: Customs Unions and Free Trade Areas

International Trade and Economic Development

International Resource Movements and Multinational Corporations

Balance of Payments

Exchange Rate Determination

The Price Adjustment Mechanism With Flexible and Fixed Exchange Rates

The Income Adjustment Mechanism and Synthesis of Automatic Adjustments

Open Economy Macroeconomics: Adjustment Policies

Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply

Flexible Versus Fixed Exchange Rates, the European Monetary System, and Macroeconomic Policy Coordination

The International Monetary System: Past, present, and Future Answers to Selected Problems on Web

Filters