Question 1

What is the difference between a risk-free transaction and an arbitrage transaction?

Accepted Answer

A risk-free transaction is,as its name suggests,a transaction in which the outcome is determined at the time that the transaction is entered into;that is,the entity entering into the transaction is assured of the outcome of the transaction.An arbitrage transaction is essentially a risk-free transaction because the entity entering into the transaction essentially enters into two transactions that will occur simultaneously and ensure the outcome that the entity desires.From that standpoint,a risk-free transaction and an arbitrage transaction are the same.The difference in the two types of transactions is in how they are financed.In a risk-free transaction,the entity makes an investment or a commitment which will eventually produce the outcome that the entity desires,but the entity is required to make the investment or commitment before the results are achieved;that is,the entity must finance its participation in the transaction in some way.In an arbitrage transaction,the entity entering into the transaction buys an asset in one market at one price and sells that asset in another market at a higher price,thereby making a profit.Because the purchase and the sale are simultaneous,the transaction is self-funding (the purchase price is provided by the sale price),and no investment is required by the entity conducting the transaction.

Question 2

Forward parity refers to:

Accepted Answer

A) the equality of a forward rate to the expected spot rate of the currency. 
B) the difference between a forward rate and the expected spot rate of the currency. 
C) the amount by which the future spot rate of a currency exceeds the forward rate of the currency. 
D) the amount by which the forward rate of a currency exceeds the future spot rate of the currency. 
A) the equality of a forward rate to the expected spot rate of the currency. 
B) the difference between a forward rate and the expected spot rate of the currency. 
C) the amount by which the future spot rate of a currency exceeds the forward rate of the currency. 
D) the amount by which the forward rate of a currency exceeds the future spot rate of the currency. A

Question 3

Older studies say that forward rates are _________________________ but more recent studies suggest that forward rates __________________________________________.

Accepted Answer

A) are not good indicators of future currency values;are even less accurate in predicting future currency values 
B) are not good indicators of future currency values;of currencies of emerging nations are fairly accurate 
C) accurate indicators of future currency values;are poor predictors of future currency values 
D) fairly accurate indicators of future currency values;are even better indicators of future currency values than previously thought 
A) are not good indicators of future currency values;are even less accurate in predicting future currency values 
B) are not good indicators of future currency values;of currencies of emerging nations are fairly accurate 
C) accurate indicators of future currency values;are poor predictors of future currency values 
D) fairly accurate indicators of future currency values;are even better indicators of future currency values than previously thought B

Question 4

Fundamental forecasting requires:

Accepted Answer

A) a basic knowledge of currency value trends. 
B) the use of basic mathematical analysis applied to basic economic data. 
C) the construction of models that relate currency values to variable derived from economic theory. 
D) the use of sophisticated computer models to predict future currency values. 
A) a basic knowledge of currency value trends. 
B) the use of basic mathematical analysis applied to basic economic data. 
C) the construction of models that relate currency values to variable derived from economic theory. 
D) the use of sophisticated computer models to predict future currency values.

Question 5

What effect does the process of arbitrage have on currency markets?

Accepted Answer

A) It interferes with the proper functioning of the currency markets. 
B) It creates unnatural demand for currencies that are the subject of arbitrage transactions. 
C) It makes them function properly and is responsible for the rational pricing of currencies. 
D) It does not affect the currency markets because it involves both purchases and sales of the same currency. 
A) It interferes with the proper functioning of the currency markets. 
B) It creates unnatural demand for currencies that are the subject of arbitrage transactions. 
C) It makes them function properly and is responsible for the rational pricing of currencies. 
D) It does not affect the currency markets because it involves both purchases and sales of the same currency.

Question 6

MNCs use currency forecasting in:

Accepted Answer

A) speculating in purchasing and selling foreign currency. 
B) budgeting,financing,and working capital management. 
C) determining their operating cash needs at a specific future date. 
D) computing profit or loss on completed transactions. 
A) speculating in purchasing and selling foreign currency. 
B) budgeting,financing,and working capital management. 
C) determining their operating cash needs at a specific future date. 
D) computing profit or loss on completed transactions.

Question 7

The part of the financial markets that trades financial instruments issued by governments,banks and corporations is called the:

Accepted Answer

A) credit market. 
B) money market. 
C) equity market. 
D) currency market. 
A) credit market. 
B) money market. 
C) equity market. 
D) currency market.

Question 8

In the short term:

Accepted Answer

A) purchasing power parity can be accomplished,but only with government intervention to control prices. 
B) purchasing power parity will be accomplished if markets are allowed to operate freely. 
C) purchasing power parity is not reached and currency values do not tend to converge because of other factors affecting. 
D) purchasing power parity is not reached buy currency values do tend to converge anyway. 
A) purchasing power parity can be accomplished,but only with government intervention to control prices. 
B) purchasing power parity will be accomplished if markets are allowed to operate freely. 
C) purchasing power parity is not reached and currency values do not tend to converge because of other factors affecting. 
D) purchasing power parity is not reached buy currency values do tend to converge anyway.

Question 9

"Grossing-up" nominal interest rates means:

Accepted Answer

A) adding up all of the interest rates at major institutions in a country and dividing by the number of institutions considered to determine an average interest rate. 
B) determining the differential in interest rates in one country compared to interest rates in another country. 
C) reducing nominal rates by the inflation rate to compensate for the loss of purchasing power attributed to inflation. 
D) increasing nominal rates by the inflation percentage to determine the real purchasing power of consumers. 
A) adding up all of the interest rates at major institutions in a country and dividing by the number of institutions considered to determine an average interest rate. 
B) determining the differential in interest rates in one country compared to interest rates in another country. 
C) reducing nominal rates by the inflation rate to compensate for the loss of purchasing power attributed to inflation. 
D) increasing nominal rates by the inflation percentage to determine the real purchasing power of consumers.

Question 10

___________ is based on the concept that if you buy something at one price and sell it at a higher price,you will make a profit.

Accepted Answer

A) Arbitrage 
B) Capitalism 
C) Currency exchange 
D) Barter 
A) Arbitrage 
B) Capitalism 
C) Currency exchange 
D) Barter

Question 11

Purchasing power parity can arise from two types of transactions:

Accepted Answer

A) trading and manufacturing. 
B) arbitrage and financing. 
C) speculating and hoarding. 
D) production and bartering. 
A) trading and manufacturing. 
B) arbitrage and financing. 
C) speculating and hoarding. 
D) production and bartering.

Question 12

What is the law of one price?

Accepted Answer

The law of one price says that if goods

Question 13

__________________________ say(s)that exchange rates should equalize prices of a basket of goods in two countries.

Accepted Answer

A) Purchasing Power Parity 
B) Product market mechanics 
C) Government regulations 
D) Currency values 
A) Purchasing Power Parity 
B) Product market mechanics 
C) Government regulations 
D) Currency values

Question 14

What is the International Fisher Effect and what does it say about inflation?

Accepted Answer

The Fisher Effect simply says that the n

Question 15

Relative purchasing power parity focuses on ________________ while absolute purchasing power parity focuses on _________________.

Accepted Answer

A) price levels;price changes 
B) inflation;price changes 
C) price changes;price levels 
D) price changes;inflation 
A) price levels;price changes 
B) inflation;price changes 
C) price changes;price levels 
D) price changes;inflation

Question 16

If an investor borrows funds in currency with a low interest rate and loans those funds in a currency with a higher interest rate but the investor does not acquire a forward contract that assures an acceptable exchange rate for the loaned currency,the transaction is called a (an)________________ transaction.

Accepted Answer

A) ill-advised 
B) currency swap gamble 
C) carry trade 
D) uncovered interest arbitrage 
A) ill-advised 
B) currency swap gamble 
C) carry trade 
D) uncovered interest arbitrage

Question 17

When a foreign interest rate is higher than a domestic interest rate,the foreign currency's forward rate will be less than its spot rate.That means that:

Accepted Answer

A) the value of the foreign currency is expected to decline in the future. 
B) the value of the foreign currency is expected to increase in the future. 
C) the foreign interest rate is expected to increase in the future. 
D) the foreign interest rate is expected to decline in the future. 
A) the value of the foreign currency is expected to decline in the future. 
B) the value of the foreign currency is expected to increase in the future. 
C) the foreign interest rate is expected to increase in the future. 
D) the foreign interest rate is expected to decline in the future.

Question 18

Purchasing Power Parity is most useful in explaining currency misalignments when it compares:

Accepted Answer

A) countries located in the same region of the world. 
B) dissimilar economies. 
C) countries at a similar stage of development. 
D) longer periods of time as opposed to shorter periods of time. 
A) countries located in the same region of the world. 
B) dissimilar economies. 
C) countries at a similar stage of development. 
D) longer periods of time as opposed to shorter periods of time.

Question 19

What is covered interest arbitrage?

Accepted Answer

If an investor can borrow funds in one c

Question 20

The effect of arbitrage transactions on markets can best be described as:

Accepted Answer

A) currency and money markets will be destabilized. 
B) those who need currencies for business and trade purposes will be excluded from the markets. 
C) interest rates and values of the currencies involved will tend to converge. 
D) regulators will eventually restrict the ability to engage in arbitrage transactions. 
A) currency and money markets will be destabilized. 
B) those who need currencies for business and trade purposes will be excluded from the markets. 
C) interest rates and values of the currencies involved will tend to converge. 
D) regulators will eventually restrict the ability to engage in arbitrage transactions.

What is the difference between a risk-free transaction and an arbitrage transaction?

Forward parity refers to:

Older studies say that forward rates are _ but more recent studies suggest that forward rates __________________.

Fundamental forecasting requires:

What effect does the process of arbitrage have on currency markets?

MNCs use currency forecasting in:

The part of the financial markets that trades financial instruments issued by governments,banks and corporations is called the:

In the short term:

"Grossing-up" nominal interest rates means:

___________ is based on the concept that if you buy something at one price and sell it at a higher price,you will make a profit.

Purchasing power parity can arise from two types of transactions:

What is the law of one price?

__________________________ say(s)that exchange rates should equalize prices of a basket of goods in two countries.

What is the International Fisher Effect and what does it say about inflation?

Relative purchasing power parity focuses on while absolute purchasing power parity focuses on _.

When a foreign interest rate is higher than a domestic interest rate,the foreign currency's forward rate will be less than its spot rate.That means that:

Purchasing Power Parity is most useful in explaining currency misalignments when it compares:

What is covered interest arbitrage?

The effect of arbitrage transactions on markets can best be described as:

Introduction

International Financial Markets: Structure and Innovation

Currency and Eurocurrency Derivatives

Currency Systems and Valuation

Currency Risk Exposure Measurement

Currency Exposure Management

Capital Budgeting

Advanced Capital Budgeting

Long-Term Financing

Optimizing and Financing Working Capital

International Alliances and Acquisitions

International Trade

International Taxation and Accounting

International Portfolio Investments

Filters

Exam 5: Currency Parity Conditions

What is the difference between a risk-free transaction and an arbitrage transaction?

Forward parity refers to:

Older studies say that forward rates are _________________________ but more recent studies suggest that forward rates __________________________________________.

Fundamental forecasting requires:

What effect does the process of arbitrage have on currency markets?

MNCs use currency forecasting in:

The part of the financial markets that trades financial instruments issued by governments,banks and corporations is called the:

In the short term:

"Grossing-up" nominal interest rates means:

___________ is based on the concept that if you buy something at one price and sell it at a higher price,you will make a profit.

Purchasing power parity can arise from two types of transactions:

What is the law of one price?

__________________________ say(s)that exchange rates should equalize prices of a basket of goods in two countries.

What is the International Fisher Effect and what does it say about inflation?

Relative purchasing power parity focuses on ________________ while absolute purchasing power parity focuses on _________________.

When a foreign interest rate is higher than a domestic interest rate,the foreign currency's forward rate will be less than its spot rate.That means that:

Purchasing Power Parity is most useful in explaining currency misalignments when it compares:

What is covered interest arbitrage?

The effect of arbitrage transactions on markets can best be described as:

Introduction

International Financial Markets: Structure and Innovation

Currency and Eurocurrency Derivatives

Currency Systems and Valuation

Currency Risk Exposure Measurement

Currency Exposure Management

Capital Budgeting

Advanced Capital Budgeting

Long-Term Financing

Optimizing and Financing Working Capital

International Alliances and Acquisitions

International Trade

International Taxation and Accounting

International Portfolio Investments

Filters

Older studies say that forward rates are _ but more recent studies suggest that forward rates __________________.

Relative purchasing power parity focuses on while absolute purchasing power parity focuses on _.