Question 1

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 2

Consider the price elasticity of demand. If a product has price elasticity less than one it is considered to have relatively elastic demand.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Both covered and uncovered interest arbitrage are risky operations in the sense that even without default in the securities, the returns are unknown until all transactions are complete.

Accepted Answer

A) True 
 B)False

Question 5

In its approximate form the Fisher effect may be written as ________. Where: i = the nominal rate of interest, r = the real rate of return and π = the expected rate of inflation.

Accepted Answer

A) i = (r)(π) 
B) i = r + π + (r)(π) 
C) i = r + π 
D) i = r + 2π 
A) i = (r)(π) 
B) i = r + π + (r)(π) 
C) i = r + π 
D) i = r + 2π

Question 6

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 7

Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the percentage margin the company will realize given the new exchange rate?

Accepted Answer

A) 20.0% 
B) 15.3% 
C) 12.4% 
D) 7.2% 
A) 20.0% 
B) 15.3% 
C) 12.4% 
D) 7.2%

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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.

Question 10

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 11

The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S. dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year. Other things equal U.S. ________ to/from Japan think this is good news and U.S. ________ to/from Japan think this is bad news.

Accepted Answer

A) importers; exporters 
B) importers; importers 
C) exporters; exporters 
D) exporters; importers 
A) importers; exporters 
B) importers; importers 
C) exporters; exporters 
D) exporters; importers

Question 12

COVERED interest arbitrage (CIA), is where investors borrow in countries and currencies exhibiting relatively low interest rates and convert the proceeds into currencies that offer much higher interest rates. The transaction is "covered," because the investor does not sell the higher yielding currency proceeds forward.

Accepted Answer

A) True 
 B)False

Question 13

Other things equal, and assuming efficient markets, if a Honda Accord costs $24,682 in the U.S., then at an exchange rate of $1.57/£, the Honda Accord should cost ________ in Great Britain.

Accepted Answer

A) £24,682 
B) £38,751 
C) £10,795 
D) £15,721 
A) £24,682 
B) £38,751 
C) £10,795 
D) £15,721

Question 14

Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________.

Accepted Answer

A) conflicting; not efficient 
B) conflicting; efficient 
C) consistent; inefficient 
D) none of the above 
A) conflicting; not efficient 
B) conflicting; efficient 
C) consistent; inefficient 
D) none of the above

Question 15

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

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

Consider the price elasticity of demand. If a product has price elasticity less than one it is considered to have relatively elastic demand.

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.

Both covered and uncovered interest arbitrage are risky operations in the sense that even without default in the securities, the returns are unknown until all transactions are complete.

In its approximate form the Fisher effect may be written as ________. Where: i = the nominal rate of interest, r = the real rate of return and π = the expected rate of inflation.

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 is the US and €70 in France, then the PPP exchange rate would be $.70/€.

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:

Two general conclusions can be made from the empirical tests of purchasing power parity (PPP):

Other things equal, and assuming efficient markets, if a Honda Accord costs $24,682 in the U.S., then at an exchange rate of $1.57/£, the Honda Accord should cost ________ in Great Britain.

Empirical tests have yielded evidence about market efficiency with a general consensus that developing foreign markets are .

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

Current Multinational Challenges and the Global Economy

Corporate Ownership, Goals, and Governance

The International Monetary System

The Balance of Payments

The Continuing Global Financial Crisis

The Foreign Exchange Theory and Markets

Foreign Currency Derivatives and Swaps

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Portfolio Theory and Diversification

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Working Capital Management

International Trade Finance

Filters

Exam 7: International Parity Conditions

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

Consider the price elasticity of demand. If a product has price elasticity less than one it is considered to have relatively elastic demand.

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.

Both covered and uncovered interest arbitrage are risky operations in the sense that even without default in the securities, the returns are unknown until all transactions are complete.

In its approximate form the Fisher effect may be written as ________. Where: i = the nominal rate of interest, r = the real rate of return and π = the expected rate of inflation.

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 is the US and €70 in France, then the PPP exchange rate would be $.70/€.

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:

Two general conclusions can be made from the empirical tests of purchasing power parity (PPP):

Other things equal, and assuming efficient markets, if a Honda Accord costs $24,682 in the U.S., then at an exchange rate of $1.57/£, the Honda Accord should cost ________ in Great Britain.

Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________.

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

Current Multinational Challenges and the Global Economy

Corporate Ownership, Goals, and Governance

The International Monetary System

The Balance of Payments

The Continuing Global Financial Crisis

The Foreign Exchange Theory and Markets

Foreign Currency Derivatives and Swaps

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Portfolio Theory and Diversification

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Working Capital Management

International Trade Finance

Filters

Empirical tests have yielded evidence about market efficiency with a general consensus that developing foreign markets are .