Question 1

If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, then

Accepted Answer

A)  an investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent. 
B)  an investor should invest only in euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent. 
C)  an investor should be indifferent between dollars and euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent. 
D)  an investor should invest only in dollars. 
E)  an investor should invest only in euros.

Question 2

-Using the data in the table above, plot today's dollar/euro exchange rate against the expected dollar return on euro deposits.

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-Using the data in the table above,...

Question 3

Who are the major participants in the foreign exchange market?

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Question 4

The covered interest rate parity condition can be stated as follows: The interest rate on dollar deposits equals the interest rate on euro deposits ________ the forward ________ on dollars against euros.

Accepted Answer

A)  plus; premium 
B)  plus; discount 
C)  times; premium 
D)  minus; premium 
E)  minus; discount

Question 5

Discuss the effects of a rise in the interest rate paid by euro deposits on the exchange rate.

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Question 6

Exxon Mobil wants to pay  160,000 to a German supplier. They get an exchange rate quotation from its own commercial bank and instructs it to debit their dollar account and pay  160,000 to the supplier's German account. If the exchange rate quoted is $1.2 per euro, how much is debited to Exxon Mobil's account?

Accepted Answer

A)  $160,000 
B)  $172,000 
C)  $180,000 
D)  $192,000 
E)  $150,000

Question 7

Explain the purpose of the following figure.

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Question 8

In the year 2012, Shinzo Abe became prime minister of Japan, promising bold policies to improve Japan's economy. What was the focus of his policies and how did they affect Japan's trade position?

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Question 9

What is the interest parity condition?

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Question 10

If the dollar interest rate is 4 percent, the euro interest rate is 6 percent, then

Accepted Answer

A)  an investor should invest only in dollars. 
B)  an investor should invest only in euros. 
C)  an investor should be indifferent between dollars and euros. 
D)  invest only in dollars if the exchange rate is expected to remain constant. 
E)  invest only in euros if the exchange rate is expected to remain constant.

Question 11

For the following 15 cases, compare the dollar rates of return on dollar and euro deposits.

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Question 12

If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, then

Accepted Answer

A)  an investor should invest only in dollars if the expected dollar depreciation against the euro is 4 percent. 
B)  an investor should invest only in euros if the expected dollar depreciation against the euro is 4 percent. 
C)  an investor should be indifferent between dollars and euros if the expected dollar depreciation against the euro is 4 percent. 
D)  an investor should invest only in dollars. 
E)  an investor should invest only in euros.

Question 13

Which of the following is NOT a major actor in the foreign exchange market?

Accepted Answer

A)  corporations 
B)  central banks 
C)  commercial banks 
D)  non-bank financial institutions 
E)  tourists

Question 14

Based on the case study, "Exchange Rates, Auto Prices, and Currency Wars," explain why exchange rates are of critical importance to firms in the automobile industry, and how Japan has benefited from changes in the value of the Yen.

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Question 15

Show graphically a drop in the interest rate paid by euro deposits. What is the effect on the dollar?

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Question 16

Which major actor is at the center of the foreign exchange market?

Accepted Answer

A)  corporations 
B)  central banks 
C)  commercial banks 
D)  non-bank financial institutions 
E)  individual firms

Question 17

For the table below calculate the EXACT relationship.

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Question 18

The largest trading of foreign exchange occurs in

Accepted Answer

A)  New York. 
B)  London. 
C)  Tokyo. 
D)  Frankfurt. 
E)  Singapore.

Question 19

Explain what is a "vehicle currency." Why is the U.S. dollar considered a vehicle currency?

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Question 20

Explain the purpose of the following figure 14-2 from the text in the context of the interest rates on the dollar and the Japanese Yen between 1980 and 2010.

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Exam 14: Exchange Rates and the Foreign Exchange Market: an Asset Approach