Question 1

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as ________.

Accepted Answer

A) absolute PPP 
B) the law of one price 
C) relative PPP 
D) the international Fisher Effect

Question 2

The authors state that empirical tests of purchasing power parity "have,for the most part,not proved PPP to be accurate in predicting future exchange rates." The authors then state that PPP does hold up reasonably well in two situations.What are some reasons why PPP does not accurately predict future exchange rates,and under what conditions might we reasonably expect PPP to hold?

Accepted Answer

The answer of The authors state that empirical tests of...

Question 3

If the forward rate is an unbiased predictor of the expected spot rate,which of the following is NOT true?

Accepted Answer

A) The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now. 
B) The distribution of possible actual spot rates in the future is centered on the forward rate. 
C) The future spot rate will actually be equal to what the forward rate predicts. 
D) All of the above are true.

Question 4

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

Question 5

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 6

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 $44,600 which is the UK price multiplied by the current exchange rate of $1.63/£. Jaguar has committed to keeping the US price at $44,600 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $1.75/£,and Jaguar has not hedged against currency changes,what is the amount the company will receive in pounds at the new exchange rate?

Accepted Answer

A) £22,803 
B) £25,487 
C) £27,363 
D) £44,600

Question 7

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

Question 8

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.

Question 9

If an identical product can be sold in two different markets,and no restrictions exist on the sale or transportation costs,the product's price should be the same in both markets.This is know as

Accepted Answer

A) relative purchasing power parity. 
B) interest rate parity. 
C) the law of one price. 
D) equilibrium.

Question 10

One year ago the spot rate of U.S.dollars for Canadian dollars was $1/C$1.Since that time the rate of inflation in the U.S.has been 4% greater than that in Canada.Based on the theory of Relative PPP,the current spot exchange rate of U.S.dollars for Canadian dollars should be approximately ________.

Accepted Answer

A) $0.96/C$ 
B) $1/C$1 
C) $1.04/C$1 
D) Relative PPP provides no guide for this type of question.

Question 11

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 12

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

Question 13

If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2010,and find that the U.S.dollar has changed to a value of 91.4,then from a competitive perspective the U.S.dollar is ________.

Accepted Answer

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

Question 14

________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

Accepted Answer

A) The Fisher Effect 
B) The International Fisher Effect 
C) Absolute Purchasing Power Parity 
D) Relative Purchasing Power Parity

Question 15

One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland." The current spot rate between the euro and dollar is $1.3225/euro.What is the expected spot rate in one year if the international Fisher effect holds?

Accepted Answer

A) $1.3315/euro 
B) $1.3135/euro 
C) $1.3225/euro 
D) None of the above

Question 16

The current U.S.dollar-yen spot rate is 85¥/$.If the 90-day forward exchange rate is 88 ¥/$ then the yen is selling at a per annum ________ of ________.

Accepted Answer

A) premium; 1.57% 
B) premium; 6.30% 
C) discount; 3.41% 
D) discount; 13.64%

Question 17

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.

Question 18

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 19

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) $0.00012/¥ 
D) 85.5¥/$

Question 20

If the forward exchange rate is an unbiased predictor of future spot rates,then future spot rates will always be equal to current forward rates.

Accepted Answer

A) True 
 B)False

Exam 7: International Parity Conditions

The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as ________.

If the forward rate is an unbiased predictor of the expected spot rate,which of the following is NOT true?

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 ________.

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

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.

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

If an identical product can be sold in two different markets,and no restrictions exist on the sale or transportation costs,the product's price should be the same in both markets.This is know as

One year ago the spot rate of U.S.dollars for Canadian dollars was $1/C$1.Since that time the rate of inflation in the U.S.has been 4% greater than that in Canada.Based on the theory of Relative PPP,the current spot exchange rate of U.S.dollars for Canadian dollars should be approximately ________.

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

With covered interest arbitrage,

If we set the real effective exchange rate index between the United Kingdom and the United States equal to 100 in 2010,and find that the U.S.dollar has changed to a value of 91.4,then from a competitive perspective the U.S.dollar is ________.

________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

One-year interest rates are currently 3.30% in the United States and 2.60% in "Euroland." The current spot rate between the euro and dollar is $1.3225/euro.What is the expected spot rate in one year if the international Fisher effect holds?

The current U.S.dollar-yen spot rate is 85¥/$.If the 90-day forward exchange rate is 88 ¥/$ then the yen is selling at a per annum of .

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

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.

If the forward exchange rate is an unbiased predictor of future spot rates,then future spot rates will always be equal to current forward rates.