Question 1

The price of a McDonald's Big Mac sandwich

Accepted Answer

A) is about the same in the 120 countries that McDonalds does business in. 
B) varies considerably across the world in dollar terms. 
C) supports PPP. 
D) none of the options.

Question 2

If the interest rate in the U.S.is i$ = 5 percent for the next year and interest rate in the U.K.is i£ = 8 percent for the next year,uncovered IRP suggests that

Accepted Answer

A) the pound is expected to depreciate against the dollar by about 3 percent. 
B) the pound is expected to appreciate against the dollar by about 3 percent. 
C) the dollar is expected to appreciate against the pound by about 3 percent. 
D) the pound is expected to depreciate against the dollar by about 3 percent and the dollar is expected to appreciate against the pound by about 3 percent.

Question 3

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.The one-year interest rate in the U.S.is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%.The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00.Show how to realize a certain profit via covered interest arbitrage.

Accepted Answer

A) Borrow $1,000,000 at 2%.Trade $1,000,000 for €800,000; invest at i€ = 6%; translate proceeds back at forward rate of $1.20 = €1.00,gross proceeds = $1,017,600. 
B) Borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit $2,400. 
C) Borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit €2,000. 
D) Borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €848,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is $2,400.Additionally,one may borrow €800,000 at i€ = 6%; translate to dollars at the spot,invest in the U.S.at i$ = 2% for one year; translate €850,000 back into euro at the forward rate of $1.20 = €1.00.Net profit is €2,000.

Question 4

According to the research in the accuracy of paid exchange rate forecasters,

Accepted Answer

A) as a group,they do not do a better job of forecasting the exchange rate than the forward rate does. 
B) the average forecaster is better than average at forecasting. 
C) the forecasters do a better job of predicting the future exchange rate than the market does. 
D) none of the options

Question 5

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany,and that the spot exchange rate is $1.12/€ and the forward exchange rate,with one-year maturity,is $1.16/€.Assume that an arbitrager can borrow up to $1,000,000.If an astute trader finds an arbitrage,what is the net cash flow in one year?

Accepted Answer

A) $10,690 
B) $15,000 
C) $46,207 
D) $21,964.29

Question 6

The random walk hypothesis suggests that

Accepted Answer

A) the best predictor of the future exchange rate is the current exchange rate. 
B) the best predictor of the future exchange rate is the current forward rate. 
C) the best predictors of the future exchange rate are the current exchange rate and the current forward rate. 
D) none of the options

Question 7

The moving average crossover rule

Accepted Answer

A) is a fundamental approach to forecasting exchange rates. 
B) states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is appreciating. 
C) states that a crossover of the short-term moving average above the long-term moving average signals that the foreign currency is depreciating. 
D) none of the options

Question 8

Assume that you are a retail customer (i.e.,you buy at the ask and sell at the bid).Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Bid}} & \text { ASK} & \text { APR } \
 S_{0}(\$ / €) & \$ 1.42= €1.00 & \$1.45= €1.00  &i \$  4\% \
F_{360}(\$ / €) & \$ 1.48= € 1.00&  \$1.50= €1.00 & i €3\%
\end{array}$
 If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 9

Assume that you are a retail customer.Use the information below to answer the following question.
 $$\begin{array} { r c c c c c } 
& \text { Bid }& \text { Ask }& \text { Borrowing } &\text { Lending }\
S _ { 0 } ( \$ / € ) & \$ 1.42 = € 1.00 & \$ 1.45 = € 1.00  &\text { i\$ } 4.25 \% \mathrm { APR } & 4 \% \mathrm { APR } \
F _ { 360 } ( \$ / \epsilon ) & \$ 1.48 = € 1.00 & \$ 1.50 = € 1.00 & \text { i€ } 3.10 \% \mathrm { APR } & 3 \% \mathrm { APR }
\end{array}$$ If you borrowed $1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of Assume that you are a retail customer.Use...

Question 10

Generating exchange rate forecasts with the fundamental approach involves

Accepted Answer

A) looking at charts of the exchange rate and extrapolating the patterns into the future. 
B) estimation of a structural model. 
C) substituting the estimated values of the independent variables into the estimated structural model to generate the forecast. 
D) estimation of a structural model and substitution of the estimated values of the independent variables into the estimated structural model to generate the forecast.

Question 11

As of today,the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

Accepted Answer

A) €1.00 = $1.6157 
B) €1.6157 = $1.00 
C) €1.00 = $1.5845 
D) $1.00 × 1.03 = €1.60 × 1.02

Question 12

An arbitrage is best defined as

Accepted Answer

A) a legal condition imposed by the CFTC. 
B) the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making reasonable profits. 
C) the act of simultaneously buying and selling the same or equivalent assets or commodities for the purpose of making certain guaranteed profits. 
D) none of the options

Question 13

Although IRP tends to hold,it may not hold precisely all the time

Accepted Answer

A) due to transactions costs,like the bid-ask spread. 
B) due to asymmetric information. 
C) due to capital controls imposed by governments. 
D) due to transactions costs,like the bid-ask spread,as well as capital controls imposed by governments.

Question 14

Governments sometimes restrict capital flows,inbound and/or outbound.They achieve this objective by means of

Accepted Answer

A) jawboning. 
B) imposing taxes. 
C) bans on cross-border capital movements. 
D) all of the options

Question 15

According to the monetary approach,what matters in exchange rate determination are

Accepted Answer

A) the relative money supplies. 
B) the relative velocities of monies. 
C) the relative national outputs. 
D) all of the options

Question 16

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must the one-year interest rate be in the euro zone to avoid arbitrage?

Accepted Answer

A) 5.0% 
B) 6.09% 
C) 8.62% 
D) none of the options

Question 17

Suppose you observe a spot exchange rate of $1.0500/€.If interest rates are 3 percent APR in the U.S.and 5 percent APR in the euro zone,what is the no-arbitrage 1-year forward rate?

Accepted Answer

A) €1.0704/$ 
B) $1.0704/€ 
C) €1.0300/$ 
D) $1.0300/€

Question 18

A higher U.S.interest rate (i$ ↑)relative to interest rates abroad,ceteris paribus,will result in

Accepted Answer

A) a stronger dollar. 
B) a lower spot exchange rate (expressed as foreign currency per U.S.dollar). 
C) a stronger dollar and a lower spot exchange rate (expressed as foreign currency per U.S.dollar). 
D) none of the options

Question 19

How high does the lending rate in the euro zone have to be before an arbitrageur would not consider borrowing dollars,trading for euro at the spot,investing in the euro zone and hedging with a short position in the forward contract? $$\begin{array} { r c c c c } 
& \text { Bid } & \text { Ask } & \text { Borrowing } & \text { Lending } \
\boldsymbol { s } _ { 0 } ( \$ / € ) & \$ 1.40 - € 1.00 & \$ 1.43 - € 1.00 & \text { i\$ } 4.20 \% \mathrm { APR } & 4.10 \% \mathrm { APR } \
F _ { 360( \$ / € ) } & \$ 1.44 - € 1.00 & \$ 1.49 - € 1.00 & \text { i€ } &
\end{array}$$

Accepted Answer

A) The bid-ask spreads are too wide for any profitable arbitrage when i€ > 0 
B) 3.48% 
C) ?2.09% 
D) none of the options

Question 20

Assume that you are a retail customer.Use the information below to answer the following question.
 $$\begin{array} { r c c c c c } 
& \text { Bid }& \text { Ask }& \text { Borrowing } &\text { Lending }\
S _ { 0 } ( \$ / € ) & \$ 1.40 = € 1.00 & \$ 1.43 = € 1.00  &\text { i\$ } 4.20 \% \mathrm { APR } & 4.10 \% \mathrm { APR } \
F _ { 360 } ( \$ / \epsilon ) & \$ 1.44= € 1.00 & \$ 1.49= € 1.00 & \text { i€ } 3.65\% \mathrm { APR } & 3.50 \% \mathrm { APR }
\end{array}$$ If you borrowed €1,000,000 for one year,how much money would you owe at maturity?

Accepted Answer

The answer of Assume that you are a retail customer.Use...

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

The price of a McDonald's Big Mac sandwich

If the interest rate in the U.S.is i_$ = 5 percent for the next year and interest rate in the U.K.is i_£ = 8 percent for the next year,uncovered IRP suggests that

According to the research in the accuracy of paid exchange rate forecasters,

The random walk hypothesis suggests that

The moving average crossover rule

Generating exchange rate forecasts with the fundamental approach involves

As of today,the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

An arbitrage is best defined as

Although IRP tends to hold,it may not hold precisely all the time

Governments sometimes restrict capital flows,inbound and/or outbound.They achieve this objective by means of

According to the monetary approach,what matters in exchange rate determination are

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must the one-year interest rate be in the euro zone to avoid arbitrage?

Suppose you observe a spot exchange rate of $1.0500/€.If interest rates are 3 percent APR in the U.S.and 5 percent APR in the euro zone,what is the no-arbitrage 1-year forward rate?

A higher U.S.interest rate (i_$ ↑) relative to interest rates abroad,ceteris paribus,will result in

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

The price of a McDonald's Big Mac sandwich

If the interest rate in the U.S.is i$ = 5 percent for the next year and interest rate in the U.K.is i£ = 8 percent for the next year,uncovered IRP suggests that

According to the research in the accuracy of paid exchange rate forecasters,

The random walk hypothesis suggests that

The moving average crossover rule

Generating exchange rate forecasts with the fundamental approach involves

As of today,the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

An arbitrage is best defined as

Although IRP tends to hold,it may not hold precisely all the time

Governments sometimes restrict capital flows,inbound and/or outbound.They achieve this objective by means of

According to the monetary approach,what matters in exchange rate determination are

Suppose that the one-year interest rate is 5.0 percent in the United States; the spot exchange rate is $1.20/€; and the one-year forward exchange rate is $1.16/€.What must the one-year interest rate be in the euro zone to avoid arbitrage?

Suppose you observe a spot exchange rate of $1.0500/€.If interest rates are 3 percent APR in the U.S.and 5 percent APR in the euro zone,what is the no-arbitrage 1-year forward rate?

A higher U.S.interest rate (i$ ↑) relative to interest rates abroad,ceteris paribus,will result in

If the interest rate in the U.S.is i_$ = 5 percent for the next year and interest rate in the U.K.is i_£ = 8 percent for the next year,uncovered IRP suggests that

A higher U.S.interest rate (i_$ ↑) relative to interest rates abroad,ceteris paribus,will result in