Question 1

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)   12.2%
D)   7.2% C

Question 2

If the current exchange rate is 113 Japanese yen per U.S.dollar,the price of a Big Mac hamburger in the United States is $3.41,and the price of a Big Mac hamburger in Japan is 280 yen,then other things equal,the Big Mac hamburger in Japan is:

Accepted Answer

A)   correctly priced.
B)   under priced.
C)   over priced.
D)   There is not enough information to determine if the price is appropriate or not. B

Question 3

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 C

Question 4

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 amount the company will receive in pounds at the new exchange rate?

Accepted Answer

A)   £22,803
B)   £25,581
C)   £27,363
D)   £55,000

Question 5

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 6

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

Question 7

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.

Question 8

Arbitragers applying Covered Interest Arbitrage drive the international currency and money markets toward the equilibrium described by:

Accepted Answer

A)   the effective exchange rate index.
B)   the purchasing power parity.
C)   the nominal effective exchange rate index.
D)   the interest rate parity.

Question 9

According to the International Fisher Effect,the forecast change in the spot rate between two countries is equal to:

Accepted Answer

A)   the current spot rate multiplied by the ratio of the inflation rates in the respective countries.
B)   but the opposite sign to the difference between nominal interest rates.
C)   but the opposite sign to the difference between inflation rates.
D)   but the opposite sign to the difference between real interest rates.

Question 10

The assumptions for relative PPP are more rigid than the assumptions for absolute PPP.

Accepted Answer

A) True 
 B)False

Question 11

Assume a nominal interest rate on one-year U.S.Treasury Bills of 2.60% and a real rate of interest of 1.00%.Using the Fisher Effect Equation,what is the approximate expected rate of inflation in the U.S.over the next year?

Accepted Answer

A)   2.10%
B)   2.05%
C)   1.60%
D)   1.00%

Question 12

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

Question 13

Empirical tests prove that PPP is an accurate predictor of future exchange rates.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

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

Question 17

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 18

________ 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 19

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 20

Assume a nominal interest rate on one-year U.S.Treasury Bills of 3.80% and a real rate of interest of 2.00%.Using the Fisher Effect Equation,what is the exact expected rate of inflation in the U.S.over the next year?

Accepted Answer

A)   1.84%
B)   1.80%
C)   1.76%
D)   1.72%

Exam 6: International Parity Conditions

If the current exchange rate is 113 Japanese yen per U.S.dollar,the price of a Big Mac hamburger in the United States is $3.41,and the price of a Big Mac hamburger in Japan is 280 yen,then other things equal,the Big Mac hamburger in Japan is:

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.

With covered interest arbitrage:

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.

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

Arbitragers applying Covered Interest Arbitrage drive the international currency and money markets toward the equilibrium described by:

According to the International Fisher Effect,the forecast change in the spot rate between two countries is equal to:

The assumptions for relative PPP are more rigid than the assumptions for absolute PPP.

Assume a nominal interest rate on one-year U.S.Treasury Bills of 2.60% and a real rate of interest of 1.00%.Using the Fisher Effect Equation,what is the approximate expected rate of inflation in the U.S.over the next year?

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:

Empirical tests prove that PPP is an accurate predictor of future exchange rates.

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

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:

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.

________ 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.

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

Assume a nominal interest rate on one-year U.S.Treasury Bills of 3.80% and a real rate of interest of 2.00%.Using the Fisher Effect Equation,what is the exact expected rate of inflation in the U.S.over the next year?