Question 1

If annualized interest rates on January 1,1985 in the U.S.and France were 9% and 13%,respectively,and the spot value of the franc was $.1109,then at what 180-day forward rate would interest rate parity hold?

Accepted Answer

A)  $.1070
B)  $.1150
C)  $.1088
D)  $.1130 C

Question 2

The spot rate on the euro is $1.33 and the 180-day forward rate is $1.34.The difference between the two rates means

Accepted Answer

A)  interest rates are higher in the U.S.than in Germany
B)  the euro has risen in relation to the dollar
C)  the inflation rate in Germany is declining
D)  the euro is expected to fall in value relative to the dollar A

Question 3

On January 1,1990,the annual inflation rates in the U.S.and Greece were expected to be 3% and 8%,respectively.If the current spot rate that day for the drachma was $.007,then the expected spot rate in three years was

Accepted Answer

A)  $.00607
B)  $.00823
C)  $.00751
D)  $.00694 A

Question 4

The Fisher effect states that the _________ rate is made up of a real required rate of return and an inflation premium.

Accepted Answer

A)  nominal exchange
B)  real exchange
C)  nominal interest
D)  adjusted dividend

Question 5

If the rate of inflation in all of the world's currency markets rises from 5% to 7%,this will tend to make forward exchange rates move toward

Accepted Answer

A)  smaller premiums or larger discounts in relation to the dollar
B)  larger premiums or smaller discounts in relation to the dollar
C)  no change on average
D)  parity

Question 6

Which one of the following statements concerning exchange rate changes is correct?

Accepted Answer

A)  Changes in expected,as well as actual,inflation will cause exchange rate changes.
B)  Changes in expected,but not actual,inflation will cause exchange rate changes.
C)  An increase in a currency's expected rate of inflation makes that currency less expensive to hold over time,all other things being equal.
D)  An increase in a currency's expected rate of inflation makes that currency more in demand at the same price,all other things being equal.

Question 7

Suppose the price indexes in Mexico and the U.S. ,which both began the year at 100,are at 160 and 103,respectively,by the end of the year.If the exchange rate began the year at Mex$4.5 = $1 and ended the year at Mex$5.9 = $1,then the change in the real value of the peso during the year is a "?" indicates a real devaluation

Accepted Answer

A)  0.0%
B)  -5.0%
C)  18.5%
D)  -8.2%

Question 8

The direct spot quote for the Canadian dollar is $.76 and the 180-day forward rate is $.74.The difference between the two rates is likely to mean that

Accepted Answer

A)  inflation in the U.S.during the past year was lower than in Canada
B)  interest rates are rising faster in Canada than in the U.S.
C)  prices in Canada are expected to rise more rapidly than in the U.S.
D)  the Canadian dollar's spot rate is expected to rise in terms of the U.S.dollar

Question 9

Suppose the Swiss franc revalues from $0.40 at the beginning of the year to $0.44 at the end of the year.U.S.inflation is 5% and Swiss inflation is 3% during the year.What is the real devaluation ? or real revaluation + of the Swiss franc during the year?

Accepted Answer

A)  + 7.9%
B)  - 5.3%
C)  + 8.1%
D)  - 1.6%

Question 10

Suppose it is October 1,1990 and inflation rates in the U.S.and France are expected to be 4% and 9%,respectively,next year and 6% and 7%,respectively,in the following year.If the current spot rate is $.1050,then the expected spot value of the franc in two years is

Accepted Answer

A)  $.1111
B)  $.1024
C)  $.0992
D)  $.1074

Question 11

Suppose it is January 1,1994 and the Deutsche mark revalues from $.30 at the beginning of the year to $.33 at the end of the year.Inflation during the year is 5% in the U.S.and 3% in Germany.What is the real devaluation ? or real revaluation + of the Deutsche mark during the year?

Accepted Answer

A)  + 7.9%
B)  - 5.3%
C)  + 8.1%
D)  -1.6%

Question 12

Suppose it is May 1,1981 and the price indexes in Spain and the U.S. ,which both began the year at 100,are at 117 and 105,respectively,by the end of the year.If the beginning and ending exchange rates,respectively,for the peseta are $.1320 and $.1125,then the change in the real value of the peseta a "?" indicates a real devaluation during the year is

Accepted Answer

A)  0%
B)  -5.0%
C)  2.4%
D)  -8.2%

Question 13

The theory of relative purchasing power parity states that,between two nations,the

Accepted Answer

A)  inflation rates are unrelated
B)  exchange rate differential reflects the inflation rate differential
C)  inflation rate is smaller in weaker currencies
D)  the interest rate is greater than the inflation rate during depreciations

Question 14

Suppose that on January 1,1987,the spot rate on the Dutch guilder was $0.39 and the 180-day forward rate was $0.40.The difference between the spot and forward rates suggested that

Accepted Answer

A)  interest rates were higher in the U.S.than in the Netherlands
B)  the guilder had risen in relation to the dollar
C)  the inflation rate in the Netherlands was declining
D)  the guilder was expected to fall in value relative to the dollar

Question 15

What is the name of the theory that states exchange-adjusted prices on identical tradeable goods and financial assets must be within transaction costs of equality globally? The Law of

Accepted Answer

A)  One Price
B)  Arbitrage
C)  Parity
D)  Capital Market Segmentation

Question 16

If annualized interest rates in the U.S.and Switzerland are 10% and 4%,respectively,and the 90-day forward rate for the Swiss franc is $.3864,at what current spot rate will interest rate parity hold?

Accepted Answer

A)  $.3902
B)  $.3874
C)  $.3807
D)  $.3792

Question 17

If expected inflation is 20% and the real required return is 10%,then the Fisher effect says that the nominal interest rate should be exactly

Accepted Answer

A)  30%
B)  32%
C)  22%
D)  12%

Question 18

Suppose the spot rates for the pound,mark,and Swiss franc prior to 1999 were $1.20,$.32,and $.40,respectively.At the same time,the associated 90-day interest rates annualized)were 16%,8%,and 4%,while the U.S.90-day interest rate was 12%.What was the 90-day forward rate to the nearest cent on a TCU TCU 1 = £1 + DM1 + SFr1 if interest parity were to hold?

Accepted Answer

A)  $1.92
B)  $1.98
C)  $1.94
D)  $1.87

Question 19

Suppose the value of the Polish zloty moves from Z 1000 = $1 at the start of the year to Z 1,800 at the end of the year.At the same time,the Polish price level changes from an index of 100 on January 1 to 134 on December 31.U.S.inflation during the year was 4.5%.If the one-year interest rate on the zloty is 44%,what was the real dollar cost of borrowing the zloty during the year?

Accepted Answer

A)  17.53%
B)  27.81%
C)  -23.44%
D)  -8.76%

Question 20

The current five-year Euro yen rate is 6% per annum compounded annually.The five-year Eurodollar rate is 8.5%.What is the implied forward premium or discount of the yen over the current spot rate for a five-year forward contract?

Accepted Answer

A)  4.17% premium
B)  18.46% discount
C)  11.00% discount
D)  12.36% premium

Exam 4: Parity Conditions in International Finance and Currency Forecasting