Assugnment

Question 1

1) Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of

A) political risk.
B) exchange rate risk.
C) weakness in the dollar.
D) market imperfections.

Answer 1

1) B

Question 2

2) Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British pound depreciates against the U.S. dollar,

A) to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.
B) your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise, and to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.
C) your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise.
D) your firm will be able to charge more in dollar terms while keeping pound prices stable.

Answer 2

2) B

Question 3

3) Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means that

A) your firm will be able to charge more in dollar terms while keeping peso prices stable.
B) your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
C) your company’s products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso’s fall.
D) none of the options

Answer 3

3) C

Question 4

4) Underlying the theory of comparative advantage are assumptions regarding

A) that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively mobile.
B) free trade between nations.
C) free trade between nations and that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile.
D) that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile.

Answer 4

4) C

Question 5

5) The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows:

(i) Bimetallism
(ii) Bretton Woods system
(iii) Classical gold standard
(iv) Flexible exchange rate regime
(v) Interwar period

The chronological order that they actually occurred is:
A) (i), (iii), (v), (ii), and (iv)	
B) (v), (ii), (i), (iii), and (iv)
C) (vi), (i), (iii), (ii), and (v)	
D) (iii), (i), (iv), (ii), and (v)

Answer 5

5) A

Question 6

6) The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals,

A) the metal with a commercial value higher than the currency value tends to be used as money (Gresham’s Law).
B) the metal with a commercial value lower than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham’s Law).
C) the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham’s Law).
D) none of the options

Answer 6

6) C

Question 7

7) Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.60 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment.

A) Start with $350. Exchange the dollars for pounds at the current rate of $1.60 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.
B) Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.
C) both of the options
D) none of the options

Answer 7

7) A

Question 8

8) Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system?

A) 1 German mark = $1
B) 1 German mark = $0.50
C) 1 German mark = $2
D) 1 German mark = $3

Answer 8

8) D

Question 9

9) The choice between the alternative exchange rate regimes is likely to involve a trade-off between

A) unemployment and inflation.
B) exchange rate uncertainty and national policy autonomy.
C) balance of payments autonomy and inflation.
D) national monetary policy autonomy and international economic integration.

Answer 9

9) D

Question 10

10) The main cost of European monetary union is

A) lessened political integration.
B) the loss of national monetary and exchange rate policy independence.
C) increased exchange rate uncertainty.
D) none of the options

Answer 10

10) B

Question 11

11) Generally speaking, any transaction that results in a payment to foreigners

A) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
B) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
C) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
D) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.

Answer 11

11) C

Question 12

12) The official reserve account includes

A) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
B) the export and import of goods and services.
C) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
D) none of the options

Answer 12

12) A

Question 13

13) A country that gives foreign aid to another country can be viewed as

A) importing goodwill from the latter.
B) exporting goodwill to the latter.

Answer 13

13) A

Question 14

14) When a country’s currency depreciates against the currencies of major trading partners,

A) the country’s exports tend to rise and imports rise.
B) the country’s exports tend to fall and imports fall.
C) the country’s exports tend to rise and imports fall.
D) the country’s exports tend to fall and imports rise.

Answer 14

14) C

Question 15

15) A depreciation will begin to improve the trade balance immediately if

A) imports and exports are responsive to the exchange rate changes.
B) consumers exhibit brand loyalty and price inelasticity.
C) imports and exports are inelastic to the exchange rate changes and consumers exhibit brand loyalty and price inelasticity.
D) imports and exports are inelastic to the exchange rate changes.

Answer 15

15) A

Question 16

16) Suppose a country is currently experiencing a trade deficit. In the long run, this could be self-correcting if

A) the deficit exists because of the import demand for capital goods.
B) the deficit exists because foreigners want to buy the country’s currency as an investment.
C) the deficit exists because of the import demand for consumption goods.
D) none of the options

Answer 16

16) A

Question 17

17) The notation is

Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes

The difference between a country's savings and investment is given by
A) GNP − T	
B) X − M	
C) (Y − C − T) − I	
D) I × (Y − C − T)

Answer 17

17) C

Question 18

18) The difference between a broker and a dealer is

A) brokers bring together buyers and sellers, but carry no inventory; dealers stand ready to buy and sell from their inventory.
B) dealers sell drugs; brokers sell houses.
C) brokers transact in stocks and bonds; currency is bought and sold through dealers.
D) none of the options

Answer 18

18) A

Question 19

19) Intervention in the foreign exchange market is the process of

A) commercial banks in different countries coordinating efforts in order to stabilize one or more currencies.
B) the government of a country prohibiting transactions in one or more currencies.
C) a central bank buying or selling its currency in order to influence its value.
D) a central bank requiring the commercial banks of that country to trade at a set price level.

Answer 19

19) C

Question 20

20) Consider a U.S. importer desiring to purchase merchandise from a Dutch exporter invoiced in euros, at a cost of €512,100. The U.S. importer will contact his U.S. bank (where of course he has an account denominated in U.S. dollars) and inquire about the exchange rate, which the bank quotes as €1.0242/$1.00. The importer accepts this price, so his bank will ________ the importer’s account in the amount of ________.

A) credit; $500,000
B) debit; $500,000
C) debit; $524,492
D) debit; €512,100

Answer 20

20) B

Question 21

21) The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A’s correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B.

A) Bank A’s dollar-denominated account at B will rise by $90,000.
B) Bank B’s dollar-denominated account at A will fall by $90,000.
C) Bank B’s pound-denominated account at A will rise by £45,000.
D) Bank A’s pound-denominated account at B will rise by £45,000.

Answer 21

21) D

Question 22

22) The spot market

A) involves the almost-immediate purchase or sale of foreign exchange.
B) takes place only on the floor of a physical exchange.
C) involves the sale of futures, forwards, and options on foreign exchange.
D) all of the options

Answer 22

22) A

Question 23

24) Suppose that the current exchange rate is €1.00 = $1.60. The indirect quote, from the U.S. perspective is

A) €1.00 = $1.60.
B) €1.60 = $1.00.
C) €0.6250 = $1.00.
D) none of the options

Answer 23

24) C

Question 24

25) Suppose the spot ask exchange rate, Sa($/£), is $1.90 = £1.00 and the spot bid exchange rate, Sb($/£), is $1.89 = £1.00. If you were to buy $10,000,000 worth of British pounds and then sell them five minutes later, how much of your $10,000,000 would be “eaten” by the bid-ask spread?

A) $1,000,000
B) $100,000
C) $52,910
D) $52,632

Answer 24

25) D

Question 25

27) The euro-pound cross exchange rate can be computed as:

A) S(€/£) =
B) S(€/£) = S($/£) × S(€/$)
C) S(€/£) =
D) all of the options

Answer 25

27) D

Question 26

28) Suppose a bank customer with €1,000,000 wishes to trade out of euro and into Japanese yen. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-yen exchange rate is quoted at $1.00 = ¥120. How many yen will the customer get?

A) ¥192,000,000
B) ¥5,208.33
C) ¥5,208,333
D) ¥75,000,000

Answer 26

28) A

Question 27

30) You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.20 = €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.50, how much money can an astute trader make?

A) $1,160,000
B) $250,000
C) $500,000
D) No arbitrage is possible

Answer 27

30) D

Question 28

31) The $/CD spot bid-ask rates are $0.7560–$0.7625. The 3-month forward points are 12–16. Determine the $/CD 3-month forward bid-ask rates.
A) $0.7572–$0.7641
B) $0.7548–$0.7609
C) $0.7512–$0.7616
D) Cannot be determined with the information given.

Answer 28

31) A

Question 29

32) If one has agreed to buy a foreign exchange forward,

A) you have a short position in the forward contract.
B) you have a long position in the spot market.
C) you have a long position in the forward contract.
D) until the exchange rate moves, you haven’t made money, so you’re neither short nor long.

Answer 29

32) C

Question 30

33) Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 = €1.00.

A) The trader has lost $66,287.88.
B) The trader has made $6,250.
C) The trader has lost $625.
D) The trader has lost $6,250.

Answer 30

33) D

Question 31

34) When a currency trades at a premium in the forward market

A) the forward rate is less than the spot rate.
B) the forward rate is more than the spot rate.
C) the exchange rate is less than one dollar.
D) the exchange rate is more than one dollar (e.g., €1.00 = $1.28).

Answer 31

34) B

Question 32

35) The SF/$ spot exchange rate is SF1.25/$ and the 180 day forward exchange rate is SF1.30/$. The forward premium (discount) is

A) the dollar trading at a 4% premium to the Swiss franc for delivery in 180 days.
B) the dollar trading at a 4% discount to the Swiss franc for delivery in 180 days.
C) the dollar trading at an 8% discount to the Swiss franc for delivery in 180 days.
D) the dollar trading at an 8% premium to the Swiss franc for delivery in 180 days.

Answer 32

35) D

Question 33

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

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

Answer 33

36) C

Question 34

37) Suppose that the one-year interest rate is 3.0 percent in Italy, the spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.18/€. What must the one-year interest rate be in the United States?

A) 1.0128%
B) 1.2833%
C) 4.75%
D) none of the options

Answer 34

37) B

Question 35

38) Covered Interest Arbitrage (CIA) activities will result in

A) unstable international financial markets.
B) a disintermediation.
C) no effect on the market.
D) restoring equilibrium prices quickly.

Answer 35

38) D

Question 36

40) The interest rate at which the arbitrager borrows tends to be higher than the rate at which he lends, reflecting the

A) midpoint.
B) transaction cost paradigm.
C) bid-ask spread.
D) none of the options

Answer 36

40) C