Currency Questions

Question 1

If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD:

                                                                                                                                                                                                          A) depreciated and Canadians will find U.S. goods more expensive.  B) appreciated and Canadians will find U.S. goods cheaper.  C) depreciated and Canadians will find U.S. goods cheaper.

Answer 1

The CAD is now more expensive in terms of USD, and thus it has appreciated. Therefore, each CAD yields more USD than before, and Canadians are able to purchase more U.S. goods with each CAD, making U.S. goods relatively cheaper.

Question 2

If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD A) depreciated and Canadians will find U.S. goods more expensive.
B) depreciated and Canadians will find U.S. goods cheaper.
C) appreciated and Canadians will find U.S. goods cheaper.

Answer 2

The CAD is now more expensive in terms of USD, and thus it has appreciated. Therefore, each CAD yields more USD than before, and Canadians are able to purchase more U.S. goods with each CAD, making U.S. goods relatively cheaper.

Question 3

The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to 103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in percentage terms? A) Depreciated by 4.9%.
B) Appreciated by 4.9%.
C) Appreciated by 5.1%.

Answer 3

Because the exchange rates are quoted with the EUR as the base currency, the percentage change is simply 103.00 / 98.00 − 1 = 5.1%. The increase in the quoted JPY/EUR exchange rate means it now requires 5.1% more JPY to purchase one EUR. Thus, the EUR has appreciated by 5.1% against the JPY

Question 4

The exchange rate for Australian dollars per British pound (AUD/GBP) was 1.4800 five years ago and is 1.6300 today. The percent change in the Australian dollar relative to the British pound is closest to: A) depreciation of 9.2%.
B) appreciation of 10.1%.
C) depreciation of 10.1%.

Answer 4

To correctly calculate the percentage change in AUD relative to GBP, convert the exchange rates so that AUD is the base currency: 1 / 1.4800 = 0.6757 GBP/AUD five years ago and 1 / 1.6300 = 0.6135 GBP/AUD today. The percentage change in the Australian dollar against the British pound is 0.6135 / 0.6757 − 1 = −9.2%. Note that the GBP has appreciated against the AUD by 1.6300 / 1.4800 − 1 = 10.1% over the same period.

Question 5

The Japanese yen is trading at JPY/USD 115.2200 and the Danish krone (DKK) is trading at JPY/DKK 16.4989. The USD/DKK exchange rate is: A) 6.9835.
B) 0.5260.
C) 0.1432.

Answer 5

The cross rate between USD and DKK is calculated in the following manner: (USD/JPY)(JPY/DKK) = (1 / 115.2200) × 16.4989 = USD/DKK 0.1432 (the Yen cancels out)

Question 6

If the spot exchange rate between the British pound and the U.S. dollar is GBP/USD 0.7775, and the spot exchange rate between the Canadian dollar and the British pound is CAD/GBP 1.8325, what is the USD/CAD spot cross exchange rate? A) 1.42477.
B) 0.42428.
C) 0.70186.

Answer 6

First, convert GBP/USD 0.7775 to 1/0.7775 = USD/GBP 1.28617. Then, divide USD/GBP 1.28617 by CAD/GBP 1.8325 = USD/CAD 0.70187.

Question 7

If the CAD is trading at USD/CAD 0.6403 and the GBP is trading CAD/GBP 2.5207, the USD/GBP exchange rate is: A) 0.6196.
B) 1.6140.
C) 3.9367

Answer 7

USD/CAD 0.643 × CAD/GBP 2.5207 = USD/GBP 1.6140.

Question 8

An analyst observes that the exchange rate for Mexican pesos is MXN/USD 8.0000, and the exchange rate for Polish zlotys is PLN/USD 6.0000. The MXN/PLN exchange rate is closest to: A) 0.7500.
B) 1.3333.
C) 14.0000

Answer 8

The cross rate of MXN/PLN is (MXN/USD 8) / (PLN/USD 6) = 1.3333 MXN/PLN.

Question 9

Given the following quotes, GBP/USD 2.0000 and MXN/USD 8.0000, calculate the direct MXN/GBP spot cross exchange rate A) 4.0000.
B) 0.6250.
C) 0.2500

Answer 9

Invert the first quote to read USD/GBP 0.5000. Then, 0.5000 × 8.0000 = 4.0000 MXN/GBP

Question 10

Given an exchange rate of USD/CAD 0.9250 and USD/CHF 1.6250, what is the cross rate for CAD/CHF? A) 1.7568.
B) 0.5692.
C) 1.5032.

Answer 10

(USD/CHF 1.6250) / (USD/CAD 0.9250) = CAD/CHF 1.7568

Question 11

The exchange rate of the Athelstan riyal (ATH) with the British pound is 9.00 ATH/GBP. The exchange rate of the Mordred ducat (MOR) with the U.S. dollar is 2.00 MOR/USD. If the USD/GBP exchange rate is 1.50, the ATH/MOR cross rate is closest to: A) 6.75 ATH/MOR.
B) 3.00 ATH/MOR.
C) 12.00 ATH/MOR.

Answer 11

The ATH/MOR cross rate = 9.00 ATH/GBP × (1 / 1.50) GBP/USD × (1 / 2.00) USD/MOR = 3.00 ATH/MOR.

Question 12

The spot CHF/EUR exchange rate is 1.2025. If the 90-day forward quotation is +0.25%, the 90-day forward rate is closest to: A) 1.2055. B) 1.2000. C) 1.2050

Answer 12

The 90-day forward CHF/EUR exchange rate is 1.2025 × 1.0025 = 1.20551. The EUR is at a forward premium to the CHF.

Question 13

If the AUD/CAD spot exchange rate is 0.9875 and 60-day forward points are −25, the 60-day AUD/CAD forward rate is closest to: A) 0.9900.
B) 0.9850.
C) 0.9870.

Answer 13

For an exchange rate quoted to four decimal places, forward points are expressed in units of 0.0001. The 60-day forward rate is 0.9850 + 0.0001(−25) = 0.9850. The CAD is trading at a 60-day forward discount to the AUD.

Question 14

The spot exchange rate is 1.1132 GBP/EUR and the 1-year forward rate is quoted as +1349 points. The 1-year forward exchange rate for GBP/EUR is closest to: A) 1.2481.
B) 1.1267.
C) 1.2634.

Answer 14

The one year forward is 1.1132 + (1349/10,000) = 1.2481.

Question 15

The spot exchange rate is 0.6243 USD/GBP and the 1-year forward rate is quoted as 3.016%. The 1-year forward exchange rate for USD/GDP is closest to A) 0.6054.
B) 0.6544.
C) 0.6431.

Answer 15

The one year forward rate is 0.6243 × (1 + 0.03016) = 0.6431.

Question 16

The spot exchange rate for CHF/EUR is 0.8342 and the 1-year forward quotation is −0.353%. The 1-year forward exchange rate for EUR/CHF is closest to:

Answer 16

The forward rate for CHF/EUR is 0.8342 × (1 − 0.00353) = 0.8313. The 1-year forward EUR/CHF exchange rate is 1 / 0.8313 = 1.2030.

Question 17

The spot exchange rate for United States dollars per United Kingdom pound (USD/GBP) is 1.5775. If 30-day interest rates are 1.5% in the United States and 2.5% in the United Kingdom, and interest rate parity holds, the 30-day forward USD/GBP exchange rate should be: A) 1.5788.
B) 1.5762.
C) 1.5621.

Answer 17

Forward USD/GBP = spot USD/GBP × (1 + U.S. interest rate) / (1 + UK interest rate) = 1.5775 × [(1 + 0.015/12) / (1 + 0.025/12)] = 1.5762

Question 18

A country’s central bank announces a monetary policy goal of a stable exchange rate with the euro, which it defines as deviations of no more than 3% from its current exchange rate of 2.5000. The country’s exchange rate regime is best described as a : A) fixed peg.
B) target zone.
C) crawling band.

Answer 18

This exchange rate regime is best described as a target zone, or a system of pegged exchange rates within horizontal bands. A target zone allows wider exchange rate fluctuations than a conventional fixed peg arrangement, which typically limits the permitted range to within 1% of the pegged exchange rate. Management of exchange rates within crawling bands allows the percentage deviation from the pegged exchange rate to increase over time.

Question 19

With respect to exchange rate regimes, crawling bands are most likely used in a transition toward :A) a fixed peg arrangement.
B) floating exchange rates.
C) a monetary union

Answer 19

When exchange rates are managed within crawling bands, the margin around a target exchange rate increases over time. This technique is sometimes used in a transition from fixed exchange rates to freely floating exchange rates.

Question 20

In which of the following exchange rate regimes can a country participate without giving up its own currency? A) Target zone or conventional fixed peg.
B) Crawling peg or formal dollarization.
C) Monetary union or currency board

Answer 20

With formal dollarization or a monetary union, a country does not have its own currency. With a currency board, conventional fixed peg, target zone, or crawling peg, a country has its own currency and manages its exchange rate with another currency or basket of currencies.

Question 21

The Marshall-Lerner condition suggests that a country’s ability to narrow a trade deficit by devaluing its currency depends on A) elasticity of demand for imports and exports.
B) national saving relative to domestic investment.
C) capacity utilization in the domestic economy.

Answer 21

The Marshall-Lerner condition is an outcome of the elasticities approach to analyzing the balance of trade. It suggests that depreciation or devaluation of a currency is more likely to narrow a country’s trade deficit if domestic demand for imports and foreign demand for the country’s exports are more elastic. The absorption approach to analyzing the balance of trade implies that national saving must increase relative to domestic investment for a currency devaluation to narrow a trade deficit, which in turn depends on whether the economy is producing at maximum capacity (full employment or potential GDP) when the devaluation occurs.

Question 22

The tendency for currency depreciation to increase a country’s trade deficit in the short run is known as the: A) absorption effect.
B) J-curve effect.
C) Marshall-Lerner effect.

Answer 22

The J-curve refers to a graph of the effect of currency depreciation on the trade balance over time. In the short run, a trade deficit may increase because current import and export contracts may be fixed in foreign currency units over the near term, and only reflect the exchange rate change over time. In the long run, currency depreciation should decrease a trade deficit.

Question 23

Country G and Country H have currencies that trade freely and have markets for forward currency contracts. If Country G has an interest rate greater than that of Country H, the no-arbitrage forward G/H exchange rate is: A) equal to the G/H spot rate.
B) greater than the G/H spot rate.
C) less than the G/H spot rate.

Answer 23

. If the interest rate in Country G is greater than the interest rate in Country H, the numerator is greater than the denominator on the right side of the equation. The left side must have the same relationship, so the forward rate must be greater than the spot rate.v

Question 24

If the current spot exchange rate for quotes of JPY/GBP is greater than the no-arbitrage 3-month forward exchange rate, the 3-month GBP interest rate is: A) equal to the 3-month JPY interest rate.
B) less than the 3-month JPY interest rate.
C) greater than the 3-month JPY interest rate.

Answer 24

. If the no-arbitrage forward JPY/GBP rate is less than the spot rate, the interest rate for JPY must be less than the interest rate for GBP.