International Finance Test Questions

____________ is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit from a price discrepancy.

Arbitrage

_____________ were the earliest multinationals

Raw-material seekers

According to the chart, which currency is worth the least? $1 = .61 British Pound $1 = .70 Euros $1 = 76,54 Japanese Yen $1 = 12.29 Mexican Peso $1 = 1080.44 South Korean Won 1 British Pound = $1.64 1 Euro = $1.43 1 Japanese Yen = $0.013 1 Mexican Peso = $0.081 1 South Korean Won = $ 0.00093

South Korean Won Least amount of USD per Won

If Inflation is higher in the Eurozone than in Japan. What is going to happen to the €/¥ exchange rate?

The € will appreciate and the ¥ depreciate

According to the Interest rate parity, higher interest rates on a currency are offset by forward discounts.

True

During the gold standard, money supply was constrained by the available supply of gold.

True

Fisher effects asserts that real returns tend toward equality across countries through arbitrage.

True

Forward discount is when the forward rate is below the spot rate.

True

Moral Hazard explains the "excessive" risk-taking behavior by Asian companies which contributed to the 90s Asian currencies crisis.

True

Regardless of the form of foreign exchange market intervention, fixed rates don't remain fixed for long. Neither do floating rates. The basic reason is that governments subordinate exchange rate considerations to domestic political considerations.

True

Which of the following is correct? The Bretton Woods system fell apart because

US monetary policy was too expansionary

According to the International Fisher Effect, Currencies with low interest rates are expected to _______ due to the fact that most probably there is _______ in the background

appreciate, inflation

The ________ is an exchange rate system that is relatively free from central bank and other government-type interventions.

clean float

Which of the following is correct? If a foreigner purchases a U.S. government security the ______

demand for US dollars rises

International ________ can reduce the volatility of an investment portfolio because national financial markets tend to move independently of each other.

diversification

Which of the following is the odd one out? Governments intervene in the foreign exchange markets for all of the following EXCEPT to earn foreign exchange reduce inflation reduce economic uncertainty improve the nation's export competitiveness

earn foreign exchange

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

exchange rate differentials reflect the inflation rate differential

Countries with higher inflation rates have

higher interest rates

The current Global exchange rate system can best be characterized as a ___ system.

hybrid

The spot rate on the US dollar is SFr2.56/$ and the 180 day forward rate is SFr2.50/$. The difference between the spot and forward rates suggested that

interest rates were higher in the U.S. than in Switzerland

Which of the following is correct? The multinational financial system does NOT enable companies to: 1. gain negotiating power 2. avoid exchange rate risk 3. reduce taxes 4. access lower-cost financing sources

reduce taxes

When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention.

unsterilized

Which of the following is correct? If expected inflation is 20% and the real interest rate is 10%, what is the the nominal interest rate?

30%

Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years is

$.00102 e3 = $.005 x (1.06/1.08)^3 = $.00102/ peso

The interest rate in the United States is 10%; in Japan, the comparable rate is 7%. The spot rate for the yen is $0.003800/¥. If interest rate parity holds, what is the 90-day forward rate?

$0.003828/¥ f90 = $0.003800 x (1.025/1.0175)

Imagine the one-year interest rate is 2% on Swiss francs and 7% on U.S. dollars, If the current exchange rate is SFr 1 = $0.91, what is the expected future exchange rate in one year?

$0.9546/SFr. et = $0.91 x (1.07/1.02)

If the 90-day UNBIASED forward rate is €1 = $0.987, what is the expected value of the euro in 90 days?

$0.987/€

Using the following table answer the questions: $1 = .61 British Pound 1 British Pound = $1.64 How much does it cost in American dollars ($) to buy one British Pound (£)?

$1.64/£

$1 = 76,54 Japanese Yen 1 Japanese Yen = $0.013 Suppose you wanted to buy a painting that cost 3000 Japanese Yen (¥). How much would the painting cost in American dollars($)?

$39 --> 3000 yen x $.013/ yen = $39

Imagine that the Turkish lira was worth €0.0013. Over the weekend the Turkish lira devalued against the euro to €0.0012. By how much had the Turkish lira devalued against the euro?

-7.69% ----> (e1-e0)/e0 (.0012 - .0013) / (.0013) = -7.69%

If the exchange rate between the US dollar and the Turkish Lira is 1.78₺/$. How many Turkish Lira would it take to equal $20?

35.6₺ ---> $20 x 1.78₺/$ = 35.6₺

According to the graph, in 2020, how many Euros was the US dollar worth?

0.9€

If the exchange rate between the Japanese Yen and the Euro is 0.009€/¥. How many Yen would equal 15€?

1666.66 ¥ ---> 15€ / 0.009€/¥ = 1666.66 ¥

The euro devalued by 17% against the U.S. dollar. This is equivalent to a revaluation of the U.S. dollar against the euro by:

20.48% ---> e0 = 1E/$ e1 = .83E/$ (e0-e1)/ e1 = (1-.83)/.83 = 20.48%

Following the "trilemma" or a fundamental conflict among policy objectives that nations face, Spain would fall under which category?

A country with fixed exchange rates and free capital movement

Which one of the following statements concerning exchange rate changes is correct? An increase in a currency's expected rate of inflation makes that currency less expensive to hold over time, all other things being equal. 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. Changes in expected, as well as actual, inflation will cause exchange rate changes. Changes in expected, but not actual, inflation will cause exchange rate changes.

Changes in expected, as well as actual, inflation will cause exchange rate changes.

Following the trilemma of international monetary policies that countries face, what country would be an example of a country with an independent monetary policy and a stable or fixed exchange rate?

China

When the U.S. dollar becomes weaker, U.S. exports become more ____ in foreign markets.

Competitive

Companies gradually increase their commitment to international business with strategies that are progressively more sophisticated. Which one of the following steps is NOT one of the steps? 1. Exporting 2. Setting up a sales subsidiary 3. Setting up a distribution system 4. Creating a legal entity in the new target country

Creating a new legal entity in the new target country

What would be the preferred mode of market penetration for the firm seeking to expand globally when the company wants to sell a product on which it holds a patent in the US only (hence it is a unique good)? Exporting Setting up a foreign sales office Licensing Setting up local facilities

Exporting

According to the chart, compared to the Euro, the value of the US $ is appreciating since 2020.

False

The gold standard involved a commitment by participating countries to fix exchange rates in terms of a specific amount of gold or other precious metals such as platinum.

False

The parity condition that relates inflation and interest rates is the

Fisher Effect

Underlying emerging markets currency crises, there is a "trilemma" or a fundamental conflict among policy objectives that the affected nations have failed to resolve. Which one of the following is NOT in conflict? independent domestic monetary policy free capital movement IMF bailouts fixed exchange rates

IMF bailouts

A rise in the inflation rate in one nation relative to others will be associated with a fall in the first nation's exchange rate and with a rise of its interest rate relative to foreign interest rates. The two conditions combined result in the______

International Fisher Effect

In a widely anticipated move, July 20th, the Bank of Japan raised the interest rate to 5% from 4.25%. Many currency traders had expected the Japanese central bank to raise its rate to 5.5%. What was the likely consequence of this interest rate rise on the Japanese yen to U.S.dollar exchange rate after July 20th?

The Japanese Yen will depreciate and the US$ appreciate

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

The Law of One Price

Which of the following is generally a licensing rather that an exporting opportunity for a multinational looking to expand globally? A firm that has specialized cost-saving equipment. The firm is seeking to market a specific product or process technology that can be written down and transmitted easily and objectively. The firm has a product such as a new device that is technologically advanced and unique, and could be easily copied The firm has a product that can be shipped without adaptation.

The firm is seeking to market a specific product or process technology that can be written down and transmitted easily and objectively.

Which of the following is the odd one out? Managed floats do NOT fall into which of the following categories of central bank intervention? smoothing out daily fluctuations letting market forces set exchange rates leaning against the wind unofficial pegging

letting market forces set exchange rates

A slowdown in Eurozone economic growth will

lower the value of the euro because the Eurozone will be a less attractive place to investors

An increase in the exchange rate will

make a country less competitive in international trade AND lower the cost of foreign goods.

The ________ are the archetype of the modern multinational firm that goes overseas to produce and sell in foreign markets

market seekers

The primary objective of the multinational corporation is to:

maximize shareholder wealth

Which of the following is correct? 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

no change on average *** if they ALL change, then stays constant***

A decrease in the supply of euros by the European Central Bank will

raise the external value of the euro because the € supply decrease will lead to higher Eurozone interest rates

Countries wanting to enter the European Monetary System need to follow the ___________________ monetary system

target zone arrangement

In order to boost the value of the U.S. dollar relative to the euro the European Central Bank (ECB) and the Federal Reserve (Fed) should:

the ECB should sell U.S. dollars for euros and the Fed should buy dollars with euros

Which of the following is an example of foreign exchange market intervention? The Canadian government pays interest to Saudi Arabian investors IBM sells euros it receives in international trade the U.S. government pays Social Security checks to pensioners living in Poland the French government sells U.S. dollars in the foreign exchange market to prop up the value of the euro

the French government sells U.S. dollars in the foreign exchange market to prop up the value of the euro

A gold standard ensures a long-run tendency toward price stability because

the cost of producing an ounce of gold stays relatively constant over time