CHAPTER 14: EXCHANGE RATES AND THE FOREIGN EXCHANGE MARKET: AN ASSET APPROACH

The largest trading of foreign exchange occurs in A. New York. B. London. C. Tokyo. D. Frankfurt. E. Singapore.

B

13. Which one of the following statements is the most accurate? A. A depreciation of a country's currency makes its goods cheaper for foreigners. B. A depreciation of a country's currency makes its goods more expensive for foreigners. C. A depreciation of a country's currency makes its goods cheaper for its own residents. D. A depreciation of a country's currency makes its goods cheaper. E. None of the above.

A

An American put option on foreign exchange A. gives the buyer the right to sell the foreign currency at a known exchange rate at any time during the period of the option. B. gives the seller the right to sell the foreign currency at a known exchange rate at any time during the period of the option. C. gives the buyer the right to sell the foreign currency at a known exchange rate at a specific time in the future. D. obligates the buyer to sell the foreign currency at a known exchange rate at any time during the period of the option. E. None of the above.

A

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 2.00 dollars per British pound? A. 22.5 British pounds B. 32.5 British pounds C. 12.5 British pounds D. 40 British pounds E. 30 British pounds

A

If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, and the expected return on dollar depreciation against the euro is negative 4 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above.

A

If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is zero percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above.

A

The German currency is called the A. Euro B. DM C. Yen D. Dollar E. Pound

A

Which of the following statements is the most accurate? A. For a given U.S. interest rate and a given expectation with regard to the future exchange rate, a rise in the interest rate paid by euro deposits causes the dollar to depreciate. B. For a given U.S. interest rate and a given expectation with regard to the future exchange rate, a rise in the interest rate paid by euro deposits causes the dollar to appreciate. C. A rise in the interest rate paid by euro deposits does not affect the value of the dollar. D. A rise in the interest rate paid by euro deposits causes the dollar to depreciate. E. None of the above.

A

Which one of the following statements is the most accurate? Countries in the euro zone include A. Austria, Belgium, Finland, France, Germany, Greece, Luxemburg, and Ireland. B. Austria, Belgium, Finland, France, Germany, Luxembourg, Portugal, and Poland. C. Austria, Belgium, Finland, France, Germany, Portugal, Ireland, and the Czeck Republic. D. Austria, Belgium, Finland, France, Germany, Spain, Italy, and Ukraine. E. All of the above statements are correct.

A

Which one of the following statements is the most accurate? Trades of U.S. dollars for Canadian dollars in New York are executed with A. a one-day lag. B. a two-day lag. C. a three-day lag. D. a four-day lag. E. a zero-day lag.

A

An American call option on foreign exchange A. obligates you to buy foreign currency at a known price at any time during the period of the option. B. gives you the right to buy foreign currency at a known price at any time during the period of the option. C. gives you the right to buy foreign currency at a known price at a specific day in the future. D. gives you the right to sell foreign currency at a known price at any time during the period of the option. E. None of the above.

B

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.60 dollars per British pound? A. 38.125 British pounds B. 28.125 British pounds C. 48.125 British pounds D. 58.125 British pounds E. 18.125 British pounds

B

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.80 dollars per British pound? A. 10 British pounds B. 25 British pounds C. 20 British pounds D. 30 British pounds E. 40 British pounds

B

How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.80 dollars per one British pound? A. 40 dollars B. 90 dollars C. 50 dollars D. 100 dollars E. 95 dollars

B

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 8 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above.

B

Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euros it is 4 percent. Under these assumptions, A. covered interest parity does hold. B. covered interest parity does not hold. C. It is hard to tell whether covered interest parity does or does not hold. D. Not enough information is given to answer the question. E. None of the above.

B

The exchange rate between currencies depends on A. the interest rate that can be earned on deposits of those currencies. B. the expected future exchange rate. C. the interest rate that can be earned on deposits of those currencies and the expected future exchange rate. D. national output. E. None of the above.

B

What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 50 dollars in New York and 100 pounds in London? A. 1.5 dollars per British pound B. 0.5 dollars per British pound C. 2.5 dollars per British pound D. 3.5 dollars per British pound E. 2 dollars per British pound

B

A foreign exchange swap A. is a spot sale of a currency. B. is a forward repurchase of the currency. C. is a spot sale of a currency combined with a forward repurchase of the currency. D. is a spot sale of a currency combined with a forward sale of the currency. E. None of the above.

C

By early 2002, A. A Canadian dollar was worth only about 15 United States cents. B. A Canadian dollar was worth only about 20 United States cents. C. A Canadian dollar was worth only about 65 United States cents. D. A Canadian dollar was worth only about 100 United States cents. E. A Canadian dollar was worth only about 5 United States cents.

C

How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.50 dollars per British pound? A. 10 British pounds B. 20 British pounds C. 30 British pounds D. 35 British pounds E. 25 British pounds

C

If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 4 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. It is impossible to tell given the information. E. All of the above.

C

An appreciation of a country's currency A. decreases the relative price of its exports and lowers the relative price of its imports. B. raises the relative price of its exports and raises the relative price of its imports. C. lowers the relative price of its exports and raises the relative price of its imports. D. raises the relative price of its exports and lowers the relative price of its imports. E. None of the above.

D

Forward and spot exchange rates A. are necessarily equal B. do not move closely together C. The forward exchange rate is always above the spot exchange rate. D. while not necessarily equal, do move closely together. E. None of the above.

D

How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.25 dollars per one British pound? A. 50 dollars B. 60 dollars C. 70 dollars D. 62.5 dollars E. 40 British pounds

D

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then A. an investor should invest only in dollars. B. an investor should invest only in euros. C. an investor should be indifferent between dollars and euros. D. it is impossible to tell given the information. E. All of the above.

D

Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euros it is 4 percent. What is the rate of return on a covered euro deposit? A. 0.10 B. 0.101 C. 0.102 D. 0.103 E. 0.104

D

Which of the following statements is the most accurate? A. A rise in the interest rate offered by dollar deposits causes the dollar to appreciate. B. A rise in the interest rate offered by dollar deposits causes the dollar to depreciate. C. A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar. D. For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate. E. None of the above.

D

How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.50 dollars per one British pound? A. 50 dollars B. 60 dollars C. 70 dollars D. 80 dollars E. 75 dollars

E

In 2001, A. 20 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. B. 10 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. C. 30 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. D. 40 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars. E. 90 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

E

What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 60 dollars in New York and 30 pounds in London? A. 1.5 dollars per British pound B. 0.5 dollars per British pound C. 2.5 dollars per British pound D. 3.5 dollars per British pound E. 2 dollars per British pound

E

When a country's currency depreciates, A. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are more expensive. B. foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are cheaper. C. foreigners find that its exports are cheaper; however, domestic residents are not affected. D. foreigners are not affected, but domestic residents find that imports from abroad are more expensive. E. None of the above.

E

Which one of the following statements is the most accurate? A. The dollar rate of return on euro deposits is the euro interest rate plus the rate of depreciation of the dollar against the euro. B. The dollar rate of return on euro deposits is approximately the euro interest rate minus the rate of depreciation of the dollar against the euro. C. The dollar rate of return on euro deposits is the euro interest rate minus the rate of depreciation of the dollar against the euro. D. The dollar rate of return on euro deposits is approximately the euro interest rate plus the rate of appreciation of the dollar against the euro. E. The dollar rate of return on euro deposits is approximately the euro interest rate plus the rate of depreciation of the dollar against the euro.

E

Which one of the following statements is the most accurate? Countries in the euro zone include A. Austria, Australia, and Belgium. B. Austria, Belgium, and Finland. C. Austria and Finland. D. Austria, Belgium, Finland, and France. E. Austria, Belgium, Finland, France, and Germany.

E

Which one of the following statements is the most accurate? Countries in the euro zone include A. Austria, Belgium, Finland, France, Germany, and Greece. B. Austria, Belgium, Finland, France, Germany, and Luxembourg. C. Austria, Belgium, Finland, France, Germany, Portugal, and Ireland. D. Austria, Belgium, Finland, France, Germany, Spain, and Italy. E. All of the above statements are correct.

E

Which one of the following statements is the most accurate? The term spot exchange rate is A. misleading because even spot exchanges usually become effective only three days after a deal is struck. B. misleading because even spot exchanges usually become effective only four days after a deal is struck. C. misleading because even spot exchanges usually become effective only five days after a deal is struck. D. misleading because even spot exchanges usually become effective only six days after a deal is struck. E. misleading because even spot exchanges usually become effective only two days after a deal is struck.

E