Internat Finance

You purchase a futures contract for September delivery (September 15th) of 62,500 poounds on March 15th. The pound futures exchange rate is $1.65 per pound. The bank has a margin requirement of 2 percent. When the futures contract matures in September, the spot rate is $1.63 per pound. What is the total cost of your 62,500 pounds when the futures contract matures?

$103,125

Assume that Citibank quotes you a buy rate of $1.50 per pound and a sell rate of $1.60 per pound. How much will you pay in pounds, if you buy 1,000 dollars from Citibank?

$666.67

The "Euro" prefix in eurocurrency market was developed:

Because the eurocurrency market was initially started in Europe.

Secondary income includes which of the following?

Foreign aid

Which of the following currencies does not exist in physical form?

Special Drawing Rights

In the twin deficits hypothesis, to reduce a current account deficit, a country has to:

reduce the fiscal government budget deficit

Assume that you are interested in the spot foreign exchange market for the Swedish Krona (SKr), and that Citibank quotes you a buy rate of 8.50 and sell rate of 8.60 (SKr per $). If you want to buy 1,000 SKr, how much would you have to pay?

$117.65

Assume that the monthly interest rate in the UK is 6% and in the US 12%. Further, assume that the current spot rate is 2.00 dollars per pound ($ per Pound). Calculate the one-month forward rate using the approximate CIRP condition.

2.01

A currency trader at the Boston airport has a buy rate of 1.3062 and a sell rate of 1.7484 for dollars per pound. Assume that a U.S. tourist returns from the U.K. and wants to sell 1,000 pounds. Five minutes later a U.S. tourist that is on his way to the U.K. comes to the same trader and wants to buy 1,000 pounds. Compute the profit/loss in dollars, for the currency trader from the two transactions.

442.20

Suppose that the U.S. dollar price of a Big Mac is $3.57. The price of a Big Mac in Norway is 17.85 kroner. Suppose that the current exchange rate is 6.00 krone per dollar. If absolute PPP holds, the PPP-implied exchange rate is ____________ and Norwegian krone is ____________.

5.00 krone per dollar; undervalued.

We can expect deviations from absolute PPP because of: Different bundles of goods across countries Quotas and tariffs Transaction costs

All of the above are correct

Suppose that Citibank buys a large amount of Japanese yen from Toyota and Citibank does not want to continue holding too much yen. Assume that the current buy rate is 101.4 and the current sell rate is 101.8 (yen per dollar). How should Citibank adjust its buy rate and sell rate of the yen (yen per dollar) to "square off"?

Citibank has to raise both buy and sell rates.

A Japanese store buys Apple computers shipped from the U.S. causes a:

Credit to the U.S. merchandise account

Arrange the following currency exchange systems from the one with least independent monetary policy to the most independent monetary policy. Target bands Currency board Fixed peg Free floating

Currency board, fixed peg, target bands, free floating

What financial instruments allow firms to obtain long-term foreign currency financing at lower cost than they can by borrowing directly?

Currency swaps

A U.S. gift of wheat to Nicaragua causes a:

Debit in the U.S. secondary income

A U.S. tourist spends $2,000 on traveling costs around South Korea after the Winter Olympic games. This is counted as:

Debit to services

If a U.S. firm imports Samsung (a Korean company) phones for $2,000,000, would there be a debit or credit entry to merchandise?

Debit, because the item is imported into the US, not sold to a different country.

When a country abolishes its own currency and adopts the currency of some other country, it is called:

Dollarization

An American firm bought merchandise from a British firm for £50,000 with the payment being due in 90 days. The firm decided to purchase a 3-month call option of 50,000 pounds at a strike price of $1.7 per pound and a premium cost of $0.2 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound, you will:

Exercise the option, because the strike price is lower than the spot exchange rate.

Which of the following is NOT a benefit of Foreign Direct Investment (FDI) to the host country?

FDI limits growth in human capital

Policy in the IMF is determined by voting, and votes are allocated by:

Financial contribution to the IMF

Countries with fixed exchange rates tend to have what features? I. Trade concentrated with a single country II. Similar inflation rates with trading partners III. Large, relatively closed economies IV. Trade diversified across many countries

I and II

Which of the following features describe the forward market for foreign exchange? Tailored size contracts Small amount contracts Tailored maturities Large amount contracts

I, III, and IV

In the twin deficits hypothesis, to reduce a current account deficit, a country has to: I. increase domestic investment II. reduce private saving III. reduce the government budget deficit

III only

_______________ is the effect on exchange rates when traders alter quotes to maintain a balance between amounts of currency bought and sold to "square off" (return to the beginning of the day holdings) at the end of a day.

Inventory control effect

Which of the following best describes LIBOR?

LIBOR is a benchmark interest rate set by surveying a panel of top banks in London.

Exchange rates are 150 yen per dollar, 0.8 euro per dollar, and 20 pesos per dollar. A bottle of beer in New York costs 6 dollars, 1,200 yen in Tokyo, 7 euro in Munich, and 180 pesos in Cancun. Where is the cheapest beer?

New York

The Citibank trading desk quotes a buy rate of 1.25 and a sell rate of 1.27 for the dollar per euro exchange rate (S$/€). Suppose that traders are continually buying euros from Citibank, leaving Citibank with a shortage of euros. How should Citibank adjust its rates to "square off" (i.e. return to its starting position)?

Raise both buy and sell rates

Assume that you are considering a portfolio of two assets, A and B, with 60% invested in asset A and 40% invested in asset B. Assume that the two assets have the following statistics: Return Variance Covariance Asset A 20% 0.20 -0.01 Asset B 15% 0.10 The portfolio expected return is ___________

Return = 18%

One advantage of the forward exchange market is:

That no buying/selling of the currency is needed until a specified date in the future.

Assume that French people have an increased taste for U.S. exports. Would the euro appreciate or depreciate according to the trade flow model?

The Euro would depreciate according to the trade flow model, as demand for goods made in France would go down.

Suppose that the U.S. considers devaluing its dollar against a foreign currency to improve the trade balance. What type of currency contracting would definitely worsen the U.S. trade balance?

The U.S. import contracts are written in foreign currency and the U.S. export contracts are written in dollars.

The Bretton Woods agreement required that each country, other than the U.S., fix the value of its currency in terms of a(n):

The US dollar

Suppose that the one-year U.S. interest rate is 8% and the equivalent one-year India interest rate is 12%. According to approximate covered interest parity, is there a forward premium, forward discount or forward flat on the dollar?

There is a 4% forward premium on the dollar.

Which of the following will shift the demand curve for the Japanese yen to the right in a trade flow model with dollars per Yen on the y-axis?

U.S. demand for products imported from Japan increases significantly as Japanese culture becomes more popular in the U.S.

Let Y be domestic income, C be consumption, I be investment, G be government spending and T be taxes. The total saving (private + public) is:

Y - C - G

Let Y be domestic income, C be consumption, I be investment, G be government spending, and T be taxes. The private saving is:

Y - C - T

Suppose that an economy is experiencing large trade deficits. According to pass-through effects, a devaluation would always improve trade balance, when:

both supply of domestic imports and exports are perfectly inelastic.

The balance on current account includes all of the following items EXCEPT:

changes in U.S. assets owned abroad and foreign assets owned in the U.S.

The balance on current account includes all of the following items EXCEPT:

changes in U.S. private assets owned abroad

If the spot exchange rate goes from 0.80 euro per dollar to 0.60 euro per dollar, the dollar has ____________ against the euro by ____________ percent.

depreciated; -25.0

The Bretton Woods Agreement of 1944 established a monetary system based on:

dollars and adjustable pegged exchange rates

Suppose that under a gold standard, that the price of gold in the United States is $450 per ounce and the price of gold in the United Kingdom is 200£ per ounce. The exchange rate is thus:

fixed at $2.25 per pound

The IS curve represents the _________, while the LM curve represents the __________.

goods and services market; money market

According to the absorption approach, if the domestic output is greater than the domestic absorption, then is the country experiencing a trade surplus or a trade deficit?

if Y>A -> X-M >0 then there is an account surplus. So if the domestic output (Y) is greater than the domestic absorption (A) then the country is experiencing a trade surplus.

A call option with a strike price less than the current spot price is said to be _______.

in-the-money

When the domestic demand for imports is perfectly inelastic, a devaluation will ____________ prices of imports in domestic currency and ___________ the total domestic import value.

increase, increase

Suppose the U.S. income grows by 4%. Under the MABP, which of the following percentage changes could offset this growth?

international reserves increase by 2% and foreign inflation falls by 2%

You purchase a futures contract for September delivery (September 15th) of 62,500 pounds on March 15th. The pound futures exchange rate is $1.65 per pound. The bank has a margin requirement of 2 percent. If you hold the futures contract until September 15th and the spot rate for pounds on September 15th is $1.63 per pound, you would:

lose $1,250 from the purchase of the futures contract.

A depreciation of a country's currency

lowers the relative price of its exports and raises the relative price of its imports.

With flexible exchange rates, the IS-LM-BP model shows that a country can use _________ to alter domestic income.

monetary policy

Under fixed exchange rates, when a central bank increases money supply, it first shifts the LM curve to the _______ and later shifts ________.

right; the LM curve to the left

Consider the market for Chinese currency (yuan). Suppose that the initial equilibrium exchange rate was $0.125 per yuan in a trade flow model. Assume that American consumers like Chinese products more than before. If China's central bank wants to peg the exchange rate at its initial level ($0.125 per yuan), the central bank will have to:

sell yuan and buy dollar.

Assume the following: the current spot rate S$/£ = 2.00 and the annual interest rates: iUS = 4% and iUK = 8%. According to covered interest parity, if an intern at a bank in U.K. sets the 90-day forward: F90$/£= 1.80, then:

the U.S. investment return exceeds the British investment return.

The negative of the sum of the balance on the current account and the balance on the financial account is:

the statistical discrepancy

Assume perfectly floating exchange rates. Suppose that there is a 5% growth in U.S. output and a 5% decrease in foreign inflation. Using the monetary approach to the exchange rate, what will the effect be of the two changes?

the two changes will offset each other