Multinational Final 2

Your predicted value for the USD/BRL was 6.04 however the actual value was 7.21. What was your absolute forecast error in percentage form?

16.23%

The 5-year forward premium is 2.50% for the USD/BRL. The USD/BRL current spot rate is 5.58 BRL. Using market-based analysis, what is the closest estimate for the USD/BRL spot rate in 5-years?

5.72

Using the PPP model, if the U.S. inflation is expected to be 5% and the Brazilian inflation is expected to be 13%, what will the estimated USD/BRL spot rate approximately be in 1-year if today it is 5.58 BRL?

6.03

Which of the following is not a form of exposure to exchange rate fluctuations?

Credit exposure

An MNC can avoid translation exposure if its foreign subsidiaries do not remit their earnings to the parent.

False

Firms with more in foreign costs than in foreign revenues will be favorably affected by a stronger foreign currency.

False

Inflation would be an example of the type of indicator used in market-based analysis.

False

Predicting exchange rates allows firms to maximize returns and maximize exchange rate risk

False

The primary purpose of forward contracts by market participants is speculation.

False

Using instantaneous factors in regression analysis will always increase the accuracy of forecasts compared to using lagged factors

False

When conducting valuation analysis that requires currency conversion, it is always best to use a point estimate as opposed to range of forecasted exchange rate values

False

You conduct the following regression analysis: % Δ Spot Ratet = α+ β_1 〖Inflation Diff〗_t+ Income Difft-1 + GPD Growth Diff t + ε All intendent variables are instantaneous.

False

〖% Δ Spot Rate〗t =0.05+ 0.5〖Inflation Diff_t- 0.4〖Income Growth Diff_t - 0.50〖GDP Growth Diff〗t According to the regression results above, for each 1% change in _______ the spot rate is expected to appreciate by .50%

Inflation

individuals purchase call options when they want to lock in a ______ price to _____ a currency in the future.

Maximum; buy

Which of the following factors best explains why regional trading agreements are more popular than larger multilateral trade agreements?

Quicker and easier coordination

Appreciation in a firm's local currency causes a(n) ____ in cash inflows and a(n) ____ in cash outflows.

Reduction; reduction

If you believe that exchange rates price in all publicly known and relevant information but do not price in all private information. You believe the market is at most_______ form-efficient

Semi-Strong

A firm expecting future receivables in foreign currency most closely classifies into which financial management category?

Short-term hedging and cash management

Which type of trade restriction would most likely increase domestic government revenue?

Tariff

The holder of the option pays the writer of the option a premium regardless of whether the option contract is ever exercised.

True

When conducting valuation analysis on MNC's, all the firm's cash flows need to be converted into the domestic currency of the company.

True

Brazil is expected to have higher inflation rates than the United States over the next five years. Based on relative economic strength, which currency would you expect to appreciate?

USD

Which of the following trade restrictions is likely to result in the greatest welfare loss for the importing country?

Voluntary Export Restraint (VER)

A fixed exchange rate regime in which the monetary authority is legally required to hold foreign exchange reserves backing 100% of its domestic currency issuance is best described as:

a currency board

Which of the following best represents a contractionary fiscal policy?

a freeze in discretionary government spending

A large country can:

benefit by imposing a tarrif

Which is the most accurate statement regarding central banks and monetary policy?

central bank activities are typically intended to maintain price stability

If Brazil and South Africa have free trade with each other, a common trade policy against all other countries, but no free movement of factors of production between them, then Brazil and South Africa are part of a:

customs union

Monetary policy is least likely to include:

enacting a transfer payment program

In practice, both a fixed parity regime and a target zone regime allow the exchange rate to float within a band around the parity level. The most likely rationale for the band is that the band allows the monetary authority to:

exercise more discretion in monetary policy

One drawback of over-the-counter markets are that they are heavily regulated.

false

Which of the following is not true regarding currency correlations?

if two inflow currencies are highly positively correlated, transaction exposure is somewhat offset

Which of the following is not a condition of an ideal currency regime?

independent floating exchange rates

When a central bank announces a decrease in its official policy rate, the desired impact is an increase in

investment

From the holder's perspective: If the strike/exercise price is greater than the spot rate, a call is _________ and a put is _________.

not profitable; profitable

Which action is a central bank least likely to take if it wants to encourage businesses and households to borrow for investment and consumption purposes? Hint: Think open market operations.

sell long-dated government securities

Which type of analysis relies on recognizing patterns and trends in forex data to predict exchange rates?

technical analysis

You conduct a regression analysis where the actual spot is the dependent variable and the predicted spot rate is the independent variable. Your resulting Beta coefficient is 1.5, which is statistically significant. According to your model, it would appear that your prediction method _________ predicts the exchange rate.

underestimates