international finance ch 4

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?

$1.235

Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies.

False

If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed's action is called ____ intervention.

appreciate; indirect

The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%.

appreciated; 5.80

If a currency's spot market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

liquid; insensitive

Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

$208,044.

Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?

$579,845.

____ is not a factor that causes currency supply and demand schedules to change.

All of the above are factors that cause currency supply and demand schedules to change.

Which of the following is not mentioned in the text as a factor affecting exchange rates?

All of the above are mentioned in the text as factors affecting exchange rates.

Which of the following interactions will likely have the least effect on the dollar's

An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates

Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y's currency more than the exchange rate of Country X's currency.

False

Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

False

Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in financial flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

False

Government controls can only affect the supply of a given currency for sale and not the demand.

False

If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

False

If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds.

False

In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.

False

Increases in relative income in one country vs. another result in an increase in the first country's currency value.

False

Movements of foreign currencies tend to be more volatile for shorter time horizons.

False

Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate.

False

The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

False

The main effect of interest rate movements on exchange rates is through their effect on international trade.

False

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

False

The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less.

False

Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

False

When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.

False

When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.

False

Which of the following events would most likely result in an appreciation of the U.S. dollar?

The Fed indicates that it will raise U.S. interest rates.

An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar.

True

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.

True

Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.

True

Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

True

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal.

True

Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.

True

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

True

The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.

True

The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:

U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.

The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:

U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

Which of the following is not mentioned in the text as a factor affecting exchange rates?

all of the above are mentioned in the text as factors affecting exchange rates.

Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:

an increase in the supply of British pounds for sale.

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

an increased U.S. demand for euros and a decreased supply of euros for sale.

If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar.

cannot be determined from the information provided.

Assume that Japan places a strict quota on goods imported from the U.S. and the U.S. places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____.

decline; decline

Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.

decline; decline

Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.

decline; increase

Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

decrease; U.S. dollar

Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.

decrease; U.S. dollar

If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value.

decrease; increase; downward

British investors frequently invest in the U.S. or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.

decrease; upward

If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the U.S. and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.

dollars; yen

Assume that the U.S. experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.)

downward

If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar.

downward

Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.

downward; more

Assume that the income levels in U.K. start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of British pound. Also, assume that U.S. interest rates rise, while the British pound remains unchanged. This will place ____ pressure on the value of British pound.

downward; upward

Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound.

downward; upward

Investors from Germany, the United States, and the U.K. frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.

fewer; depreciate

If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

illiquid; highly sensitive

Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal.

increase; U.S. dollar

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal.

increase; U.S. dollar

If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value.

increase; decrease; upward

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.

increase; depreciate

The real interest rate adjusts the nominal interest rate for:

inflation.

If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.

interest rate differentials; inflation and income differentials

Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.

more; even minor

An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.

reduce; increase

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.

remain unchanged; increase; decrease

Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates stay the same. This would likely cause:

the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.

The phrase "the dollar was mixed in trading" means that:

the dollar strengthened against some currencies and weakened against others.

Assume that U.S. inflation is expected to surge in the near future. The expectation of surge in inflation will most likely place ____ pressure on U.S. dollar immediately.

upward

News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.

upward; immediately

When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be:

weak, since the country's quoted interest rate would be low relative to the inflation rate.