Chap 14 Exchange Rates An Asset Approach

Which one of the following statements is the MOST accurate? A) For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the current exchange rate. B) For a fixed interest rate, a rise in the expected future exchange rate causes a fall in the current exchange rate. C) For a fixed interest rate, a rise in the expected future exchange rate does not cause a change in the current exchange rate. D) For a given dollar interest rate and a constant expected exchange rate, a rise in the interest rate of the euro causes the dollar to depreciate. E) For a fixed interest rate, a fall in the expected future exchange rate causes a rise in the current exchange rate.

A) For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the current exchange rate.

If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, then A) an investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent. B) an investor should invest only in euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent. C) an investor should be indifferent between dollars and euros. An investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent. D) an investor should invest only in dollars. E) an investor should invest only in euros.

A) an investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.

The dollar rate of return on euro deposits is A) approximately the euro interest rate plus the rate of depreciation of the dollar against the euro. B) approximately the euro interest rate minus the rate of depreciation of the dollar against the euro. C) the euro interest rate minus the rate of inflation against the euro. D) the rate of appreciation of the dollar against the euro. E) the euro interest rate plus the rate of inflation against the euro.

A) approximately the euro interest rate plus the rate of depreciation of the dollar against the euro.

The action of arbitrage is A) the process of buying a currency cheap and selling it dear. B) the process of buying a currency dear and selling it cheap. C) the process of buying and selling currency at the same price. D) the process of selling currency at different prices in different markets. E) the process of buying a currency and holding onto it to take it off the market.

A) the process of buying a currency cheap and selling it dear.

What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.10 per euro, next year's expected exchange rate is $1.165 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%? A) 10% B) 11% C) -1% D) 0% E) 15%

B) 11%

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) 90 dollars

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 euro it is 4 percent. Under these assumptions A) interest parity does not hold. B) interest parity does hold. C) it is hard to tell whether interest parity does or does not hold. D) interest parity fluctuates. E) Not enough information is given to answer the question.

B) interest parity does hold.

If the goods' money prices do NOT change, a depreciation of the dollar against the pound A) makes British sweaters cheaper in terms of American jeans. B) makes British sweaters more expensive in terms of American jeans. C) makes American jeans more expensive in terms of British sweaters. D) doesn't change the relative price of sweaters and jeans. E) makes British jeans more expensive in Britain.

B) makes British sweaters more expensive in terms of American jeans.

Which major actor is at the center of the foreign exchange market? A) corporations B) central banks C) commercial banks D) non-bank financial institutions E) individual firms

C) commercial banks

A(n) ________ of a nation's currency will cause imports to ________ and exports to ________, all other things held constant. A) depreciation; increase; decrease B) appreciation; decrease; increase C) depreciation; decrease; increase D) appreciation; increase; increase E) depreciation; decrease; decrease

C) depreciation; decrease; increase

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then an investor should A) invest only in dollars. B) invest only in euros. C) be indifferent between dollars and euros. D) invest only in dollars if the exchange rate is expected to remain constant. E) invest only in euros if the exchange rate is expected to remain constant.

D) invest only in dollars if the exchange rate is expected to remain constant.

Forward and spot exchange rates A) are necessarily equal. B) do not move closely together. C) are always such that the forward exchange rate is higher. D) move closely together and are equal on the value date. E) are unrelated to the value date.

D) move closely together and are equal on the value date.

Show graphically a drop in the interest rate paid by dollar deposits. What is the effect on the dollar? Answer: A drop in the interest rate from R1$ to R2$ causes the dollar to depreciate from (point 2) to (point 1).

Dollar return shifts right while exchange rate decreases

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) 2 dollars per British pound

In 2018, about 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) 87 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

E) 87 percent of foreign exchange transactions involved exchanges of foreign currencies for U.S. dollars.

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) foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more expensive.

E) foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more expensive.