ECO4713 Midterm

Assume that the following exchange rates exist for the U.S. dollar, Japanese Yen and the British Pound. If you are an arbitrageur that starts with $1,000 in New York, you will end up with the arbitrage profit of:

$142.86

Suppose that the spot exchange rates for British pound quoted in two locations are: Suppose that you have $1 million, how much arbitrage profit can you make?

$31,627.64

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

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

Credit to the U.S. merchandise account

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

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.

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

III and IV

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

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

Assume that the exchange rate is 2.00 dollars per pound. Referring to Figure 2.2, an increase in the demand for British goods by the U.S. importers has led to a shift to the right of the demand curve. If the Bank of England wants to maintain a fixed exchange rate of $2.00 per pound, which currency should it sell and how much?

Pounds, 2 billion

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.

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

Special Drawing Rights

One advantage of the forward exchange market is:

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

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

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 private saving is:

Y - C - T

Assume that the following exchange rates exist for the U.S. dollar, Japanese Yen and the British Pound. If you are an arbitrageur that starts with $1,000 in New York,

You will buy yen in New York, because the pound is more expensive in New York.

Refer to Figure 1.1. Suppose that the market for British pound is initially in equilibrium at point A with the exchange rate $2.00 per pound. When the demand curve shifts to D2, the pound ____________ and the quantities of pound traded in the market ____________.

appreciates; increases

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

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.

You are given the above options market table, indicating the currency option market for the Swiss Franc. Assume that next month (March) you are going to receive 125,000 Swiss francs. Using the above table, which of the following option would you buy if you only want to protect yourself from a substantial fall in the cost of your receivable, but you can accept a small fall in the value of Swiss francs.

put option, 1035 strike price

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

reduce the fiscal government budget deficit

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.

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

the statistical discrepancy