FX

8) If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro depreciates from ________ dollars to ________ dollars per euro. A) 1.25; 0.83 B) 0.83; 1.25 C) 0.67; 1.50 D) 1.50; 0.67

A) 1.25; 0.83

69) A weaker dollar benefits ________ and hurts ________ A) American businesses; American consumers. B) American businesses; foreign consumers. C) American consumers; American businesses. D) foreign businesses; American consumers

A) American businesses; American consumers.

33) According to the interest parity condition, if the domestic interest rate is ________ the foreign interest rate, then ________. A) above; there is expected appreciation of the foreign currency B) above; there is expected depreciation of the foreign currency C) below; there is expected appreciation of the foreign currency D) below; the interest parity condition is violated

A) above; there is expected appreciation of the foreign currency

25) When François the Foreigner considers the expected return on dollar deposits in terms of foreign currency, the expected return must be adjusted for A) any expected appreciation or depreciation of the dollar. B) the interest rates on foreign deposits. C) both A and B of the above. D) neither A nor B of the above

A) any expected appreciation or depreciation of the dollar.

11) When the exchange rate for the euro changes from $1.00 to $1.20, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B) appreciated and German cars sold in the United States become less expensive. C) depreciated and American wheat sold in Germany becomes more expensive. D) depreciated and American wheat sold in Germany becomes less expensive.

A) appreciated and German cars sold in the United States become more expensive.

57) If the consistent or cross exchange rates condition is violated, traders can profit by _______. A) buying a currency at a lower exchange rate and selling it at a higher exchange rate B) buying a currency at a higher exchange rate and selling it at a lower exchange rate C) buying a commodity at a lower price and selling it at a higher price D) investing in the country with low interest rates E) investing in the country with high interest rates

A) buying a currency at a lower exchange rate and selling it at a higher exchange rate.

21) In the short run, the quantity of dollars supplied (deposits, bonds, equities) is A) fixed with respect to the exchange rate. B) quite volatile and difficult to model in a supply-demand framework. C) typically following the business cycle (procyclical). D) is best represented with a horizontal supply curve.

A) fixed with respect to the exchange rate.

47) An exchange rate for a transaction that will occur at some point in the future is a _______ rate. A) forward B) future C) spot D) predicted E) biased

A) forward

54) All else equal, a higher real rate of return in the country should lead to _______. A) increased capital flows into the country B) increased capital flows out of the country C) depreciation of the country's currency against major world currencies D) higher inflation E) an increase in export

A) increased capital flows into the country

1) In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the A) interest parity condition. B) purchasing power parity condition. C) exchange rate parity condition. D) foreign asset parity condition

A) interest parity condition.

24) If the inflation rate in the United States is higher than that in Germany and productivity is growing at a slower rate in the United States than it is in Germany, in the long run, A) the euro should appreciate relative to the dollar. B) the euro should depreciate relative to the dollar. C) there should be no change in the euro price of dollars. D) it is not clear what will happen to the euro price of dollars.

A) the euro should appreciate relative to the dollar.

27) If the interest rate on foreign deposits increases, holding everything else constant, A) the expected return on these deposits must also increase. B) the expected return on domestic deposits must decrease. C) the expected return on domestic deposits must increase. D) both A and B of the above. E) both A and C of the above

A) the expected return on these deposits must also increase.

70) The price of one country's currency in terms of another's is called A) the foreign exchange rate. B) the interest rate. C) the Dow Jones industrial average. D) none of the above.

A) the foreign exchange rate.

14) The theory of purchasing power parity is a theory of how exchange rates are determined in A) the long run. B) the short run. C) both A and B of the above. D) none of the above.

A) the long run.

49) If the U.S. Dollar is expected to appreciate against the Japanese Yen, _______. A) the yen-dollar spot exchange rate will be higher than the forward exchange rate B) the yen-dollar spot exchange rate will be equal the forward exchange rate C) the yen-dollar spot exchange rate will be lower than the forward exchange rate D) one dollar is expected to buy fewer yens in the future E) both Aand D

A) the yen-dollar spot exchange rate will be higher than the forward exchange rate

15) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries. A) theory of purchasing power parity B) law of one price C) theory of money neutrality D) quantity theory of money

A) theory of purchasing power parity

39) As the relative expected return on dollar deposits increases, A) foreigners will want to hold fewer dollar deposits and more foreign deposits. B) Americans will want to hold more dollar deposits and less foreign deposits. C) Americans will want to hold fewer dollar deposits and more foreign deposits. D) Americans and foreigners will be indifferent toward holding dollar deposits or foreign deposits.

B) Americans will want to hold more dollar deposits and less foreign deposits.

62) Which of the following statements is inconsistent with the interest rate parity? A) Real interest rate must be the same across countries. B) Nominal interest rates must be the same across countries. C) Differences in nominal interest rates across countries are equal to the differential inflation. D) If the interest rate parity is violated, arbitrage opportunities arise. E) All of the above statements are consistent with the interest rate parity

B) Nominal interest rates must be the same across countries.

51) Assume that the spot exchange rate between the Euro (€) and the Swiss (CHF) franc is €6025/CHF and the one-year forward rate is €6225/CHF. Which of the following must be true? A) The Euro is expected to appreciate relative to the Swiss Franc. B) The Euro is expected to depreciate relative to the Swiss Franc. C) The Euro is undervalued relative to the Swiss Franc. D) Interest rates in Switzerland are higher than interest rates in the Euro-zone. E) The Euro is expected to depreciate, while the Swiss Franc is expected to appreciate against the U.S. Dollar.

B) The Euro is expected to depreciate relative to the Swiss Franc

61) Suppose that you invested in a foreign money market security for one year. The return on this foreign investment was 5% and the foreign currency depreciated against the dollar over the year. Which of the following statements must be true? A) The domestic return on this investment is negative. B) The domestic return on this investment is below 5%. C) The domestic return on this investment is above 5% D) The domestic return on this investment is equal to 5% E) The U.S. inflation was higher than the European inflation over the year.

B) The domestic return on this investment is below 5%.

64) Assume that the nominal one-year risk-free rates are the same in the U.S. and the U.K. The British Pound one-year forward exchange rate ₤0.50/$, while the spot exchange rate is ₤0.52/$. Which of the following statements is true? A) To earn a riskless profit, an arbitrageur can borrow British Pounds, convert them into U.S. Dollars to buy Dollar-denominated securities, and enter into the forward contract to exchange U.S. dollars for Pounds one year from now. B) To earn a riskless profit, an arbitrageur can borrow U.S. Dollars, convert them into British Pounds to buy Pound-denominated securities, and enter into the forward contract to exchange Pounds for U.S. dollars one year from now. C) Covered interest arbitrage is not possible under these conditions. D) The spot and forward exchange rates are consistent with the interest rate parity. E) Both A and B

B) To earn a riskless profit, an arbitrageur can borrow U.S. dollars, convert them into British Pounds to buy Pound-denominated securities, and enter into the forward contract to exchange Pounds for U.S. dollars one year from now.

34) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4

B) appreciation; 2

3) When the value of the British pound changes from $1.50 to $1.25, the pound has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

B) depreciated; appreciated

4) When the value of the dollar changes from £0.50 to £0.75, the pound has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

B) depreciated; appreciated

5) When the exchange rate changes from 1.0 euros to the dollar to 1.2 euros to the dollar, the euro has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

B) depreciated; appreciated

36) When Americans and foreigners expect the return on ________ deposits to be high relative to the return on ________ deposits, there is a higher demand for dollar deposits and a correspondingly lower demand for foreign deposits. A) dollar; dollar B) dollar; foreign C) foreign; dollar D) foreign; foreign

B) dollar; foreign

45) Exchange rates for major world currencies are _______. A) fixed B) floating C) pegged to the U.S. Dollar D) pegged to the Euro E) standardized

B) floating

48) If foreign exchange markets are efficient, _______. A) spot exchange rates are unbiased predictors of future exchange rates B) forward exchange rates are unbiased predictors of future spot rates C) spot exchange rates are always equal to forward exchange rates D) spot exchange rates are never equal to forward exchange rates E) both A and D

B) forward exchange rates are unbiased predictors of future spot rates

37) When Americans and foreigners expect the return on dollar deposits to be high relative to the return on foreign deposits, there is a ________ demand for dollar deposits and a correspondingly ________ demand for foreign deposits. A) higher; higher B) higher; lower C) lower; higher D) lower; lower

B) higher; lower

55) If a government sells domestic currency in the forex market, the supply of the domestic currency should _______, and its exchange rate should _______. A) increase; increase B) increase; decrease C) increase; not change D) decrease; increase E) decrease; decrease

B) increase; decrease

32) According to the interest parity condition, the domestic interest rate is equal to the foreign interest rate A) plus the expected appreciation of the domestic currency. B) less the expected appreciation of the domestic currency. C) less the expected depreciation of the domestic currency. D) less the expected depreciation of the domestic currency weighted by the domestic interest rate.

B) less the expected appreciation of the domestic currency.

44) A speculator exchanged Euros for U.S. Dollars. The speculator's expectation must be that _______. A) the Dollar will depreciate against the Euro B) the Dollar will appreciate against the Euro C) the Dollar-Euro exchange rate will remain unchanged D) inflation in the U.S. will be higher than inflation in Europe E) Both A and D

B) the Dollar will appreciate against the Euro

52) If one-year interest rates in the U.S. are higher than in the U.K., _______. A) the U.S. Dollar is expected to buy fewer British Pounds one year from now B) the U.S. Dollar is expected to buy more British Pounds one year from now C) the U.S. Dollar should trade at a forward premium D) the Dollar-Pound forward exchange rate should be equal to the spot rate E) both A and C

B) the U.S. Dollar is expected to buy more British Pounds one year from now

31) The condition which states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called A) the purchasing power parity condition. B) the interest parity condition. C) money neutrality. D) the theory of foreign capital mobility.

B) the interest parity condition.

68) A stronger dollar benefits ________ and hurts ________ A) American businesses; American consumers. B) American businesses; foreign businesses. C) American consumers; American businesses. D) foreign businesses; American consumers.

C) American consumers; American businesses.

10) If the dollar appreciates relative to the Swiss franc, A) Swiss chocolate will become more expensive in the United States. B) American computers will become less expensive in Switzerland. C) Swiss chocolate will become cheaper in the United States. D) both A and B of the above will happen.

C) Swiss chocolate will become cheaper in the United States.

6) When the exchange rate changes from 1.0 euros to the dollar to 0.8 euros to the dollar, the euro has ________ and the dollar has ________. A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

C) appreciated; depreciated

17) In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a rise in the country's relative productivity causes its currency to ________. A) appreciate; appreciate B) appreciate; depreciate C) depreciate; appreciate D) depreciate; depreciate

C) depreciate; appreciate

12) When the exchange rate for the euro changes from $1.20 to $1.00, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B) appreciated and German cars sold in the United States become less expensive. C) depreciated and American wheat sold in Germany becomes more expensive. D) depreciated and American wheat sold in Germany becomes less expensive

C) depreciated and American wheat sold in Germany becomes more expensive.

35) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent. A) appreciation; 4 B) appreciation; 2 C) depreciation; 2 D) depreciation; 4

C) depreciation; 2

41) The purchasing power parity theory A) has significant predictive power in the short run. B) is the starting point for understanding how exchange rates are determined. C) does not take into account that many goods and services are not traded across borders. D) is none of the above.

C) does not take into account that many goods and services are not traded across borders.

38) As the relative expected return on dollar deposits increases, foreigners will want to hold more ________ deposits and less ________ deposits. A) foreign; foreign B) foreign; dollar C) dollar; foreign D) dollar; dollar

C) dollar; foreign

22) Increased demand for a country's ________ causes its currency to appreciate in the long run, while increased demand for ________ causes its currency to depreciate. A) imports; imports B) imports; exports C) exports; imports D) exports; exports

C) exports; imports

65) If the one-year risk-free interest rate in the U.S. is _______ than in Japan, the one-year forward exchange rate of the U.S. Dollar (¥/$) should be ________ than the spot rate. A) higher; higher B) lower; lower C) higher; lower D) lower; the same as E) both A and C

C) higher; lower

59) The purchasing power parity describes _______. A) how interest rates should change to maintain the same investment returns across countries B) how exchange rates should change to maintain the same investment returns across countries C) how exchange rates should change to maintain the same value for the same good across countries D) how prices of goods should change to maintain the same exchange rate across markets E) how capital should flow across countries to maintain the same cost of labor

C) how exchange rates should change to maintain the same value for the same good across countries.

63) The interest rate parity implies that _______. A) nominal interest rates are the same across countries B) inflation levels are the same in across countries C) investors earn the same risk-adjusted rates of return in different countries D) a commodity has the same price in every country E) the exchange rate between two currencies is the same across different dealers

C) investors earn the same risk-adjusted rates of return in different countries

58) According to the _______, a commodity should have the same price in every country. A) consistent or cross exchange rates B) interest rate parity C) law of one price D) international trade parity E) exchange rate parity

C) law of one price

13) The starting point for understanding how exchange rates are determined is a simple idea called ________, which states that if two countries produce an identical good, the price of the good should be the same throughout the world no matter which country produces it. A) Gresham's law B) the law of one price C) purchasing power parity D) arbitrage

C) purchasing power parity

20) The theory of purchasing power parity cannot fully explain exchange rate movements because A) all goods are identical even if produced in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) fiscal policy differs across countries.

C) some goods are not traded between countries.

26) The expected return on dollar deposits in terms of foreign currency is the ________ the interest rate on dollar deposits and the expected appreciation of the dollar. A) product of B) ratio of C) sum of D) difference in

C) sum of

67) If inflation in the United States is below that in Britain, one would expect A) U.S. imports from Britain to increase significantly. B) the United States would experience balance of payments problems in the future. C) the forward exchange value of the dollar to be higher relative to the pound than spot exchange rates. D) U.S. interest rates to be above British rates.

C) the forward exchange value of the dollar to be higher relative to the pound than spot exchange rates.

66) According to the interest rate parity, an exchange rate between two currencies should change when _______. A) the two countries experience equal increases in interest rates B) the two countries experience equal decreases in interest rates C) the two countries experience unequal increases in interest rates D) both Aand B E) An exchange rate should not change in any of the above cases

C) the two countries experience unequal increase in interest rates

28) If the interest rate on dollar deposits is 10 percent, and the dollar is expected to appreciate by 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is A) 3 percent. B) 10 percent. C) 13.5 percent. D) 17 percent. E) 24 percent.

D) 17 percent.

40) The foreign exchange market A) is organized as an over-the-counter market in which several hundred dealers stand ready to buy and sell deposits denominated in foreign currencies. B) is very competitive. C) functions no differently from a centralized market. D) all of the above.

D) all of the above.

9) If the dollar depreciates relative to the Swiss franc, A) Swiss chocolate will become more expensive in the United States. B) American computers will become less expensive in Switzerland. C) Swiss chocolate will become cheaper in the United States. D) both A and B of the above will happen.

D) both A and B of the above will happen.

19) The theory of purchasing power parity cannot fully explain exchange rate movements because A) not all goods are identical in different countries. B) monetary policy differs across countries. C) some goods are not traded between countries. D) both A and C of the above. E) both B and C of the above.

D) both A and C of the above.

50) All of the following are active participants in the foreign exchange markets except A) hedge funds B) central banks C) foreign exchange traders D) corporations operating exclusively in their domestic markets E) All of the above are active participants in the foreign exchange markets

D) corporations operating exclusively in their domestic markets

7) If the dollar ________ from 1.2 euros per dollar to 0.8 euros per dollar, the euro ________ from 0.83 dollars to 1.25 dollars per euro. A) appreciates; appreciates B) appreciates; depreciates C) depreciates; depreciates D) depreciates; appreciates

D) depreciates; appreciates

23) If the demand for ________ goods decreases relative to ________ goods, the domestic currency will depreciate. A) foreign; domestic B) foreign; foreign C) domestic; domestic D) domestic; foreign

D) domestic; foreign

18) If the 2005 inflation rate in Britain is 6 percent, and the inflation rate in the U.S. is 4 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the British pound in terms of U.S. dollars will A) rise by 10 percent. B) rise by 2 percent. C) fall by 10 percent. D) fall by 2 percent. E) do none of the above.

D) fall by 2 percent.

42) Which of the following risks is created by investing in foreign assets? A) liquidity risk B) intervention risk C) default risk D) foreign exchange risk E) basis risk

D) foreign exchange risk

2) A spot transaction in the foreign exchange market involves the A) exchange of exports and imports at a specified future date. B) exchange of bank deposits at a specified future date. C) immediate (within two days) exchange of exports and imports. D) immediate (within two days) exchange of bank deposits.

D) immediate (within two days) exchange of bank deposits.

29) If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and if the dollar is expected to appreciate at a 4 percent rate, A) euro deposits have a higher expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 11 percent. C) the expected return on dollar deposits in terms of euros is 1 percent. D) the expected return on euro deposits in terms of dollars is 3 percent. E) the expected return on dollar deposits equals the expected return on euro deposits

D) the expected return on euro deposits in terms of dollars is 3 percent.

16) The theory of purchasing power parity states that exchange rates between any two currencies will adjust to reflect changes in A) the trade balances of the two countries. B) the current account balances of the two countries. C) fiscal policies of the two countries. D) the price levels of the two countries

D) the price levels of the two countries

46) A currency forward contract should specify all but one of the following: A) currencies to be exchanged B) the amount of one of the currencies in the exchange C) the exchange rate D) the date of the exchange E) A currency forward contract should specify all of the above.

E) A currency forward contract should specify all of the above.

43) Which of the following cannot be a reason for purchasing foreign assets? A) earning high rates of return B) diversifying asset portfolios C) speculating on the direction of exchange rate changes D) moving funds out of politically unstable countries E) All of the above can be reasons for purchasing foreign assets.

E) All of the above can be reasons for purchasing foreign assets.

53) If the U.S. Dollar trades at a forward premium relative to the Euro, _______. A) the Dollar is expected to appreciate against the Euro. B) the interest rates in the U.S. are higher than in the Euro-zone C) the Euro is expected to buy fewer dollars in the future D) both a and b E) both A and C

E) both A and C

60) Which of the following factors does not contribute to deviations from the law of one price? A) barriers to trade B) nontraded goods C) imperfect competition D) trade imbalances E) free flow of capital

E) free flow of capital

30) If the interest rate is 13 percent on euro deposits and 15 percent on dollar deposits, and if the euro is expected to appreciate at a 4 percent rate relative to the dollar, then A) euro deposits have a lower expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 9 percent. C) the expected return on dollar deposits in terms of euros is 19 percent. D) both A and B of the above will occur. E) none of the above will occur.

E) none of the above will occur.

56) Consistent or cross exchange rates imply that _______. A) short-term interest rates are the same in every country B) inflation is the same in every country C) investors earn the same rates of return in different countries D) a commodity has the same price in every country E) the exchange rate between two currencies is the same across different dealers

E) the exchange rate between two currencies is the same across different dealers.

T/F 2. The spot exchange rate between the U.S. Dollar and the Swiss Franc (CHF) is $.7875/CHF and the forward discount for CHF is 4%. What is the one-year forward rate of CHF?

False

T/F 6. Assume that the Canadian annual inflation rate is 4%, the US annual inflation is 7%, and the current spot exchange rate is C$1.23/$1. Under these market conditions what spot exchange rate will be necessary to maintain one price for goods between the two countries one year from now?

False

T/F 7. You bought a one-year European security that provided a return of 8%. Over the same year, the Euro depreciated against the Dollar by 3%. What is total (domestic) return on this investment?

False

T/F 8. Assume that the spot rate of the Euro is $1.31/€, the U.S. one-year interest rate is 4%, and the European one-year interest rate is 6%. What should the one-year forward rate of the Euro be?

False

T/F 1. The spot exchange rate between the U.S. Dollar and the Euro is $1.3085/€ and the six-month forward rate is $1.3136/€. What is the forward premium or discount the Euro is trading at?

True

T/F 10. Assume that six-month risk-free interest rates in the U.S. and Europe are 5.4% and 4.8%, respectively (note: these are annual quotes for interest rates). A spot exchange rate between the Dollar and the Euro is €0.75/$, and the six-month forward exchange rate is €0.78/$. Compute the profit of an arbitrageur who starts with the amount equivalent to $100,000 or €100,000.

True

T/F 3. The six-month forward exchange rate between the U.S. Dollar and the Euro is $1.3125/€ and the forward discount for the Euro is 5%. What is the spot exchange rate?

True

T/F 4. Assume that the U.S. Dollar/British Pound exchange rate is $2.00/£1.0 at a New York dealer. Also, assume that at the same time a London dealer has the exchange rate at $1.92/£1.0. What would be the profit of a trader who starts with 120,000 British Pounds to exploit this discrepancy?

True

T/F 5. Hockey skates sell in Canada for 105 Canadian dollars (C$). Currently, the exchange rate is $0.71/C$. If the purchasing power parity holds, what is the price of the same hockey skates in the U.S?

True

T/F 9. The spot exchange rate between the U.S. Dollar and the British Pound is $0.5225/₤ and the two-month forward rate is $0.5184/₤. What is the forward premium or discount the Pound is trading at?

True