978-0132757089 Chapter 19 Part 2

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36) The exchange rate that represents the number of units of a home currency that is required to

purchase one unit of a foreign currency is referred to as a(n) ________ quote.

A) forward

B) direct

C) market

D) indirect

E) arbitrage

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: direct, indirect quotes

Principles: Principle 3: Cash Flows Are the Source of Value

37) The exchange rate that represents the number of units of a foreign currency that can be

purchased with one unit of a home currency is referred to as a(n) ________ quote.

A) forward

B) direct

C) market

D) indirect

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: direct, indirect quotes

Principles: Principle 3: Cash Flows Are the Source of Value

38) A foreign exchange dealer in New York posts an ask price of .02201 for Indian rupees and a

bid price of .02197. What is the dealer’s profit on the simultaneous purchase and sale of 1 million

rupees?

A) $40 profit

B) ($40 )loss

C) $400 profit

D) ($4) loss

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: bid-ask

Principles: Principle 3: Cash Flows Are the Source of Value

39) The international currency system that presently exists is best described as a ________ rate

currency system.

A) parity

B) fixed

C) multinational

D) floating

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: exchange rate risk

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: cross rate

Principles: Principle 3: Cash Flows Are the Source of Value

41) The asked rate is the price a customer will receive from a foreign currency trader when

selling a foreign currency.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: bid-ask

Principles: Principle 3: Cash Flows Are the Source of Value

42) The foreign exchange market is similar in form to the New York Stock Exchange.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: foreign exchange markets

Principles: Principle 3: Cash Flows Are the Source of Value

43) Arbitrage eliminates forward discounts and premiums across the markets of a single

currency.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: arbitrage

Principles: Principle 3: Cash Flows Are the Source of Value

44) Arbitrage is the process of buying and selling in one market in order to make a riskless profit.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: arbitrage

Principles: Principle 3: Cash Flows Are the Source of Value

45) The efficiency of foreign currency markets is ensured, in large measure, by the process of

arbitrageurs.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: arbitrage

Principles: Principle 3: Cash Flows Are the Source of Value

46) A direct quote in Bombay tells one how many British pounds can buy one Indian rupee.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: bid-ask

Principles: Principle 3: Cash Flows Are the Source of Value

48) The foreign exchange market provides a physical entity that transfers the purchasing power

from one currency to another.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: foreign exchange markets

Principles: Principle 3: Cash Flows Are the Source of Value

49) Foreign exchange transactions carried out in the spot market entails an agreement today to

deliver a specific number of units of currency on a future date in return for a specified number of

units of another currency.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: spot rates

Principles: Principle 3: Cash Flows Are the Source of Value

50) Transactions carried out in the foreign exchange markets can include direct or indirect

exchange rate quotes.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: foreign exchange markets

Principles: Principle 3: Cash Flows Are the Source of Value

51) Spot transactions are made immediately in the market place at the market price.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: spot rates

Principles: Principle 3: Cash Flows Are the Source of Value

52) Spot exchange markets are efficient due to arbitrage forces.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: spot rates

Principles: Principle 3: Cash Flows Are the Source of Value

53) When banks transact in foreign currencies, the direct bid quote is greater than the direct

asked quote.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: bid-ask

Principles: Principle 3: Cash Flows Are the Source of Value

54) The forward rate is the same as the spot rate that will prevail in the future.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: forward rates

Principles: Principle 3: Cash Flows Are the Source of Value

55) The major advantage of the forward market is risk reduction.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: forward rates

Principles: Principle 3: Cash Flows Are the Source of Value

56) Spot exchange markets have the potential for arbitrage opportunities for a long period of

time.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: spot rates

Principles: Principle 3: Cash Flows Are the Source of Value

57) The difference between the asked price and the bid price is known as the spread.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: bid-ask

Principles: Principle 3: Cash Flows Are the Source of Value

58) A narrow spread indicates efficiency in the spot exchange market.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: bid-ask

Principles: Principle 3: Cash Flows Are the Source of Value

59) Forward contracts are usually quoted for periods greater than one year.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: forward rates

Principles: Principle 3: Cash Flows Are the Source of Value

60) Forward rates, like spot rates, are quoted in both direct and indirect form.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: forward rates

Principles: Principle 3: Cash Flows Are the Source of Value

61) Forward contracts benefit only the customer due to a reduction in uncertainty.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: forward rates

Principles: Principle 3: Cash Flows Are the Source of Value

62) What is the role of arbitrage in the foreign exchange markets?

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: arbitrage

Principles: Principle 3: Cash Flows Are the Source of Value

63) A dealer in London posts an ask rate of .6238 and a bid rate of .6237. How much, in U.K.

pounds, would it cost to purchase $100,000. For how much in pounds could you sell $100,000?

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: exchange rate

Principles: Principle 3: Cash Flows Are the Source of Value

64) What is the difference between forward rates and spot rates? What is the purpose of forward

contracts?

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: forward rates

Principles: Principle 3: Cash Flows Are the Source of Value

65) What is the difference between and “ask” quote and a “bid” quote.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: bid-ask

Principles: Principle 3: Cash Flows Are the Source of Value

66) As of January 8, 2010, the spot rate for Swiss francs was .9772. The 180 day forward rate

was .9783. Compute the annualized percentage rate premium or discount for Swiss francs.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: forward rates

Principles: Principle 3: Cash Flows Are the Source of Value

67) One U.S. dollar buys 12.706 Mexican pesos and .6936 euros. What is the peso/euro

exchange rate.

Topic: 19.1 Foreign Exchange Markets and Currency Exchange Rates

Keywords: exchange rate

Principles: Principle 3: Cash Flows Are the Source of Value

1) A theory that relates the ratios of spot and forward exchange to differences in interest rates in

two countries or currency zones is known as:

A) interest rate parity.

B) purchasing power parity.

C) market efficiency.

D) forward/spot equivalence hypothesis.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

2) The interplay between interest rate differentials and exchange rates such that both adjust until

the foreign exchange market and the money market reach equilibrium is called the:

A) purchasing power parity theory.

B) balance of payments quantum theory.

C) interest rate parity theory.

D) arbitrage markets theory.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

3) Which of the following statements is true?

A) The forward rate is the same as the spot rate that will prevail in the future.

B) Only the forward rate is known.

C) An indirect quote is the exchange rate that indicates the number of units of the home currency

required to buy one unit of foreign currency.

D) Both B and C.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

4) The purchasing power parity theory is least likely to apply to the price of:

A) oral surgery.

B) smart phones.

C) crude oil.

D) cane sugar.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

6) The 1 year interest rate in the U.S. is 2%. The spot exchange rate for Canadian dollars .97 to

the U.S.dollar. The 6 months forward rate is .9698 to the U.S. dollar. These prices indicate that

interest rates in Canada, on an annualized basis, are about:

A) .08% lower.

B) .08% higher.

C) .04% higher.

D) .8% lower.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

7) The spot exchange rate for Canadian dollars is .97 to the U.S.dollar. The 6 months forward

rate is .9698 to the U.S. dollar. The interest rate in Canada (annual) is 2.04%. What is the U. S.

Interest rate?

A) 2.02%

B) 4.04%

C) 1.08%

D) .9982%

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

8) A barrel of oil currently costs $85 in U.S. dollars. The current exchange rate is $1.40 U. S. to

the euro. If purchasing power parity prevails what is the price of a barrel of oil in euros?

A) 71.43 euros

B) 140 euros

C) 119 euros

D) 60.71 euros

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

45.5 rupees to the dollar. If purchasing power parity prevails, what is the price of 10,000 bushels

of corn in rupees?

A) 2,607,150 rupees

B) 12,593.34 rupees

C) 45,500 rupees

D) 260,715 rupees

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: purchasing power parity

Principles: Principle 3: Cash Flows Are the Source of Value

10) The current spot exchange rate between the Japanese yen and the U.S. dollar is 92.61 Y/US$.

The yen is expected to appreciate by 4% against the dollar over the next year. What do you

expect the spot exchange rate between the yen and the dollar to be one year from now?

A) 92.61 Y/US$

B) 98.18 Y/US$

C) 89.05 Y/US$

D) 103.08 Y/US$

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

11) According to the domestic Fisher effect, if the inflation rate is 3% and the real rate of interest

is 2%, the nominal rate of interest will be:

A) 5.06%.

B) 5.00%.

C) 6%.

D) 8.15%.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

13) According to the international Fisher effect, if the nominal interest rate in Russia is 9.5% and

the inflation rate is 8%, the real rate of interest is approximately:

A) 18.26%.

B) 6.5%.

C) 1.5%.

D) -1.5%.

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value

14) The nominal rate of interest in Russia is 9.5% and the inflation rate is 8%. The nominal rate

of interest in Spain is 3% and the inflation rate is 1%. Which country has the higher real rate of

interest?

A) Russia

B) Spain

C) There is no difference.

D) There is not enough information

Topic: 19.2 Interest Rate and Purchasing-Power Parity

Keywords: interest rate parity

Principles: Principle 3: Cash Flows Are the Source of Value