42) Forward parity states that
A) any forward premium or discount is equal to the expected change in the exchange rate.
B) any forward premium or discount is equal to the actual change in the exchange rate.
C) the nominal interest rate differential reflects the expected change in the exchange rate.
D) an increase (decrease) in the expected inflation rate in a country will cause a proportionate
increase (decrease) in the interest rate in the country.
43) The International Fisher Effect suggests that
A) any forward premium or discount is equal to the expected change in the exchange rate.
B) any forward premium or discount is equal to the actual change in the exchange rate.
C) the nominal interest rate differential reflects the expected change in the exchange rate.
D) an increase (decrease) in the expected inflation rate in a country will cause a proportionate
increase (decrease) in the interest rate in the country.
44) The Fisher effect states that
A) any forward premium or discount is equal to the expected change in the exchange rate.
B) any forward premium or discount is equal to the actual change in the exchange rate.
C) the nominal interest rate differential reflects the expected change in the exchange rate.
D) an increase (decrease) in the expected inflation rate in a country will cause a proportionate
increase (decrease) in the interest rate in the country.
45) Decision-making for multinational corporations formulating international sourcing,
production, financing, and marketing strategies depends, primarily, on
A) risk management techniques.
B) expertise of staff attorneys.
C) luck.
D) forecasting exchange rates as accurately as possible.
46) The main approaches to forecasting exchange rates are
A) Efficient market, Fundamental, and Technical approaches.
B) Efficient market and Technical approaches.
C) Efficient market and Fundamental approaches.
D) Fundamental and Technical approaches.
47) The benefit to forecasting exchange rates
A) are greatest during periods of fixed exchange rates.
B) are nonexistent now that the euro and dollar are the biggest game in town.
C) accrue to, and are a vital concern for, MNCs formulating international sourcing, production,
financing, and marketing strategies.
D) all of the options
48) The Efficient Markets Hypothesis states
A) markets tend to evolve to low transactions costs and speedy execution of orders.
B) current asset prices (e.g., exchange rates) fully reflect all the available and relevant information.
C) current exchange rates cannot be explained by such fundamental forces as money supplies,
inflation rates and so forth.
D) none of the options
49) Good, inexpensive, and fairly reliable predictors of future exchange rates include
A) today’s exchange rate.
B) current forward exchange rates (e.g., the six-month forward rate is a pretty good predictor of the
spot rate that will prevail six months from today).
C) esoteric fundamental models that take an econometrician to use and no one can explain.
D) today’s exchange rate, as well as current forward exchange rates (e.g. the six-month forward
rate is a pretty good predictor of the spot rate that will prevail six months from today).
50) Which of the following is a true statement?
A) While researchers found it difficult to reject the random walk hypothesis for exchange rates on
empirical grounds, there is no theoretical reason why exchange rates should follow a pure random
walk.
B) While researchers found it easy to reject the random walk hypothesis for exchange rates on
empirical grounds, there are strong theoretical reasons why exchange rates should follow a pure
random walk.
C) While researchers found it difficult to reject the random walk hypothesis for exchange rates on
empirical grounds, there are compelling theoretical reasons why exchange rates should follow a
pure random walk.
D) none of the options
51) If the exchange rate follows a random walk
A) the future exchange rate is unpredictable.
B) the future exchange rate is expected to be the same as the current exchange rate, St = E(St + 1).
C) the best predictor of future exchange rates is the forward rate Ft = E(St + 1/It).
D) the future exchange rate is expected to be the same as the current exchange rate, St = E(St + 1),
and the best predictor of future exchange rates is the forward rate Ft = E(St + 1/It).
52) One implication of the random walk hypothesis is
A) given the efficiency of foreign exchange markets, it is difficult to outperform the market-based
forecasts unless the forecaster has access to private information that is not yet reflected in the
current exchange rate.
B) given the efficiency of foreign exchange markets, it is difficult to outperform the market-based
forecasts unless the forecaster has access to private information that is already reflected in the
current exchange rate.
C) given the relative inefficiency of foreign exchange markets, it is difficult to outperform the
technical forecasts unless the forecaster has access to private information that is not yet reflected in
the current futures exchange rate.
D) none of the options
53) The random walk hypothesis suggests that
A) the best predictor of the future exchange rate is the current exchange rate.
B) the best predictor of the future exchange rate is the current forward rate.
C) the best predictors of the future exchange rate are the current exchange rate and the current
forward rate.
D) none of the options
54) With regard to fundamental forecasting versus technical forecasting of exchange rates
A) the technicians tend to use “cause and effect” models.
B) the fundamentalists tend to believe that “history will repeat itself” is the best model.
C) the technicians tend to use “cause and effect” models and the fundamentalists tend to believe
that “history will repeat itself” is the best model.
D) none of the options
55) Generating exchange rate forecasts with the fundamental approach involves
A) looking at charts of the exchange rate and extrapolating the patterns into the future.
B) estimation of a structural model.
C) substituting the estimated values of the independent variables into the estimated structural
model to generate the forecast.
D) estimation of a structural model and substitution of the estimated values of the independent
variables into the estimated structural model to generate the forecast.
56) Which of the following issues are difficulties for the fundamental approach to exchange rate
forecasting?
A) One has to forecast a set of independent variables to forecast the exchange rates. Forecasting
the former will certainly be subject to errors and may not be necessarily easier than forecasting the
latter.
B) The parameter values, that is the α’s and β’s, that are estimated using historical data may change
over time because of changes in government policies and/or the underlying structure of the
economy. Either difficulty can diminish the accuracy of forecasts even if the model is correct.
C) The model itself can be wrong.
D) none of the options
57) Researchers have found that the fundamental approach to exchange rate forecasting
A) outperforms the efficient market approach.
B) fails to more accurately forecast exchange rates than either the random walk model or the
forward rate model.
C) fails to more accurately forecast exchange rates than the random walk model but is better than
the forward rate model.
D) outperforms the random walk model, but fails to more accurately forecast exchange rates than
the forward rate model.
58) Academic studies tend to discredit the validity of technical analysis. Which of the following is
true?
A) This can be viewed as support technical analysis.
B) It can be rational for individual traders to use technical analysis—if enough traders use
technical analysis the predictions based on it can become self-fulfilling to some extent, at least in
the short-run.
C) The statement can be explained by the difficulty professors may have in differentiating between
technical analysis and fundamental analysis.
D) none of the options
59) The moving average crossover rule
A) is a fundamental approach to forecasting exchange rates.
B) states that a crossover of the short-term moving average above the long-term moving average
signals that the foreign currency is appreciating.
C) states that a crossover of the short-term moving average above the long-term moving average
signals that the foreign currency is depreciating.
D) none of the options
60) According to the technical approach, what matters in exchange rate determination
A) is the past behavior of exchange rates.
B) is the velocity of money.
C) is the future behavior of exchange rates.
D) is the beta.
61) Studies of the accuracy of paid exchange rate forecasters
A) tend to support the view that “you get what you pay for”.
B) tend to support the view that forecasting is easy, at least with regard to major currencies like the
euro and Japanese yen.
C) tend to support the view that banks do their best forecasting with the yen.
D) none of the options
62) According to the research in the accuracy of paid exchange rate forecasters,
A) as a group, they do not do a better job of forecasting the exchange rate than the forward rate
does.
B) the average forecaster is better than average at forecasting.
C) the forecasters do a better job of predicting the future exchange rate than the market does.
D) none of the options
63) According to the research in the accuracy of paid exchange rate forecasters,
A) you can make more money selling forecasts than you can following forecasts.
B) the average forecaster is better than average at forecasting.
C) the forecasters do a better job of predicting the future exchange rates than the market does.
D) none of the above.
64) According to the monetary approach, what matters in exchange rate determination are
A) the relative money supplies.
B) the relative velocities of monies.
C) the relative national outputs.
D) all of the options
65) According to the monetary approach, the exchange rate can be expressed as
A) S = × ×
B) =
C) S = × ×
D) none of the options
66) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
1.60
=
1.00
i$
2
%
F360($/€)
1.58
=
1.00
i€
4
%
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
67) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
1.60
=
1.00
i$
2
%
F360($/€)
1.58
=
1.00
i€
4
%
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
68) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
1.60
=
1.00
i$
2
%
F360($/€)
1.58
=
1.00
i€
4
%
If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?
$1,000,000
×
€1
=
€625,000
$1.60
Topic: Covered Interest Arbitrage
69) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
1.60
=
1.00
i$
2
%
F360($/€)
1.58
=
1.00
i€
4
%
If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?
×
=
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
i€
3
%
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
i€
3
%
72) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
1.45
=
1.00
i$
4
%
F360($/€)
1.48
=
1.00
i€
3
%
If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?
$1,000,000
×
€1
=
€689,655.17
$1.45
Topic: Covered Interest Arbitrage
73) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
1.45
=
1.00
i$
4
%
F360($/€)
1.48
=
1.00
i€
3
%
If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?
×
$1.45
=
$1,450,000
APR
$
1.42
1.00
=
%
$
1.48
1.00
=
%
75) Assume that you are a retail customer (i.e., you buy at the ask and sell at the bid). Use the
information below to answer the following question.
Bid
Ask
APR
S0($/€)
$
1.42
=
€
1.00
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
$
1.50
=
€
1.00
i€
3
%
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
76) Assume that you are a retail customer (i.e., you buy at the ask and sell at the bid). Use the
information below to answer the following question.
Bid
Ask
APR
S0($/€)
$
1.42
=
€
1.00
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
$
1.50
=
€
1.00
i€
3
%
If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?
×
=
Bid
Ask
APR
S0($/€)
$
1.42
=
€
1.00
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
$
1.50
=
€
1.00
i€
3
%
×
=
78) Assume that you are a retail customer. Use the information below to answer the following
question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
79) Assume that you are a retail customer. Use the information below to answer the following
question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
80) Assume that you are a retail customer. Use the information below to answer the following
question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?
81) Assume that you are a retail customer. Use the information below to answer the following
question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?
Bid
Ask
$1.40 = €1.00
F360($/€)
Bid
Ask
$1.43 = €1.00
F360($/€)
84) Assume that you are a retail customer. Use the information below to answer the following
question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.40 = €1.00
$1.43 = €1.00
i$
4.20% APR
4.10% APR
F360($/€)
$1.44 = €1.00
$1.49 = €1.00
i€
3.65% APR
3.50% APR
If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?
$1.43
Bid
Ask
Borrowing
Lending
$1.40 = €1.00
$1.43 = €1.00
i$
4.20% APR
4.10% APR
F360($/€)
$1.44 = €1.00
$1.49 = €1.00
i€
3.65% APR
3.50% APR
$1.40