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CHAPTER 12
TRUE/FALSE QUESTIONS
dollar in the spot market will be higher than in the forward market.
people expect it to have more inflation than other countries.
account flows is shown as statistical discrepancy.
import substitutes to lower prices.
marketable.
their balance of payments.
depreciated relative to the Canadian dollar.
Canadian dollars.
the foreign country’s currency also increases.
currency relative to other countries.
has assumed the exchange rate risk in the transaction.
economic transaction.
surplus in capital accounts.
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position.
spot market, then Euro is said to be selling at a discount to the spot rate.
rate approximately equal to the amount by which its inflation rate exceeds that of the
United States.
and the real assets based on prospects of real returns
MULTIPLE-CHOICE QUESTIONS
a. the cost of a unit of foreign currency.
b. the current interest rates of varying countries.
c. the cost of a unit of one currency in terms of another currency.
d. the expected change in prices of international goods.
a. the cost of a unit of currency in terms of another.
b. the variability in the current accounts balance of the balance of payments.
c. the variability of investment returns or prices of goods and services caused by
changes in the value of one currency versus another.
d. the difference between domestic and international interest rates.
a. to provide for efficient capital exchange between governments.
b. to exchange purchasing power between trading partners with different local
currencies.
c. to provide a means for passing the risk associated with changes in foreign
exchange rates to professional risk-takers.
d. to accommodate credit extension and delayed payments for goods and services
between countries.
domestic traders?
a. One party in the trade has to be concerned about foreign exchange risk.
b. No one legal authority has control over the transaction and legal remedies.
c. Credit information on opposite parties is often incomplete.
d. There is one currency involved.
a. by demanding Euros in return for U.S. dollars.
b. by supplying Euros in return for U.S. dollars.
c. by demanding Japanese yen in return for dollars.
d. by supplying U.S. dollars in return for Euros.
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e. both a and d
foreign exchange markets?
a. supply Canadian dollars
b. demand pesos
c. demand Canadian dollars
d. demand U.S. dollars
e. none of the above
exchange transactions?
a. supply U.S. Dollars
b. demand British Pounds
c. supply British Pounds
d. demand Chinese Yuan
e. both a and b
Ontario bank advertises a rate of 7.5%. If it costs approximately $50 in travel and
forward contract commissions to invest in Canada, which CD should the Detroit investor
take? Refer to the foreign exchange rates below.
U.S. Equiv. Rates
Canada (dollar) $0.8345
180 day Forward $0.8225
a. Make the U.S. CD investment.
b. Make the Canadian CD investment.
c. The investor is indifferent between the two because of interest parity.
d. One is unable to make this calculation with the data provided
percent. The Canadian spot rate was 1.367 C$/U.S.$ when the investment was made.
The U.S. dollar cost of the investment was ________ and the total amount of Canadian
investment was _________ C$ after 180 days?
a. 136,700; 107,000
b. $100,000; 107,000
c. $73,153; 103,500
d. $136,700; 103,500
a. one Dollar can buy 1.355 Euros
b. one Euro can buy 0.738 Dollars
c. one Dollar can buy 0.738 Euros
d. one Euro can buy 1.355 Dollars
e. both c and d
a. The yen has appreciated against the dollar.
b. The dollar has depreciated against the yen.
c. The dollar has appreciated against the yen.
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d. the cost of a yen has increased in terms of dollars.
exceed those in Japan,
a. the yen is likely to appreciate moving from 110 yen per dollar to 120 yen per
dollar.
b. the yen is likely to appreciate moving from 120 yen per dollar to 110 yen per
dollar.
c. the yen is likely to depreciate moving from 120 yen per dollar to 110 yen per
dollar.
d. the yen is likely to depreciate moving from 110 yen per dollar to 120 yen per
dollar.
U.S. dollar
a. has appreciated against the Canadian dollar.
b. has depreciated against the Canadian dollar.
c. has more buying power in England.
d. none of the above
a. another trade or service account must balance it.
b. the entire balance of payments will be in a surplus position.
c. other accounts or capital movements offset the surplus to provide a balance.
d. a shift of capital must balance the trade surplus.
imports exceed merchandise exports for a period,
a. the country has a surplus in the balance on current account.
b. the country has a deficit in the capital accounts for the period.
c. the country has a deficit in the merchandise trade account.
d. the country has a surplus in the merchandise trade account.
a. the U.S. inflation rate is twice that of other developed nations.
b. current account budget deficits/surpluses are offset by reverse capital flows.
c. the current account deficits in the U.S. are offset by capital flows much larger
than the current account deficit.
d. central banks want them stable.
what effect on a country’s exchange rate?
a. Trade levels do not affect exchange rates.
b. The country’s currency should appreciate in value relative to their major trading
countries.
c. The country’s currency should depreciate in value relative to their major trading
countries.
d. None of the above is correct.
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in its exchange rate if
a. foreigners are buying more long-term investments in the United States than U.S.
citizens are buying abroad.
b. foreigners wants to hold additional dollars to help them mediate their financial
institutions.
c. foreign governments loan their excess dollars to the Unites States.
d. all of the above
a. trade flows.
b. financial flows.
c. government intervention.
d. all of the above.
a. trade.
b. speculation.
c. flight of capital.
d. all of the above
a. investment capital flows.
b. political capital flows
c. speculative capital flows
d. capital flight
e. all of the above
a. nominal rate of return on the foreign investment
b. the expected real rate of return on the foreign investment.
c. spot exchange rate when making the investment.
d. the realized real rate of return on the foreign investment.
a. trade flows of goods and services
b. financial capital flows
c. governmental intervention
d. an expansion in the number of traders of foreign exchange
a. barriers to trade
b. consumer tastes
c. productivity
d. relative costs of factors of production
e. activity of arbitrageurs in the foreign exchange markets
a. buy assets (securities) abroad
b. sell assets (securities) abroad
c. buy dollars in foreign exchange markets
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d. impose severe import restrictions
the following policies except:
a. Establish import trade barriers and quotas.
b. Buy domestic currency in the foreign exchange markets.
c. Provide low cost financing for export industries.
d. Buy foreign financial assets.
a. the dollar is a generally acceptable medium of exchange in international
transactions.
b. they don’t have enough money of their own.
c. interest rates on the dollar are higher than on their currency.
d. inflation is higher in the United States.
a. foreign exchange rates would remain constant.
b. goods and services would cost the same in terms of dollars everywhere in the
world.
c. goods and services would cost the same in each local currency.
d. foreign exchange rates would be the same anywhere in the world markets.
precisely is that
a. investors are using forward contracts when trading.
b. financial or capital flows may affect foreign exchange rates.
c. consumers and businesses of each country are not concerned about the cost of
goods in other countries.
d. purchasing power parity is only a theory.
e. Exchange rates do, in fact, adjust to ensure that purchasing power parity holds.
what is the yen/dollar exchange rate?
a. 105 yen/dollar
b. 525 yen/dollar
c. 100 yen/dollar
d. 125 yen/dollar
e. .0095 yen/dollar
exchange rates of $1.3135/€, what is the price of the item in the U.S.?
a. $0.33
b. $5.25
c. $3.05
d. $4.00
e. €4.00
a. its forward exchange rate will fall relative to countries with lower inflation
b. its forward exchange rate will fall relative to countries with higher inflation
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c. its exports will increase significantly.
d. its interest rates will fall.
e. the forward exchange rate will fall relative to all other countries.
a. U.S. imports from Britain to increase significantly.
b. the United States to experience balance of payments problems in the future.
c. the dollar to appreciate against the pound in the future.
d. U.S. interest rates to be above British rates.
a. purchasing power parity will not be attained.
b. the yen/dollar exchange rate is likely to decrease.
c. the yen/dollar exchange rate is likely to increase.
d. the exchange rate will not change because inflation has no effect on exchange
rates.
world markets?
a. foreign exchange deals
b. forward markets
c. futures markets
d. arbitragers
e. none of the above
a. is an auction market with a physical exchange floor, similar to NYSE
b. has restricted trading hours
c. is composed of a group of informal markets closely interlocked through
international banking relationships
d. ensures that purchasing power parity holds
e. both a and b
wishes to hedge the risk in the futures market. To do so the bank should
a. sell $20 million in Canadian dollar futures with two months maturity.
b. buy $20 million in Canadian dollar futures.
c. buy C$20 million in Canadian dollar futures.
d. sell C$20 million in Canadian dollar futures.
currencies consistent with each other.
a. arbitragers
b. regulators
c. traders
d. brokers
e. bankers
a. in the forward market.
b. in the spot market today.
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c. in the spot market 60 days from now.
d. all of the above
180 days. The current exchange rate is $1.98/₤. The exporter hedges its exchange rate
risk by selling ₤250,000 forward 180 days at the prevailing 180-day forward exchange
rate of $2.01/₤. What is the dollar amount the American firm is expected to receive in
180 days?
a. $495,000
b. $502,500
c. $201,000
d. $198,000
e. ₤250,000
180 days. The current exchange rate is $1.98/₤. The exporter hedges its exchange rate
risk by buying a put option on ₤250,000 with the strike exchange rate of $1.92/₤. The put
expiring in 180 days cost the firm $5,000. What is the dollar amount the American firm
will net on this transaction if the exchange rate is $1.96/₤ in 180 days?
a. $495,000
b. $490,000
c. $485,000
d. $480,000
e. $475,000
a. sight draft.
b. time draft.
c. letter of credit.
d. documented transfer.
e. bill of lading.
maturity as stated in the _______.
a. time; sight; bill of lading
b. sight; time; bill of lading
c. time; sight; letter of credit
d. sight; time; letter of credit
transactions?
a. letters of credit
b. bills of lading
c. sight drafts
d. repurchase agreements
e. All of the above instruments are used to facilitate international transactions.
a. the use of dollar currency ($100 bills) in less-developed countries in Europe.
b. the financing of Europeans by domestic U.S. banks.
c. the holding of a dollar-denominated bank deposit outside the U. S.
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d. the development of a common currency in Europe.
a. Any currency held in a time deposit account outside of its country of origin.
b. Any currency held in a time deposit account in Europe.
c. Any currency held in a time deposit account outside of the U.S.
d. Euros held in a time deposit account in Europe.
multinational firms because:
a. Lower regulatory costs allow lenders to offer lower cost loans.
b. With transactions starting at $500,000, economies of scale provide better pricing.
c. Lower credit checking costs and other processing costs lowers lending rates.
d. all of the above
store excess liquidity for corporations, countries, and individuals?
a. Investors are allowed to hold debt securities in bearer form
b. Automatic withholding of tax on interest earned
c. Investments earn higher returns
d. High liquidity of Eurocurrency deposits
U.S.?
a. Eurobonds are usually issued in bearer form; bonds sold in the U.S. are usually
registered bonds.
b. Eurobonds usually pay interest once a year; bonds sold in the U.S. usually pay
interest semiannually.
c. Eurobonds are denominated in Euros; bonds sold in the U.S. are denominated in
dollars.
d. Interest on Eurobonds is computed using a 360-day year vs. a 365-day year for
bonds issued in the U.S.
e. All of the above are differences between Eurobonds and bonds sold in the U.S.
a. They are underwritten by a multinational syndicate of investment banks.
b. Eurobonds are bearer bonds and do not have to be registered, which makes them
more marketable.
c. Interest or coupon payments are annual and are calculated based on a 360-day year.
d. all of the above.
Nardasausau stock in a Japanese company at a price of 3,150 yen per share. The total
purchasing cost was 315,000 yen. At the time of purchase, in the currency market 1
yen equaled $0.00952. Today, Nardasausau stock is selling at a price of 3,465 yen
per share, and in the currency market $1 equals 130 yen. The stock does not pay a
dividend. If the investor were to sell the stock today and convert the proceeds back to
dollars, what would be his realized return on his initial dollar investment from
holding Nardasausau stock?
a. +10.00%
b. -11.12%
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c. +12.48%
d. +11.12%
e. -12.48%
the U.S. annual nominal rate is 5% and real interest rates are 2% in both countries,
then inflation in Taiwan is about _____ than in the U.S.
a. 1% higher
b. 2% higher
c. 1% lower
d. 2% lower
e. 3% lower
and the U.S. dollar (USD) is 2.2 AD per USD. Over the year, Australia’s
inflation is 12% and the U.S. inflation is 4%. If purchasing power parity holds, at
the end of 2011, the exchange rate should be approximately _____ USDs per AD.
a. 2.3913
b. 0.4895
c. 2.8498
d. 0.4182
e. 0.3440
country’s currency?
I. high interest rates
II. high inflation
III. large current account deficit
IV. labor strike and violent protest
a. I only
b. I and II only
c. II, III, and IV only
d. II and IV only
e. I and III only
a. More goods and services are exported than are imported
b. The U.S. borrowed from abroad more than it loaned, and/or sold off some
of its assets
c. There is under consumption of foreign financial assets
d. The value of the dollar will drop
e. The country’s credit rating is going to be downgraded
ESSAY QUESTIONS
1. Explain how and why the U.S. forward exchange rates are related to short-term interest rates in
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the United States and Germany.
2. Explain why a decline in a country’s exchange rate will generally increase the demand for its
goods and reduce its demand for foreign goods.
3. With reference to the concepts and terms related to the International Payments Flow (balance of
payments), under which conditions could a country have a sizable deficit in its trade balance and
still have an appreciating currency?
4. Increased U.S. inflation, relative to other trading partner nations, should have what impact on the
value of the U.S. dollar? Explain thoroughly.
5. List a number of reasons for the increased internationalization of financial markets in the last two
decades.
6. Forrest Gump Bank, a U.S. bank, has 1-year U.S. $200 million loan that earns an average
rate of return of 6%. Forrest Gump Bank also has one year single payment Euro loans of €110
million earning 8%. Forrest Gump Bank’s funding source is $300 million in US$ one year
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NCDs, on which they are paying 4%. Initially the exchange rate is €1.10 per $1 U.S. The one
year forward rate is €1.14 per $1 U.S. What is the bank’s dollar % spread if they hedge fully
using Euro forwards?