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Page 1
1.
Exchange rates affect:
I. international trade flows
II. international investment flows
III. corporate earnings
A)
I
B)
II and III
C)
I and II
D)
I, II, and III
2.
The price of a foreign currency expressed in terms of the home currency is called the:
A)
exchange rate.
B)
rate of depreciation.
C)
dollar–yen ratio.
D)
opportunity cost.
3.
Normally, exchange rates are expressed as:
A)
the number of units of the currency per one ounce of gold.
B)
the GDP of one nation as a percentage of the GDP of the other.
C)
the price of one unit of foreign currency expressed in terms of the domestic
currency.
D)
ratios of the value of one nation's wealth compared with the other.
4.
When interpreting the meaning of an exchange rate, the first step is to always:
A)
know exactly what the exchange rate signifies in terms of which currency is the
denominator.
B)
watch for ways the currency might lose value.
C)
learn about recent behavior of the exchange rate.
D)
know exactly what the rate is at any moment in time.
5.
The notation used in the text for the euro–dollar exchange rate is:
A)
FX€/$.
B)
FX$/€.
C)
E€/$.
D)
E$/€.
Page 2
6.
Generally, exchange rates are quoted as a single price of a unit of foreign currency
rather than a ratio because:
A)
the ratio of the units of home currency to units of foreign currency is always equal
to one.
B)
the denominator is always equal to one.
C)
the price is fixed by the government.
D)
the rate is adjustable in increments of 25 basis points.
7.
The equation E$/£ = 2 means that:
A)
1 dollar buys 2 pounds.
B)
1 dollar buys a pound.
C)
2 pounds buy 1 dollar.
D)
1 dollar buys 1 pound.
8.
If the dollar–euro exchange rate on June 30, 2015, is $1.115 per euro, then the
euro–dollar exchange rate would be:
A)
€2.45 per dollar.
B)
€0.897 per dollar.
C)
€1.225 per dollar.
D)
€1 per dollar.
9.
The equation E¥/£ = 100 means that:
A)
1 yen buys 10 pounds.
B)
0.1 yen buys 1 pound.
C)
100 yen buy 1 pound.
D)
0.01 yen buys 1 pound.
10.
When we look at exchange rates between two countries, what is the relationship
between the exchange rate expressed in units of the domestic currency and the exchange
rate expressed in units of the foreign currency?
A)
They are both equal to one.
B)
They cancel each other out.
C)
One is always the reciprocal of the other.
D)
They can never coexist.
Page 3
11.
If, in 2011, $1 = 1.5 euros, and in 2016, $1 = 0.9 euros, which of the following
statements would be TRUE?
A)
More American tourists will find it cheaper to travel to Europe.
B)
More Europeans will stay home as visits to the United States become more
expensive.
C)
Europeans will import fewer products from the United States.
D)
Americans will import fewer products from Europe.
12.
A dining table costs $3,000 in New York and the same table costs 5,000 euros in Rome.
Thus, $1 is equal to:
A)
1 euro.
B)
2 euros.
C)
1.67 euros.
D)
0.6 euros.
13.
(Table: Exchange Rates Across Currencies) If the exchange rate on January 1, 2016, is
$1 = 144 yen, then:
A)
the dollar has appreciated 10% against the yen.
B)
the dollar has depreciated 24% against the yen.
C)
the yen has depreciated 12% against the dollar.
D)
the yen has depreciated 20% against the dollar.
14.
(Table: Exchange Rates Across Currencies) Based on the information provided, which
of the following statements is TRUE?
A)
1 peso = 10 yen
B)
1 rupee = 10 yen
C)
1 peso = 3 rupees
D)
$1 Canadian = 35 rupees
Page 4
15.
(Table: Exchange Rates Across Currencies) Based on the information provided, one
Canadian dollar is equal to _____ Mexican pesos and _____ Indian rupees.
A)
10; 73.5
B)
10; 37.5
C)
12; 37.5
D)
12; 45
16.
If a nation's currency buys fewer units of a foreign currency today than yesterday, we
say the value of its currency has:
A)
appreciated.
B)
depreciated.
C)
stagnated.
D)
become inverted.
17.
If today €1 exchanges for ¥135, and tomorrow €1 exchanges for ¥150, we say the euro
has:
A)
appreciated.
B)
depreciated.
C)
stagnated.
D)
become inverted.
18.
When a nation's currency appreciates, it purchases _____ units of a foreign currency and
its currency is said to _____.
A)
fewer; strengthen
B)
more; strengthen
C)
fewer; weaken
D)
more; weaken
19.
If one nation's currency strengthens against a foreign currency, the other nation's
currency must _____ against the domestic currency.
A)
strengthen
B)
equalize
C)
weaken
D)
appreciate
Page 5
20.
When the dollar declines in value against a foreign currency, it is called a(n):
A)
appreciation.
B)
depreciation.
C)
inflation.
D)
deflation.
21.
In European terms, when the exchange rate for the U.S. dollar increases:
A)
the dollar has appreciated.
B)
the dollar has depreciated.
C)
the euro has appreciated.
D)
the dollar has weakened.
22.
Which of the following statements is equivalent to an appreciation of the dollar relative
to the euro?
A)
The dollar buys fewer euros now.
B)
The euro buys fewer dollars now.
C)
The dollar costs less.
D)
The euro buys more dollars now.
23.
When the dollar “cost” of a unit of foreign currency falls, the dollar is _____ against the
foreign currency.
A)
depreciating
B)
appreciating
C)
equalizing
D)
holding its own
24.
If a euro costs $1.25 today, and it costs $1.50 tomorrow, what has happened to the
dollar-euro exchange rate?
A)
Both the dollar and euro have depreciated.
B)
The dollar has appreciated and the euro has depreciated.
C)
The dollar has depreciated and the euro has appreciated.
D)
Both the dollar and euro have appreciated.
25.
It is customary to express changes in the exchange rates of two currencies over time, as:
A)
the loss of purchasing power of one currency divided by the loss of purchasing
power of the other currency.
B)
the percentage change expressed as an appreciation or depreciation of one against
the other.
C)
a ratio of the absolute values (without signs).
D)
a ratio of the price of gold in each nation.
Page 6
26.
In general, the percentage of appreciation of one nation's currency is equal to:
A)
its rate of growth of real GDP.
B)
its purchasing power.
C)
its population growth.
D)
the percentage of depreciation of the foreign nation's currency.
27.
Slight discrepancies in the rates of appreciation versus depreciation of two currencies
are related to:
A)
a mathematical quirk that percentage increases are always larger than percentage
decreases because, in the first case, the denominator is smaller.
B)
the imprecise nature of the calculations.
C)
the lack of reliable information.
D)
the volatile nature of exchange rates.
28.
Changes in exchange rates are usually expressed in percentage terms. The percentage
rate of appreciation for one currency will be close to the rate of depreciation for the
other nation whenever:
A)
the change in the rate is very small.
B)
the exchange rates are very different in quantitative terms.
C)
the change in the rate is very large.
D)
one exchange rate is 50% more than the other one at the time of the change.
29.
If E$/£ moves from 2 to 3, this is a percentage change of:
A)
50%.
B)
33.3%.
C)
–33.3%.
D)
–50%.
30.
If E$/£ increases by 20%, this is consistent with an increase from:
A)
4 to 5.
B)
4 to 6.
C)
5 to 6.
D)
4 to 7.
Page 7
31.
(Table: Currency Values I) The U.S. dollar appreciated against the:
A)
British pound and the Indian rupee.
B)
euro and the Indian rupee.
C)
euro and the Brazilian real.
D)
euro and the Indian rupee.
32.
(Table: Currency Values I) The U.S. dollar depreciated against the _________ and the
________.
A)
euro; Brazilian real
B)
Indian rupee; Brazilian real
C)
British pound; euro
D)
euro; Indian rupee
33.
(Table: Currency Values I) The U.S. dollar appreciated against the real by:
A)
2.4%.
B)
25%.
C)
75%.
D)
12.4%.
Page 8
34.
(Table: Currency Values I) The U.S. dollar depreciated against the euro by:
A)
0.6%.
B)
1%.
C)
33%.
D)
100%.
35.
(Table: Currency Values I) The dollar rose against the rupee by:
A)
111%.
B)
11%.
C)
1%.
D)
–1%.
36.
(Table: Currency Values I) In 2015, how many euros would it take to buy one pound?
A)
0.75
B)
1.33
C)
1.5
D)
3
Page 9
37.
(Table: Currency Values I) Between 2015 and 2016, how did the euro do against the
British pound?
A)
It appreciated.
B)
It held steady.
C)
It depreciated.
D)
Not enough information is provided to know how well the euro did.
38.
(Table: Currency Values I) If you want, ceteris paribus, to invest dollars in 2015 and
then convert them back into dollars in 2016, which is the best currency to invest in?
A)
the euro
B)
the real
C)
the pound
D)
the rupee
39.
A bilateral exchange rate is an exchange rate:
A)
that has two sides: maximal and minimal.
B)
that has exhibited both appreciation and depreciation.
C)
that is a hybrid between fixed and floating.
D)
between two currencies.
40.
What is a multilateral exchange rate?
A)
It is an exchange rate that is measured by using a number of different techniques.
B)
It is an exchange rate that calculates the overall movement of the rate against more
than just one other currency.
C)
It is an exchange rate that is measured once every 10 years.
D)
It is a rate that is set by the IMF for many different nations.
Page 10
41.
The average of the bilateral rate changes for a nation, weighted by the importance of the
trading partner, is known as the:
A)
real exchange rate.
B)
nominal exchange rate.
C)
effective exchange rate.
D)
direct exchange rate.
42.
To calculate the multilateral effective exchange rate for a nation for each trading
partner:
A)
add the share of trade to the percent change in the exchange rate and add the sums.
B)
divide the share of trade by the percent change in the exchange rate and add the
dividends.
C)
subtract the share of trade from the percent change in the exchange rate and add the
differences.
D)
multiply the share of trade by the change in the exchange rate and add the products.
43.
Your textbook refers to a “basket” of currencies. What is it?
A)
a random selection of currencies
B)
currencies that are low-valued and unstable
C)
currencies that represent the average increase in value for all currencies
D)
currencies most used by the nation in its trade and other transactions, weighted by
their importance
44.
We use the effective exchange rate calculation to tell us:
A)
the underlying rate of inflation.
B)
how international finance affects a nation's exchange rate.
C)
how the overall international purchasing power of a nation has changed.
D)
the natural (real) exchange rate taking out the effects of inflation.
45.
Suppose 80% of U.S. trade is with England and the rest is with Japan. If the dollar rises
by 10% against the pound and rises by 20% against the yen, what is the percentage
change in the effective exchange rate of the United States?
A)
–16%
B)
–12%
C)
–8%
D)
–4%
Page 11
46.
Suppose 60% of U.S. trade is with England and the rest is with Japan. If the dollar rises
by 20% against the pound but falls by 20% against the yen, what is the percentage
change in the effective exchange rate of the United States?
A)
–12%
B)
–4%
C)
±0%
D)
–8%
47.
If the dollar falls by 20% against the euro and rises by 10% against the yen, which of the
following values for European and Japanese trade with the United States are consistent
with a 10% increase in the effective exchange rate of the United States?
A)
Europe: 33%; Japan: 66%
B)
Europe: 66%; Japan: 33%
C)
Europe: 50%; Japan: 50%
D)
None of these values is consistent with this increase.
48.
The U.S. dollar's effective exchange rate since 2002 steadily weakened up to 2012,
before rebounding somewhat. However, it didn't weaken as much against ALL
currencies as it did against the currencies of the major developed countries (which
include the pound and the euro). This could be because:
A)
the U.S. government has a strong dollar policy.
B)
the large trading partners, China and Japan, did not allow their currencies to
appreciate greatly against the U.S. dollar.
C)
the rate of appreciation is always somewhat greater than the rate of depreciation.
D)
the United States does not trade with some nations, so the effective rate is biased.
49.
When exchange rates change and prices stay the same:
A)
relative prices of traded goods in the two nations are unchanged.
B)
the price of foreign goods expressed in the home currency will always rise.
C)
imports get more expensive as the home currency depreciates.
D)
the price of foreign goods expressed in the home currency will always fall.
50.
The fall in the U.S. dollar has not affected Chinese trade as much as that for other
countries because:
A)
China has appreciated its currency.
B)
China has reduced its exports.
C)
China has depreciated its currency.
D)
China has pegged its currency to the dollar.
Page 12
51.
Using exchange rates, it is possible to price-compare in different nations. If an iPod
costs $90 in the United States and €45 in France, in which nation would you get the
better deal when the dollar–euro exchange rate is $2/€?
A)
The iPod would be cheaper in France.
B)
The iPod would be cheaper in the United States.
C)
The iPod would cost the same in both countries.
D)
From the information provided, it is impossible to answer this question.
52.
Using exchange rates, it is possible to price-compare in different nations. If an iPod
costs $90 in the United States and €45 in France, in which nation would you get the
better deal when the dollar–euro exchange rate is $2.50/€?
A)
The iPod would be cheaper in France.
B)
The iPod would be cheaper in the United States.
C)
The iPod would cost the same in both countries.
D)
From the information provided, it is impossible to answer this question.
53.
A term that categorizes patterns of exchange rate behavior is known as:
A)
exchange rate regimes.
B)
exchange rate realms.
C)
exchange rate principles.
D)
exchange rate observations.
54.
If a government wishes to limit or prohibit fluctuations in exchange rates, it will choose:
A)
to fix, or peg, the value of its currency to some base currency over a sustained
period.
B)
to allow its currency to rise or fall in price, depending on a variety of supply and
demand factors.
C)
to suspend purchases and sales of its currency.
D)
to allow the rate to be set by international banks.
55.
A flexible or floating exchange rate system is one in which the:
A)
government closely monitors and controls the value due to trade flows.
B)
government makes no attempt to fix it against any base currency.
C)
government actively tries to achieve fluctuations in the rate.
D)
government fixes the rate against the currency of its largest trading partner.
Page 13
56.
When exchange rates are limited to small fluctuations, but not totally fixed, economists
refer to the situation as:
A)
essentially fixed.
B)
essentially floating.
C)
relatively floating.
D)
intermediate regimes.
57.
Which of the following exchange rate systems is in the right order, from MOST control
to LEAST control?
A)
floating, fixed, managed float
B)
fixed, floating, managed float
C)
managed float, floating, fixed
D)
fixed, managed float, floating
58.
When exchange rates are very volatile, with a wide range of variation, the currency is
said to be:
A)
in limbo.
B)
in free float.
C)
perfectly flexible.
D)
in sluggish float.
59.
What is a currency band?
A)
a limit below which the currency is not allowed to fall
B)
a limit above which the currency is not allowed to rise
C)
a fixed rate regime with some small variations up or down allowed
D)
a very rigid control of the currency—no variation allowed
60.
A middle-ground exchange rate regime, between fixed and floating, is NOT called:
A)
a managed float.
B)
a dirty float.
C)
limited flexibility.
D)
a free float.
61.
A large and sudden currency depreciation is widely known as:
A)
a managed float.
B)
a crawling peg.
C)
an exchange rate or currency crisis.
D)
a free float.
Page 14
62.
A sudden and pronounced loss of value of one nation's currency against others is known
as a:
A)
currency crisis.
B)
forced devaluation.
C)
thinning of value.
D)
default.
63.
An exchange rate crisis is when:
A)
the currency is stable.
B)
the value of a currency declines dramatically.
C)
the value of a currency increases dramatically.
D)
a country fixes the price of its currency.
64.
A crawling peg refers to:
A)
a large and sudden currency depreciation.
B)
a fixed exchange rate regime in which the currency is adjusted very frequently to
reflect market conditions.
C)
a managed or dirty float, depending on the business cycle.
D)
a drag on exchange rate adjustment caused by imperfect markets.
65.
Which nation took the bold step of abandoning its own currency and adopting the U.S.
dollar?
A)
China
B)
India
C)
Mexico
D)
Ecuador
66.
Which European nation has kept its own currency and maintains a fixed value against
the euro?
A)
the United Kingdom
B)
Belgium
C)
Denmark
D)
Russia
67.
Since the mid-1990s, the Argentine peso has NOT experienced:
A)
a one-to-one peg with the U.S. dollar.
B)
a large devaluation and crisis.
C)
limited flexibility, after which it was kept in a narrow band with the dollar.
D)
a currency union.
Page 15
68.
A nation that allowed its currency to steadily depreciate (crawl) over a six-year period
is:
A)
France.
B)
Canada.
C)
the United Kingdom.
D)
Colombia.
69.
Some nations such as Ecuador chose dollarization because:
A)
the currency was depreciating so rapidly it became nearly worthless.
B)
Ecuadorians wanted to save dollars for eventual emigration to the United States.
C)
the Ecuadorian currency was backed by gold, which was confiscated by
government officials.
D)
All of these are reasons why such countries chose dollarization.
70.
In 2010, Ilzetzki, Reinhart, and Rogoff classified 182 economies, comparing the:
A)
value of their currencies.
B)
percentage of women in the workforce.
C)
effectiveness of governance and institutions.
D)
flexibility of their exchange rate regimes.
71.
Across the globe, exchange rate regimes are:
A)
mostly fixed.
B)
a mix of fixed and floating.
C)
mostly floating.
D)
hard to pinpoint.
72.
A currency board is set up to:
A)
manage free-floating currencies.
B)
gradually eliminate currency pegs.
C)
give a peg added durability.
D)
immediately eliminate currency pegs.
73.
Some nations use a currency board to manage their currencies. How does this work?
A)
It is all in the hands of international banks.
B)
The International Monetary Fund manages the currency.
C)
There is a fixed rate regime with a set of strict rules and policy guidelines to keep
the currency's value stable.
D)
The currency is allowed to float, but its fluctuations are reviewed periodically by a
board of economists.
Page 16
74.
Eurozone countries:
A)
have no separate legal tender.
B)
are pegged to the euro.
C)
are pegged to the dollar.
D)
are fixed against a single currency.
75.
If a nation abandons its own currency and decides to use another nation's currency as its
own circulating currency, this is known as:
A)
euro-zoning.
B)
dollarization.
C)
a managed float.
D)
a Western regime.
76.
Dollarization refers to:
A)
increased trade with the United States, resulting in a glut of dollars circulating in
the domestic economy.
B)
the fall of the U.S. dollar.
C)
the dominance of the U.S. dollar in international finance.
D)
the adoption of any foreign currency as an official currency by nations outside the
United States, such as El Salvador and Ecuador.
77.
The foreign exchange market refers to:
A)
a physical place in the heart of New York City's financial district, where traders
come to trade other currencies.
B)
a collection of all purchases and sales of one currency for another, where exchange
rates are determined.
C)
the discount window of the Federal Reserve.
D)
the commodity futures market.
78.
From 1992 to 2013, the volume of currency traded worldwide:
A)
slumped due to the world recession.
B)
has steadily increased.
C)
fluctuated wildly due to investor expectations.
D)
was concentrated in trades in the developing world.
Page 17
79.
Which of the following correctly ranks the size of the three largest foreign currency
trading centers in dollar volume?
A)
1. Paris; 2. Miami; 3. London
B)
1. New York; 2. Rome; 3. Chicago
C)
1. London; 2. New York; 3. Singapore
D)
1. Tokyo; 2. Los Angeles; 3. Paris
80.
Which of the following is NOT a major foreign exchange center?
A)
London
B)
New York
C)
Tokyo
D)
Chicago
81.
Foreign exchange is traded:
A)
weekly on the Internet in special auctions arranged by the Federal Reserve.
B)
continuously all over the world 24 hours a day and seven days a week.
C)
only in officially designated trading centers such as London or New York.
D)
It is traded in none of these ways or venues.
82.
The spot market for foreign exchange:
A)
is a market that exists only in one place at one time.
B)
is when a person borrows to speculate in the market.
C)
are purchases and sales of currencies for immediate delivery.
D)
is the rate of exchange quoted during the next business day.
83.
A spot contract is a(n):
A)
promise to purchase a foreign currency in 30 days.
B)
promise to purchase a foreign currency in 90 days.
C)
contract for the immediate exchange of currencies.
D)
agreement to sell currencies at a fixed price indefinitely.
84.
The overall volume of daily currency trade was ____ in 2013.
A)
$3.2 billion
B)
$32 billion
C)
$320 trillion
D)
$5.3 trillion
Page 18
85.
What percent of currency transactions involve a trade in the spot market?
A)
30%
B)
40%
C)
60%
D)
80%
86.
A transaction cost associated with spot trading is:
A)
travel to and from the market.
B)
shipping costs.
C)
brokerage commissions.
D)
the spread, which is earned mostly by large banks.
87.
Spreads in quotations of exchange rates are:
A)
the geographical dispersion of nations that use the currency.
B)
a measure of contagion involved in changes in exchange rates.
C)
the difference in the price the buyer pays versus the price the seller receives.
D)
the percentage of interest one pays when borrowing to purchase currencies.
88.
Market spreads usually range from _____ on large contracts to ______ on small
contracts.
A)
3%; 0.5%
B)
10%; 2%
C)
1%; 2%
D)
0.01%; 5%
89.
The difference between the buy at and the sell at price is caused by:
A)
market friction.
B)
transaction cost.
C)
menu cost.
D)
market friction and transaction cost.
90.
A derivative is a:
A)
contract derived from a spot market rate.
B)
fixed exchange rate.
C)
flexible exchange rate.
D)
contract between firms for foreign currency.
Page 19
91.
Forwards, swaps, futures, and options are examples of:
A)
spot market transactions.
B)
transaction costs.
C)
market frictions.
D)
derivatives.
92.
The difference between the spot contract and a forward contract is that:
A)
the former is a flexible price on the currency, and the latter is a fixed price.
B)
the former is a contract to be settled immediately, and the latter is a contract to be
settled at a future agreed-upon date.
C)
the former is a derivative, and the latter is not a derivative.
D)
the former has a fixed price but the contract can be settled at a later date, and the
latter is a contract to be settled immediately.
93.
In which of the following categories would an agreement to trade currencies in pre-set
amounts at a certain date in the future be included?
A)
an option
B)
a futures contract
C)
a forward contract
D)
a swap
94.
The forward contract differs from a futures contract in that:
A)
the forward contract is to be settled immediately.
B)
the futures contract specifies a fixed amount and arranged date, whereas the
forward contract can be for any amount or date.
C)
the futures contract cannot be traded in a market, whereas the forward contract can
be bought in the market.
D)
forward contracts are standardized, whereas futures contracts are not standardized.
95.
Foreign exchange contracts, such as futures, swaps, and options, are collectively known
as:
A)
derivatives.
B)
deposits.
C)
spot contracts.
D)
spreads.
Page 20
96.
The forward market is:
A)
a market that exists only in one place at one time.
B)
when a person borrows to speculate in the market.
C)
the purchases and sales of currencies for delivery at a later time—up to a year.
D)
the rate of exchange quoted during the next business day.
97.
In which of the following categories would an agreement to buy or sell a certain
quantity of a specified currency at a fixed price at a date 30, 60, 90, 120, or 360 days in
the future be included?
A)
an option
B)
a futures contract
C)
a forward contract
D)
a swap
98.
Foreign exchange swaps involve:
A)
selling one currency on the spot market and at the same time purchasing it forward.
B)
trading goods rather than money to improve efficiency.
C)
delaying payment of a spot contract until the currency is actually delivered.
D)
a promissory note with repayment in 60 days.
99.
A foreign exchange option is:
A)
the right to engage in buying or selling on the spot market.
B)
the right to purchase or sell foreign currency at a specified price on a specified date
in the future.
C)
when the price of foreign currency exceeds the spot rate.
D)
when a speculator must decide whether to move into the market.
100.
In international finance, hedging indicates:
A)
not being able to make a commitment to buy or sell.
B)
delaying a purchase of foreign exchange, hoping the price will fall.
C)
simultaneously buying several currencies to ensure that at least one will rise in
value.
D)
avoiding risk of loss by offsetting an obligation to buy a foreign currency by
locking in a contract to sell it at the same time.
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101.
When exchange rates are ______, agreeing to wait for one week from today to engage in
an international transaction carries ______.
A)
flexible rather than fixed; less risk
B)
flexible rather than fixed; the same amount of risk
C)
flexible rather than fixed; more risk
D)
fixed rather than flexible; the same amount of risk
102.
In international finance, speculation involves:
A)
not being able to make a commitment to buy or sell.
B)
taking a risk by purchasing (or selling) a foreign currency asset, holding it in
anticipation of a rate increase (decrease).
C)
simultaneously buying several currencies to ensure that at least one will rise in
value.
D)
avoiding risk of loss by offsetting an obligation to buy a foreign currency by
locking in a contract to sell it at the same time.
103.
In which of the following categories would the sale of foreign currency with a forward
repurchase agreement be included?
A)
an option
B)
a futures contract
C)
a forward contract
D)
a swap
104.
An agreement that gives one party the right to buy from or sell to another party a
specified quantity of currency at a specified price would be included in which of the
following transactions?
A)
an option
B)
a futures contract
C)
a forward contract
D)
a swap
105.
Interbank trading is:
A)
a monopoly business in the United States.
B)
controlled by just 10 banks.
C)
a state-mandated business.
D)
a highly competitive market, with hundreds of banks offering services.
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106.
Why does a government impose controls or restrictions on converting domestic
currency to foreign currency (capital controls)?
A)
The government is trying to stop the rapid decline in value of the domestic
currency.
B)
The government wants to speculate on its own currency.
C)
The government is trying to suppress international trade.
D)
The government is trying to avoid imposing taxes on citizens.
107.
When a government sets limits or puts any restrictions on the international flow of
currency or payments, these measures are called:
A)
forex regulation and restriction.
B)
capital controls.
C)
safeguard measures.
D)
black-market measures.
108.
Why may a “black market” develop in nations in which government has imposed capital
controls?
A)
All foreign currency purchases and sales are conducted and controlled by the
government, and it is illegal to trade privately.
B)
Traders are trying to avoid the taxes they must pay on each transaction.
C)
The government makes a huge profit on currency trades that the private sector
wants access to.
D)
None of these explains why a “black market” may develop in these nations.
109.
To bypass capital controls, people who need foreign currency sometimes resort to:
A)
forward foreign exchange markets.
B)
stock markets.
C)
black markets.
D)
farmers' markets.
110.
Foreign exchange market intervention refers to:
A)
actions taken by speculators to increase profits from trading.
B)
actions taken to lower currency trading risks and make the markets safer.
C)
the forgiving of penalties and other punishments for illegal foreign exchange
activities.
D)
government purchases or sales of a nation's own currency in international markets
to change or stabilize the value of the currency.
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111.
To avoid the imposition of capital controls, a government wishing to keep its exchange
rate at a certain level, may rely on:
A)
forbidding all sales or purchases of foreign currency.
B)
asking the large banks to keep the prices at a certain level.
C)
asking for loans from the International Monetary Fund (IMF).
D)
intervention in the foreign exchange market to raise or lower the exchange rate.
112.
To maintain a fixed exchange rate via intervention in the markets, a government should:
A)
be ready to crack down on illegal traders.
B)
be ready to buy the home currency with foreign currency reserves when the home
currency's value declines.
C)
be ready to sell the home currency when the home currency's value declines.
D)
be ready to borrow funds from international banks when the home currency's value
declines.
113.
Foreign exchange arbitrage refers to:
A)
the simultaneous purchase and sale of a foreign currency asset in different markets
to take advantage of a price differential.
B)
actions taken to lower currency trading risks and make the markets safer.
C)
the forgiving of penalties and other punishments for illegal foreign exchange
activities.
D)
government purchases or sales of a nation's own currency in international markets
to change or stabilize the value of the currency.
114.
Capital control is described by all of the following, EXCEPT:
A)
restricting merchandise trade.
B)
restricting the trade in foreign exchange.
C)
channeling the currency trade through the government.
D)
restricting cross-border financial transactions.
115.
Parallel markets is another term for:
A)
government interventions.
B)
interbank trades.
C)
black markets.
D)
trade in goods and in services.
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116.
Arbitrage is:
A)
capital controls.
B)
interest rate management by the central bank.
C)
exploiting profit opportunities in the market resulting from price differences.
D)
investing in junk bonds or businesses that are not ethical.
117.
Whenever there is a difference in the same exchange rate offered in two markets, an
arbitrageur would:
A)
wait for the markets to come to equilibrium.
B)
buy in the market where the currency is offered at the cheaper rate, and
simultaneously sell the currency where the rates are higher.
C)
sell the cheaper-rate currency in the home market.
D)
not consider the trade, since prices would undoubtedly change before it could be
executed.
118.
Suppose $1 = 10.5 pesos in New York and $1 = 9.6 pesos in Mexico City. If you had
$10,000 using arbitrage, your profits would be:
A)
$937.50.
B)
937 pesos.
C)
9,600 pesos.
D)
$790.
119.
If the U.S. interest rate is 4% per year and the U.K. interest rate is 9% per year, then:
A)
an investor will see no reason to invest in the United Kingdom.
B)
an investor will borrow money in the United Kingdom and invest it in the United
States.
C)
an investor can borrow money in the United States and invest it in the United
Kingdom and profit.
D)
an investor will find that the returns are the same in both countries.
120.
Arbitrage with two currencies is NOT possible when:
A)
there is an exchange rate difference in two markets.
B)
traders are familiar with markets.
C)
the exchange rates are in equilibrium, and the same is occurring in all markets.
D)
the exchange rates are extremely volatile.
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121.
Suppose $1 = 1.5 euros in London and $1 = 1.2 euros in New York. Which of the
following would be the right trade for you to make money?
A)
You sell 1,000 euros in London and buy euros in New York.
B)
You sell dollars in New York and buy dollars in London.
C)
You sell dollars in London and buy dollars in New York.
D)
You sell euros in London and buy dollars in New York.
122.
Suppose $1 = 120 yen in New York, $1 = 2 euros in London, and one euro = 75 yen in
Tokyo. A speculator with $1 million would get a profit of _____ by engaging in a
3-point arbitrage.
A)
$1.20
B)
150,000 yen
C)
$250,000
D)
$1.25 million
123.
When it is possible to trade two separate currencies for a common third currency,
economists refer to profit opportunities as:
A)
backward arbitrage.
B)
speculation.
C)
triangular arbitrage.
D)
forced equilibrium.
124.
Approximately how many different national currencies exist in the world today?
A)
more than 100
B)
more than 5,000
C)
12
D)
535
125.
If 1 euro is priced at $1.25 and if 1 euro will also buy 88 Japanese yen (€1 = ¥88), in
equilibrium, with no arbitrage opportunities, how much is the cross rate between the yen
and the dollar (yen–dollar rate)?
A)
¥150/$
B)
¥70.4/$
C)
¥20/$
D)
¥5/$
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126.
A vehicle currency is:
A)
contraband—it is used to smuggle other assets into controlled economies.
B)
a widely accepted, tradable currency that serves as a currency to use for buying or
selling one's own.
C)
a currency whose value changes rapidly and erratically.
D)
a currency used to purchase imports of autos, buses, and other transportation
equipment.
127.
Suppose the average interest rate on euro bonds is 4%, and the average interest rate on
U.S. dollar bonds is 6%. Which should the investor choose?
A)
neither—bonds have high default rates
B)
both—an investor will choose some euro bonds and some U.S. bonds to diversify
C)
the euro bond because their economies are usually more stable
D)
It is not possible to answer without information on exchange rates.
128.
The forward exchange rate:
A)
allows investors to be sure of the price at which they can trade forex in the future.
B)
is the rate at which a trader can purchase currency for immediate delivery.
C)
is the rate of discount that international banks get when they purchase.
D)
is the rate that speculators consider if they are looking for bargain prices.
129.
If investors can cover themselves in the forward market, they will take advantage of
interest rate differentials by:
A)
buying assets (lending) denominated in the high-interest rate currency, and selling
assets (borrowing) in the low-interest rate currency.
B)
removing funds from both investments.
C)
turning over their investment portfolio to an expert in one of the two nations.
D)
selling assets denominated in high-interest rate currency and buying assets in the
low-interest rate currency.
130.
There can be an opportunity for covered interest arbitrage if:
A)
the interest rate is low and the exchange rate is high.
B)
the forward/spot rate difference is either larger or smaller in percentage terms than
the difference in the interest rates on two currencies.
C)
there is a time lag on the settlement of the transactions.
D)
the interest rate is high and the exchange rate is low.
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131.
Covered interest parity refers to the situation in which:
A)
interest rates are the same in both currencies.
B)
spot and forward rates are the same in both currencies.
C)
the forward rate between the two currencies is equal to the ratio of their returns
times the spot rate between the two currencies.
D)
there is an opportunity for arbitrage whenever prices are sluggish and sticky.
132.
If the future rate equals the spot rate, then in equilibrium:
A)
the exchange rate must depreciate.
B)
interest rates should be different.
C)
the exchange rate will appreciate.
D)
None of these will occur.
133.
Whenever nations remove capital controls on their currencies:
A)
returns are equalized and arbitrage opportunities disappear.
B)
there is no opportunity for trade or arbitrage, and differences in returns disappear.
C)
the government sets the returns on its currency, so traders cannot make profits.
D)
in those nations, because government has ensured its safety, capital is free to move.
134.
Uncovered interest parity refers to:
A)
borrowing in the low-interest currency and lending in the high-interest currency
without covering against a change in the exchange rates.
B)
foolish actions that usually are not successful.
C)
activities that are designed to raise or lower interest rates but are risky.
D)
the practice of depositing all of one's funds in one currency without regarding the
pros and cons of such a transaction.
135.
Liquidity of an asset refers to:
A)
its level of risk.
B)
whether it is held domestically or overseas.
C)
the ease with which it can be sold.
D)
its volatility.
136.
The situation in which the difference in interest rates between two currencies is equal to
the expected change in the spot rate over the same period is known as:
A)
covered interest arbitrage.
B)
covered interest parity.
C)
uncovered interest parity.
D)
the forward-spot reversal.
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137.
As the expected future spot rate moves closer to the spot rate, uncovered interest parity
indicates that:
A)
interest rates should remain constant.
B)
interest rates should converge.
C)
interest rates should diverge.
D)
The answer depends on whether the expected future spot rate is higher or lower
than the spot rate.
138.
In equilibrium, the expected future spot rate is equal to the:
A)
current spot rate.
B)
current interest rate.
C)
interest rate spread.
D)
current forward rate.
139.
If the U.S. interest rate is 4% per year and the U.K. interest rate is 9% per year, which of
the following statements is TRUE?
A)
The dollar will depreciate 4% in one year.
B)
The pound will depreciate 9% in one year.
C)
The pound will depreciate 5% in one year.
D)
The dollar will appreciate 4% in one year.
140.
In equilibrium, if both uncovered and covered interest parity hold, what condition
should exist?
A)
World interest rates will be equal.
B)
Rates of inflation will equalize.
C)
The forward rate will equal the expected future spot rate.
D)
The forward rate will decrease as the spot rate rises.
141.
Whenever a nation's currency is expected to depreciate because of various market
conditions, the following situation exists regarding its forward rate for another currency:
A)
there is a forward discount from the spot rate by the rate of depreciation.
B)
there is a forward premium from the spot rate by the rate of depreciation.
C)
there is no difference between the spot and forward rates.
D)
there is no predictable relationship between the spot and forward rates.
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142.
The expected rate of currency depreciation is equal to the proportional difference
between the forward rate and the spot rate. This is known as the:
A)
forward depreciation.
B)
backward depreciation.
C)
forward premium.
D)
backward premium.
143.
The total rate of return on an international asset is the:
A)
spot rate plus the forward rate.
B)
rate of return on the asset plus or minus the expected capital gain or loss on
currency changes.
C)
rate of return on the asset minus commissions.
D)
rate of return plus inflation minus taxes.
144.
In equilibrium, the interest parity condition requires that:
A)
all rates of returns will equalize.
B)
all spot and forward rates will equalize.
C)
the home interest rate minus its expected rate of currency depreciation (against the
foreign country) will equal the foreign interest rate on similar assets.
D)
all rates of returns and forward rates will equalize.
145.
From uncovered interest parity, we know that when the domestic currency is expected to
depreciate, the domestic interest rate should be:
A)
greater than the foreign interest rate.
B)
greater than the foreign exchange rate.
C)
less than the foreign interest rate.
D)
less than the foreign exchange rate.
146.
From uncovered interest parity, we know that when the domestic interest rate is greater
than the foreign one:
A)
the domestic currency is expected to appreciate.
B)
the domestic currency is expected to depreciate.
C)
the foreign currency is expected to appreciate.
D)
the foreign currency is expected to depreciate.
147.
Explain in your own words the effective exchange rate and why policy makers pay more
attention to it than the bilateral exchange rate.
Page 30
148.
Suppose a country trades with three countries: Brazil (20% of trade), China (45%), and
France (35%). Over the last year, the currency of this country has depreciated by 4%
against the Brazilian real, appreciated by 3% against the Chinese yuan, and depreciated
by 7% against the euro. What has happened to the effective exchange rate of the
country?
149.
If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is
sold in Mexico for 430 pesos while the exchange rate is E = $0.1100/pesos, what
arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you
would take advantage of this.
150.
You have studied how nations have adopted a wide variety of exchange rate regimes
from freely floating with almost no intervention to rigid and fixed with complete control
by the government. Other nations have chosen different paths, relinquishing some or all
control over their currencies. Discuss two such systems and comment on their
differences.
151.
What are the similarities and differences between a currency union and dollarization?
152.
Assume your company has a contract to purchase 100,000 computers from a Korean
company. The payment is due on receipt of the shipment and must be delivered in Korea
on December 31, 2015. In July 2015, when you are arranging the contract, the
computers are priced at 500,000 won each. The spot rate in July 2015 is $1 in exchange
for 1,250 won.
I. Calculate the U.S. dollar price (in July 2015) of one unit of Korean currency.
II. What is the total price of the computers in dollars?
III. What is the total price of the computers in won?
IV. What would you advise your firm to do to avoid a loss on the deal if the Korean won
costs 10% more compared with the U.S. dollar when payment is due in December?
153.
Explain two of the four main types of derivatives used in the foreign exchange market,
and why they are used.
154.
In July 2015, the spot rate is $1 exchanging for 1,250 won. You are convinced that the
won will appreciate by the end of the year. How might you profit if your hunch is
correct?
155.
What role(s) might the government play in the foreign exchange markets? Explain.
Page 31
156.
Is it possible to engage in arbitrage under the following scenario? The exchange rate in
New York is E = $1.25/euro, and it is E = $1.35/euro in London. Explain how you
would do it.
157.
Explain how a trader can exploit an arbitrage opportunity using the spot market and the
forward market, after discovering a difference in interest rate returns on two currencies.
158.
Explain the difference between risky and riskless arbitrage.
159.
Suppose the U.S. dollar interest rate is 5% and the euro interest rate is 6%. Assume no
transaction costs, fees, or commissions. In all markets, the spot rate for euros is $1.25.
You believe in one year's time the spot rate for euros will be $1.30. An investor would
like to invest $100,000 for one year and is willing to take on risk for a higher return.
I. How would you advise him?
II. What if you are incorrect and the euro rate is lower? Calculate the “break-even”
exchange rate; that is, an investment that returns the same as investing $100,000 at 5%.
160.
Suppose the U.S. dollar interest rate is 3%, while the interest rate in the United
Kingdom is 6%. Your friend thinks he can convert his dollars, invest in the United
Kingdom and convert his pounds back into dollars at the end of a year, allowing him to
make a lot higher return. Assuming uncovered interest parity (UIP), explain why he is
incorrect.
161.
Suppose interest rates in the United States are 5.5%, while they are 3% in the euro area.
Currently the dollar–euro exchange rate is at $2.50 per euro. If UIP holds, what do you
expect the exchange rate to be in the future? Round to three decimals.
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