1) suppose that the one-year u.s. interest rate is 5% and the equivalent one-year swiss
interest rate is 4%. according to the covered interest rate parity, there is a forward
discount on the swiss franc.
2) the maer emphasizes money demand and money supply as determinants of exchange
rate movements.
3) at the full-employment level, if the domestic absorption remains constant, the
currency devaluation will not change the balance of trade.
4) a letter of credit (loc) is a contract written by a bank to guarantee that the exporter
will pay the importer the amount of money owed.
5) swiss francs deposited in a u.s. bank would be considered eurocurrency.
6) in the balance of payments debits are recorded as negative entries and credits are
recorded as positive entries.
7) the pass-through analysis considers the elasticity of demand and supply resulting in
an inability for people to adjust in the short run.
8) countries with floating exchange rates tend to have large, closed economies and trade
largely with a single foreign country.
9) the portfolio-balance approach of exchange rate determination assumes that
households can choose to hold their wealth in money, domestic bonds, and foreign
bonds.
10) when the covariance of two assets is negative, then the two variables move in
opposite directions: when one rises the other falls.
11) the responsiveness of quantity to changes in price refers to elasticity.
12) the eurocurrency market is a market in which international credit, deposits, and
loans are exchanged in a currency other than the domestic currency.
13) assume that u.s. imports are contracted in foreign currency and the u.s. exports are
contracted in domestic currency. if the dollar is devalued, then the balance of trade will
become more negative.
14) suppose the u.s. income grows by 4 percent. under the mabr, which of the following
percentage changes could offset this growth?
a.international reserves increase by 2 percent and foreign inflation rises by 2 percent
b.international reserves increase by 2 percent and foreign inflation falls by 2 percent
c.international reserves decrease by 2 percent and foreign inflation rises by 2 percent
d.international reserves decrease by 2 percent and foreign inflation falls by 2 percent
15) if a currency has appreciated ________ the price differential between two countries
as implied by ppp, then a currency is ________.
a.the same as, undervalued
b.the same as, overvalued
c.less than, overvalued
d.less than, undervalued
16) risk premium equals to:
a.expected premium minus forward premium
b.expected premium plus forward premium
c.forward premium minus expected premium
d.exchange rate premium plus forward premium
17) which of the following is the difference between foreign currency options and
futures?
a.options leave a buyer with the choice of exercising or not exercising; whereas the
futures require a mandatory delivery
b.options require a mandatory delivery; whereas the futures leave a buyer with the
choice of exercising or not exercising
c.options require daily cash settlements from contract holders; while the futures do not
require any daily cash settlements
d.options do not require any daily cash settlements; while the futures require daily cash
settlements from contract holders
18) if, other things being equal, a country with a flexible exchange rate decreases its
money supply, this will lead to _____ in the value of the country’s currency, which will
tend to _____ national income.
a.a depreciation; increase
b.a depreciation; decrease
c.an appreciation; increase
d.an appreciation; decrease
19) you purchase a futures contract for september delivery (september 15th) of 62,500
pounds on march 15th. the pound futures exchange rate is $1.65 per pound. the bank
has a margin requirement of 2 percent.
to secure the futures contract deal with the bank, you will have to put ______ as a
deposit with the bank.
a.$1,250
b.$2,000
c.$2062.5
d.$2087.5
20) a foreign resident buys shares of in a u.s. company stock in the new york stock
exchange.
a.credit in u.s. services
b.credit to the u.s. unilateral transfers
c.credit in the u.s. private capital account
d.debit in u.s. services
21) suppose that a central bank sells domestic currency to buy foreign assets to fix the
exchange rate. to sterilize this intervention, the central bank will have to:
a.buy bonds in the open market operations to increase domestic money supply
b.buy bonds in the open market operations to decrease domestic money supply
c.sell bonds in the open market operations to increase domestic money supply
d.sell bonds in the open market operations to decrease domestic money supply
22) in a perfectly floating exchange rate regime, according to the monetary approach to
the exchange rate (maer), what would be the effect of a decrease in u.s. output growth
by 3% on the dollar price of a swiss franc ($/sfr)?
a.swiss franc would depreciate against the dollar
b.swiss franc would appreciate against the dollar
c.the exchange rate remains unaffected
d.the dollar would appreciate against the swiss franc
23) suppose that citibank buys a large amount of japanese yen from toyota and citibank
does not want to continue holding too much yen. how should citibank adjust its buy rate
and sell rate of the yen (yen per dollar) to square off?
a.citibank has to raise both buy and sell rates
b.citibank has to raise the buy rate, but lower the sell rate
c.citibank has to lower the buy rate, but raise the sell rate
d.citibank has to lower both buy and sell rates
24) assume that the annualized forward premium is 1 percent and that the spot rate is
2.00 ($/pound). what would the one-year forward rate have to be?
a.1.76
b.1.98
c.2.02
d.2.24
25) a contractual obligation of a bank for a future payment is called a(n):
a.letter of contract
b.export netting agreement
c.transfer price
d.bankers acceptance
26) under purchasing power parity,
a.s$/£ = pus/puk
b.s$/£ = puk/pus
c.s$/£ = pus + puk
d.s$/£ = pus puk
27) which of the following statements are true?
i.under maer, central bank intervention is used to restore equilibrium.
ii.under maer, monetary policy in one country does not affect other countries.
a.i only
b.ii only
c.i and ii
d.neither i nor ii
28) the ________ the variance of variability of returns on a portfolio, the more
________ the returns on the portfolio.
a.smaller, dangerous
b.smaller, diversified
c.larger, diversified
d.larger, uncertain
29) assume that china and the u.s. are in a managed floating exchange rate agreement.
suppose that the fed decreases the money supply by 50%. chinas central bank lets the
exchange rate partly adjust and also intervenes in foreign exchange market. what would
happen to the foreign reserve position for the u.s. and the exchange rate $/yuan?
a.foreign reserves decrease and exchange rate decreases
b.foreign reserves increases and exchange rate increases
c.foreign reserves decrease and exchange rate increases
d.foreign reserves increase and exchange rate decreases.
30) since news is unexpected and catches people off-guard,
a.it is easy to forecast the future exchange rate
b.it causes exchange rates to fluctuate substantially
c.it causes prices of goods and services to vary more than exchange rates
d.it has no effect on exchange rates
31) when investors hedge themselves from risk using forward contracts, the
international investment is considered:
a.flat
b.discounted
c.a bargain
d.covered
32) in international finance, the spending by a domestic firm to establish foreign
operating units is called:
a.capital flight
b.domestic investment
c.offshoring
d.direct foreign investment