1) assume the following: the current spot rate s/$ = 100.0 and the annual interest rates:
ijapan = 2% and ius = 10%. according to covered interest parity, if an intern at citibank
sets the one-year forward rate: f360/$ = 91, then:
a.the intern has correctly set the forward rate
b.both u.s. and japans investment returns are equal
c.the japans investment return exceeds the u.s. investment return
d.the u.s. investment return exceed the japans investment return
2) an american firm has just bought merchandise from a british firm for £50,000 on
terms of 90-day payment. this firm has purchased a 3-month call option on 50,000
pounds at a strike price of $1.7 per pound and a premium cost of $0.02 per pound. on
the day the option matures, the spot exchange rate is $1.8 per pound. what will be the
cost of the option in u.s. dollars?
a.$1000
b.$10
c.$85,000
d.$5,000
3) what is a relative price?
a.the price of a good relative to another
b.the price of a goods complement
c.the price ratio of exports to imports
d.the price of a goods substitute
4) elasticity refers to
a.the ability of the demand curve to shift in and out
b.the degree by which the demand curve includes other markets
c.the responsiveness of quantity to changes in price
d.the rate that quality increases as prices increase
5) with flexible exchange rates, a decrease in money supply by a central bank causes
the domestic interest rate to _______ , official settlements _______, and the domestic
currency to _______. as a result, the is curve will shift to bring the domestic interest
rate to be equal to foreign interest rates.
a.fall; deficit; depreciate
b.rise; deficit; depreciate
c.rise; surplus; appreciate
d.fall; surplus; appreciate
6) ________ is the rate at which banks sell a currency and ________is the rate at which
banks buy the currency.
a.bid; offer
b.offer; bid
c.spread; offer
d.closing; spot
7) profit-seeking arbitrage activity ensures:
a.covered interest rate parity
b.decreased competition
c.higher interest rates on loans
d.increased banking regulation
8) the imf has been criticized for imposing conditions on loans because:
a.borrowing governments should not be expected to repay the loans
b.most of the conditions are unnecessary and unrelated to the economy
c.borrowing countries will borrow from someone else if the conditions are too difficult
d.the conditions tend to harm short-term growth and raise unemployment
9) countries with a floating exchange rate tend have what features?
i.trade concentrated with a single country
ii.similar inflation rates with trading partners
iii.large, closed economies
iv.trade diversified across many countries
a.i only
b.i and ii
c.iii and iv
d.ii, iii, and iv
10) which financial instrument provides a buyer the right (but not the obligation) to
purchase or sell a fixed amount of currency at a prearranged price, within a few days to
a couple of years?
a.futures contract
b.foreign currency option
c.currency swap
d.forward contract
11) consider the market for chinese currency (yuan). suppose that the initial equilibrium
exchange rate was $0.125 per one yuan. then assume that american consumers like
chinese products more than before. if chinas central bank wants to peg the exchange
rate at its initial level ($0.125 per yuan), the central bank will have to
a.buy yuan and sell dollar
b.sell yuan and buy dollar
c.buy yuan and buy dollar
d.sell yuan and sell dollar
12) assume that the current buy rate for the japanese yen is 87.4100 (yen per dollar) and
the current sell rate is 87.4400 yen per dollar. assume that a bank buys and sells
$1,000,000 in the yen market. how much would the bank collect as a spread in terms of
yen?
a.30,000 yen
b.-30,000 yen
c.-343.09 yen
d.343.21 yen
13) the exact and approximate cirp are close in value when
a.interest rates are larger
b.interest rates are smaller
c.spot rates are larger
d.spot rates are smaller
14) in what market are currency prices sometimes referred to as a strike price?
a.forward market
b.swap market
c.futures market
d.options market