1) the theory of exchange rate overshooting explains high exchange rate volatility by
assuming that cirp does not hold in the short run, but ppp does.
2) a stock market in which foreign investors are not allowed to buy domestic stocks and
domestic investors are not allowed to buy foreign stocks is called a segmented market.
3) under the specie flow mechanism, a trade-surplus nation would realize gold inflows,
an increase in its money supply, and a rise of domestic inflation.
4) if the japanese yen was worth $.005 six months ago and is now worth $.007 today,
the yen has appreciated by 40%.
5) a foreign currency option gives the purchaser the right to buy or sell a given amount
of currency only after the maturity date.
6) a globalized market is a stock market where domestic investors can hold both
domestic and foreign stocks.
7) under the specie flow mechanism, a trade-surplus nation would realize gold inflows,
an increase in its money supply, and a rise of domestic inflation.
8) the forward exchange swap is a process involving the same amount of three
currencies.
9) in the bretton woods system, if the u.s. increases its money supply, foreign central
banks will have to intervene by ______ dollars and ______ foreign currencies to
maintain a fixed exchange rate.
a.selling; selling
b.selling: buying
c.buying; selling
d.buying; buying
10) suppose that the 1-year forward rate of dollar per pound is $1.32, the current spot
rate ($/pound) is $1.20, and the expected future spot rate ($/pound) is $1.40. the
forward premium on the pound is:
a.-6.7%
b.5.7%
c.10%
d.16.7%
11) according to the monetary approach, when a monetary disequilibrium exists, either
____________ or _____________ has to adjust depending on the type of exchange rate
system.
a.the balance of payments; domestic production
b.the balance of payments; exchange rate value
c.domestic production; exchange rate value
d.domestic production; foreign inflation rate
12) table 6-2: spot and forward exchange rates on may 5, 2012
refer to table 6-2. on may 5, 2012, the 3-month forward yen was selling at a:
a.13.10% premium per annum against the dollar
b.52.40% premium per annum against the dollar
c.13.10% discount per annum against the dollar
d.52.40% discount per annum against the dollar
13) a central bank sale of _____ to purchase ______ in the foreign exchange market
results in a rise in its international reserves and the money base.
a.foreign assets; domestic currency
b.foreign assets; foreign currency
c.domestic currency; foreign assets
d.domestic currency; domestic currency
14) suppose that a country devalues the domestic currency. for a period of time the
balance of trade deficit worsens before improving. this is an example of:
a.absorption period
b.the j-curve effect
c.elasticity period
d.full employment effect
15) suppose for two currencies the forward premium is 4% and the expected premium
is 8%. then the risk premium is:
a.-4%
b.-2%
c.2%
d.4%
16) which of the following is probably not an example of the use of forward contracts
by a multinational corporation (mnc)?
a.hedging pound payables by selling pounds forward
b.hedging peso receivables by selling pesos forward
c.hedging yen payables by purchasing yen forward
d.all of the above are examples of using forward contracts
17) the goal of a multinational corporation (mnc) is
a.the minimization of taxes remitted from foreign subsidiaries
b.the establishment of subsidiaries in any country where operations would provide a
return above the cost of capital, even if better projects are available domestically
c.the maximization of shareholder wealth
d.the maximization of social benefits to the host country through knowledge spillover
effects
18) table 6-1: spot and forward exchange rates on may 5, 2012
refer to table 6-1. on may 5, 2012, the 1-month forward yen was selling at a:
a.1.69% premium per annum against the dollar.
b.20.22% premium per annum against the dollar.
c.1.69% discount per annum against the dollar.
d.20.22% discount per annum against the dollar.
19) figure 1.1
refer to figure 1.1. suppose that the market for british pound is initially in equilibrium at
point a with the exchange rate $2.00 per pound. then the demand curve shifts to d2. if
the british central bank wants to fix the exchange rate at $2.00/pound, there will be
________ of pound and the pound is __________.
a.excess supply; overvalued
b.excess supply; undervalued
c.excess demand; overvalued
d.excess demand; undervalued
20) suppose that the one-year u.s. interest rate is 8% and the equivalent one-year india
interest rate is 12%. using the exact covered interest parity, the dollar is expected to:
a.depreciate by 3.6%
b.depreciate by 50%
c.appreciate by 3.6%
d.appreciate by 50%
21) which of the following is not a type of foreign exchange risk?
a.information exposure
b.translation exposure
c.transaction exposure
d.economic exposure
22) a strike price is the price where:
a.a futures contract reaches maturity
b.the owner of an options contract can transact
c.the bank sets as an out-of-bounds in contract negotiations
d.all currencies are brought to a standardized price
23) to derive the monetary approach, we need money demand equals to money supply
and:
a.leakages equal injections
b.absolute purchasing power parity to hold
c.covered interest parity to hold
d.all of the above are correct
24) given a system of floating exchange rates, assume that boeing inc. of the united
states places a large order, payable in euros, with a german contractor for jet engine
parts. the immediate effect of this transaction will be a shift in the:
a.supply curve of euros to the left which causes the dollar to appreciate against the euro
b.supply curve of euros to the right which causes the dollar to depreciate against the
euro
c.demand curve for euros to the left which causes the dollar to appreciate against the
euro
d.demand curve for euros to the right which causes the dollar to depreciate against the
euro
25) suppose that the government runs a budget surplus. then:
a.the is curve shifts right
b.the is curve shifts left
c.the lm curve shifts right
d.the lm curve shifts left
26) a certificate that represents shares of a foreign stock issued by a u.s. bank is called
a(n):
a.letter of credit
b.american depository receipt
c.foreign credit
d.exchange contract
27) assume that in a free country, people in the country can choose to hold assets in any
currency. as the domestic inflation rise, the opportunity cost of holding the domestic
currency _________ and people will switch to hold assets in _________ currency.
a.increases; foreign
b.increases; domestic
c.decreases; foreign
d.decreases; domestic
28) you have obtained the following spot rates:
from the above information, the u.s. dollar has ________ against the japanese yen and it
has ______ against the mexican peso.
a.appreciated; appreciated
b.appreciates; depreciated
c.depreciated; appreciated
d.depreciated; depreciated