1) for an investor, nonsystematic risk can be eliminated through:
a.portfolio diversification
b.avoiding transaction costs
c.increased variance
d.sterilization
2) suppose that the covered interest parity holds. if real interest rates are equal in two
countries, then:
a.the interest rate differential will equal to expected inflation rate differential
b.the interest rate differential will equal to the forward premium or discount between
two currencies
c.the expected inflation rate differential will equal to the forward premium or discount
between two currencies
d.all of the above are correct
3) base money equals to:
a.domestic credit plus domestic bonds
b.domestic credit plus international reserves
c.domestic credit minus international reserves
d.domestic bonds plus foreign bonds
4) in a fixed exchange rate regime, assuming perfect capital mobility, if china increases
government spending to stimulate the economy, which of the following would happen
in china?
a.capital account deficit
b.a decrease in money supply
c.official settlement surplus
d.a decrease in domestic output
5) a trader makes profit by buying a currency at a low price in one market and
immediately selling it in another market. this activity is called:
a.speculation
b.arbitrage
c.hedging
d.squaring off
6) the german government donates $100,000 worth of vaccine to tanzania. this action is
recorded as a $100,000 debit to the german unilateral transfers.
7) assume that the dollar value of a swiss franc is 0.8600 (dollar per franc), and that u.s.
importers start to like swiss watches more than they did in the past. assume that the
swiss central bank wants to keep the swiss franc fixed at 0.8600. to intervene, they have
to:
a.buy up swiss francs and sell dollars
b.buy up dollars and sell swiss francs
c.buy up both dollars swiss francs
d.sell both dollars and swiss francs
8) 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 $1.40. the risk
premium on the pound is:
a.-6.7%
b.5.7%
c.10%
d.16.7%
9) eurobanks can offer ________ rate of interest on dollar-denominated loans and
________ rate of interest on dollar-denominated deposits than banks in the u.s.
a.lower; lower
b.lower; higher
c.higher; lower
d.higher; higher
10) when the subsidiary manager is focused on meeting goals set by the parent firm,
then the multinational firm is probably using a(n) ________ style of management.
a.multinational cash
b.decentralized
c.centralized
d.goal-orientated
11) assume perfect capital mobility and floating exchange rates. if the government runs
a budget deficit, the domestic currency will _______ and cause the is curve to
________.
a.appreciate, shift to the right
b.appreciate, shift to the left
c.depreciate, shift to the right
d.depreciate, shift to the left
12) when a japanese company deposits 1 million yen in a canadian bank, the yen
deposit is:
a.canayen
b.euroyen
c.japandollar
d.dollaryen
13) a(n) ________ letter of credit where the agreement can be modified by the importer
of the goods is considered:
a.completed
b.irrevocable
c.revocable
d.drafted
14) general candy, inc., a u.s. firm, manufactures and sells candies worldwide. because
of a rising price of sugar in the u.s., the company is considering to build a new plant in
the u.k. the plant will cost £15 million to build. assume that the plant will have a life of
3 years before it is confiscated by the british government (zero salvage value) and the
discount rate of the cash flows is 10%. consider the following cash flows for this
project.
table 9-1:
comparing with information in table 9.1, if the forecast exchange rate ($/£) remains
constant at $1.5 per pound throughout the life of the project, which of the following is
true?
a.the net present value of this project increases
b.the net present value of this project decreases
c.the net present value of this project becomes negative
d.the net present value of this project remains unchanged
15) which of the following will shift the demand curve for the japanese yen to the right
in a trade flow model?
a.there is a large increase in japanese demand for u.s. exports as u.s. culture become
more popular in japan
b.u.s. consumers no longer want to buy japanese products after the toyota lawsuit,
leading americans to question the quality of japanese products
c.political uncertainties in asia lead u.s. investors to shift their financial investment out
of japan, back to the united states
d.u.s. demand for products imported from japan increases significantly as japanese
culture becomes more popular in the u.s
16) the monetary approach in the case of a managed floating exchange rate:
a.is like that of currency boards
b.introduces variables to represent changes in fiscal policy
c.is a combination of mabp and maer
d.is not possible to model
17) starting from a position where a countrys money demand equals the money supply
and its balance of payments is in equilibrium. according to the monetary approach, an
expansionary monetary policy will lead to a(n) ______ of the home currency under
flexible exchange rate regime; whereas it will cause trade _______ under fixed
exchange rate.
a.depreciation; deficit
b.depreciation; surplus
c.appreciation; deficit
d.appreciation; surplus
18) a year ago the spot rate of u.s. dollars for canadian dollars was $1/c$1. since that
time, the rate of inflation in the u.s. has been 4% greater than that in canada. based on
the theory of relative ppp, the current spot exchange rate of u.s. dollars for canadian
dollars should be approximately _________ per canadian dollars.
a.$0.96
b.$1
c.$1.04
d.$4
19) what exchange rate is maintained with a central rate that is frequently adjusted?
a.fixed peg
b.currency board
c.managed floating
d.crawling bands
20) suppose that the one-year u.s. interest rate is 9% and the one-year u.k. interest rate
is 8%. if the current spot rate is $70 per pound, what must the one-year forward rate
($/pound) be according to the approximate covered interest parity?
a.$1.683
b.$1.717
c.$1.723
d.$3.400