Chapter 22 Test bank – Static Key
1.
The New York Stock Exchange is one of few markets to have a higher daily volume than the foreign exchange market.
2.
The direct exchange rate quotes the number of U.S. dollars that can be exchanged for one unit of a foreign currency.
3.
The number of pesos that can be purchased with one U.S. dollar is referred to as an indirect quote.
4.
According to interest rate parity, the interest rate differential must be equal to the differential between forward and spot
exchange rates.
5.
The international Fisher effect states that nominal interest rates should be equal in all countries.
6.
The spot rate is $1 = C$1.02. The 3-month forward rate is $1 = C$1.03. The Canadian dollar is selling at a forward
premium.
7.
Interest rate parity suggests that it is cheaper to borrow in a currency with a low nominal rate of interest.
8.
Transaction risk can usually be identified and hedged.
9.
A U.S. importer of a Japanese product should sell Japanese yen forward to avoid the risk of an appreciation of the yen.
10.
Interest rate parity tells us that the cost of buying yen forward is exactly the same as the cost of borrowing dollars, buying
yen in the spot market, and leaving them on yen deposit.
11.
Even if a firm neither owes nor is owed foreign currency, it still may be affected by currency fluctuations.
12.
You can purchase a futures contract on any currency.
13.
The forward exchange rate is the rate for immediate exchange of two currencies.
14.
If the yen is trading at a forward discount relative to the dollar, then you’ll receive less yen per dollar in the future.
15.
Futures contracts offer an alternative way to buy foreign currency forward.
16.
If inflation is expected to be higher in the U.S. than in Mexico, then the peso is forecasted to depreciate against the dollar.
17.
According to the international Fisher effect, the differences in nominal interest rates across countries reflect the differences
in their expected rates of inflation.
18.
Forward rates are always equal to the actual future exchange rates.
19.
Forward contracts are standardized contracts sold in organized exchanges.
20.
The law of one price implies that when converted into the same currency a commodity should sell at the same price in all
countries.
21.
The nominal interest rate is the difference between the real interest rate and inflation.
22.
If the international Fisher effect is valid, then expected real interest rates in all countries should be equal.
23.
Buying currency in the forward market is a common method of hedging currency risk.
24.
If real interest rates are different across countries, investors will shift their money into countries with high real interest rates.
25.
An indirect quote is the rate of one unit of foreign currency expressed in U.S. dollars.
26.
If the interest rate in one country increases, then the value of that country’s currency increases in the forward market.
27.
High inflation rates are usually associated with:
28.
If the international Fisher effect holds, what will be the effect of an increase of a country’s nominal interest rates on the
country’s currency?
29.
If purchasing power parity holds, what will happen to the currency of a country with high inflation?
30.
You can value overseas investments using the NPV of the cash flows. Which of the following adjustment is necessary to
calculate the NPV?
31.
If the exchange rate of euros/U.S. dollars is USD1.351 = EUR1, then:
32.
How many dollars will it take for a U.S. citizen to purchase a Japanese product priced at 60,000 yen if the indirect exchange
rate is JPY104 = USD1?
33.
Country A has a higher inflation rate than Country B. In this case Country A will have the:
34.
A sandwich costs $6.79 in the U.S. The exchange rate is CAD0.98 = USD1 dollar. What does the identical sandwich have to
cost in Canada for the law of one price to exist?
35.
Suppose the spot rate for the Canadian dollar is CAD1.034 = USD1, the 3-month forward rate is CAD1.036 = USD1, and the
1-year forward rate is CADS1.039. = USD1. If no other information is available, what will be your guess about the spot rate
in 1 year?
36.
Suppose that the spot exchange rates against the US dollar are:
SEK9.3924 = USD1
CHF1.5231 = USD1
JPY123.380 = USD1
What rate do you think a Japanese bank would quote for exchanging Swiss francs into Swedish krone?
37.
Suppose that a bank quotes the following rates:
JPY 58.00 = CHF1
CHF1.52 = USD1
JPY123.38 = USD1
Which of the following transactions would produce an arbitrage profit for a US investor?
38.
Suppose the 1-year interest rate in Canada is 4% while it is 3% in the U.S. The indirect spot rate is CAD1.02 = USD1. What
is the indirect 1-year forward rate?
39.
If the direct exchange rate between U.S. dollars and pounds sterling is USD1.50 = GBP1, how much should you be willing to
pay to receive £350?
40.
The main purpose in contracting to purchase foreign currency in the forward market is to:
41.
Which one of the following is correct if you have contracted to purchase 1,000 Swiss francs 3 months forward at a rate of
CHF1.6 = USD1?
42.
If the spot exchange rate of Mexican pesos for U.S. dollars is MXN9.8=USD1 and the peso is trading at a forward premium
of 3%, then you will receive:
43.
If the spot exchange rate between euros and dollars is USD1.1=EUR1 before the dollar depreciates by 10%, how many
dollars will it take after the depreciation has occurred to pay an invoice of €500?
44.
The theory that, when measured in a common currency, the price of a product should be the same in two countries is referred
to as the law of:
45.
If prices in the United States rise less rapidly than in Canada, which of the following would be expected according to
purchasing power parity?
46.
If exchange rates adjust to reflect inflation differentials across countries, then:
47.
Suppose that inflation next year is 8% in Japan and 4% in the United States. If the current spot rate is JPY107 = USD1, what
is the expected spot rate at the end of the year?
48.
The pound is expected to appreciate by 2% against the dollar. If the expected inflation rate in the United States is 5% and
purchasing power parity holds, what is the expected inflation rate in the United Kingdom?
49.
Which one of the following is more likely to be roughly equal across countries?
50.
The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:
51.
Expected inflation in the United States is 6%. What do you expect to happen to prices in Japan, if the nominal interest rate is
10% in the United States and 6% in Japan?
52.
Suppose the one-year interest rate in the United States is 7%. What would you expect the interest rate to be in the UK if
expected inflation is 4% in the United States and 8% in the UK?