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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 euros 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 is easily 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 exchanges 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 are an easy method of buying 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 the same commodity should be sold 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 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. Assuming the international Fisher effect is holding, 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 is holding, 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 0.74/1, 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 104/1?
33. Country A has a higher inflation rate than Country B. Given this, Country A will have the:
34. A sandwich costs $6.79 in the U.S. The exchange rate is $C0.98 per U.S. dollar. What
does the identical sandwich have to cost in Canada for purchasing power parity to exist?
35. Suppose the spot rate for the Canadian dollar is 1.034, the 3-month forward rate is 1.036,
and the 1-year forward rate is 1.039. If no other information is available, what will be your guess
about the spot rate in 1 year?
36. Suppose that:
What rate do you think a Japanese bank would quote for buying or selling Swiss francs today?
37. Suppose that:
What arbitrage gains can be achieved by a U.S. investor if the bank quotes a rate of 75 yen per
Swiss franc?
38. Suppose the interest rate in Canada is 4% while it is 3% in the U.S. The indirect spot rate
is C$1.02. What is the indirect 1-year forward rate?
39. If the direct exchange rate between U.S. dollars and pounds sterling is 1.50/1, how much
should you be willing to pay to receive 350 pounds?
40. The main purpose in contracting to purchase foreign currency in the forward market is
to:
41. Which one of the following is correct if you have contracted to purchase 1,000 Swiss
francs 3 months forward at a rate of SFr1.6/$?
42. If the spot indirect exchange rate of Mexican pesos for U.S. dollars is 9.8/1 and the peso
is trading at a forward premium of 3%, then you will receive:
