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Version 1 1
Student name:__________
1) The law of one price (LOP) is referring to
A) a legal condition imposed by the U.S. Commodity Futures Trading Commission.
B) the same or equivalent things trading at the same price across different locations or
markets, precluding profitable arbitrage opportunities.
C) the act of simultaneously buying and selling the same or equivalent assets or
commodities for the purpose of making certain guaranteed profits.
D) the composition of a standard commodity basket.
2) An arbitrage is best defined as
A) a legal condition imposed by the U.S. Commodity Futures Trading Commission.
B) the act of simultaneously buying and selling the same or equivalent assets or
commodities for the purpose of making reasonable profits.
C) the act of simultaneously buying and selling the same or equivalent assets or
commodities for the purpose of making certain guaranteed profits.
D) a parity relationship that should hold in equilibrium.
3) Interest Rate Parity (IRP) is best defined as
A) occurring when a government brings its domestic interest rate in line with other
major financial markets.
B) occurring when the central bank of a country brings its domestic interest rate in line
with its major trading partners.
C) an arbitrage condition that must hold when international financial markets are in
equilibrium.
D) the act of simultaneously buying and selling the same or equivalent assets or
commodities for the purpose of making certain guaranteed profits.
4) When Interest Rate Parity (IRP) does not hold
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A) there is usually a high degree of inflation in at least one country.
B) the financial markets are in equilibrium.
C) there are opportunities for covered interest arbitrage.
D) the financial markets are in equilibrium and there are opportunities for covered
interest arbitrage.
5) Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 5% per
annum in the U.S. and 3% per annum in the euro zone, what is the no-arbitrage one-year forward
rate?
A) €1.0704/$
B) $1.0704/€
C) €1.0300/$
D) $1.0300/€
6) Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 3 percent per
annum in the U.S. and 5 percent per annum in the euro zone, what is the no-arbitrage one-year
forward rate?
A) €1.0704/$
B) $1.0704/€
C) €1.0300/$
D) $1.0300/€
7) Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5 percent per
annum in the U.S. and 2 percent per annum in the U.K., what is the no-arbitrage one-year
forward rate?
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A) £2.0588/$
B) $2.0588/£
C) £1.9429/$
D) $1.9429/£
8) A formal statement of IRP is
A)
B)
C)
D)
9) The two main reasons that IRP may not hold precisely at all time, especially over short
periods is:
A) transaction costs and capital controls.
B) transaction costs and inflation rates
C) inflation rates and capital controls
D) inflation rates and interest rates
10) Suppose that the one-year interest rate is 5.0 percent in the United States. The spot
exchange rate is $1.20/€, and the one-year forward exchange rate is $1.16/€. What must the one-
year interest rate be in the euro zone to avoid arbitrage opportunities?
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A) 5.0%
B) 6.09%
C) 8.62%
D) none of the options
11) Suppose that the one-year interest rate is 3.0 percent in Italy. The spot exchange rate is
$1.20/€, and the one-year forward exchange rate is $1.18/€. What must the one-year interest rate
be in the United States to avoid arbitrage opportunities?
A) 1.2833%
B) 1.0128%
C) 4.75%
D) none of the options
12) Suppose that the one-year interest rate is 4.0 percent in Italy. The spot exchange rate is
$1.60/€, and the one-year forward exchange rate is $1.58/€. What must the one-year interest rate
be in the United States to avoid arbitrage opportunities?
A) 2%
B) 2.7%
C) 5.32%
D) none of the options
13) Covered Interest Arbitrage (CIA) transactions will result in
A) unstable international financial markets.
B) restoring equilibrium prices quickly.
C) higher interest rates across all international financial markets.
D) no effect on the market.
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14) Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent
in Germany, and that the spot exchange rate is $1.12/€ and the one-year forward exchange rate is
$1.16/€. Assume that an arbitrageur can borrow up to $1,000,000.
A) This is an example where interest rate parity holds.
B) This is an example of an arbitrage opportunity; interest rate parity does not hold.
C) This is an example of a Purchasing Power Parity violation and an arbitrage
opportunity.
D) none of the options
15) Suppose that you are the treasurer of IBM with an extra $1,000,000 to invest for six
months. You are considering the purchase of U.S. T-bills that yield 1.810 percent over a six-
month period. The spot exchange rate is $1.00 = ¥100, and the six-month forward rate is $1.00 =
¥110. Alternatively, the six-month interest rate in Japan on an investment of comparable risk is
13 percent. What is your strategy to maximize guaranteed dollar proceeds in six months?
A) Take $1mn and invest in U.S. T-bills.
B) Take $1mn, convert them into yen at the spot rate, invest in Japan, and repatriate
your yen earnings back into dollars at the spot rate prevailing in six months.
C) Take $1mn, convert them into yen at the spot rate, invest in Japan, and hedge with a
short position on the forward contract.
D) Take $1mn, convert them into yen at the forward rate, invest in Japan, and hedge
with a short position on the spot contract.
16) Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in
Germany, and that the spot exchange rate is $1.60/€ and the forward exchange rate, with one-
year maturity, is $1.58/€. Assume that an arbitrager can borrow up to $1,000,000 or €625,000. If
an astute trader finds an arbitrageopportunity, what is the net cash flow in one year?
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A) $238.65
B) $14,000
C) $46,207
D) $7,000
17) An American currency dealer has good credit and can borrow either $1,000,000 or
€800,000 for one year. The one-year interest rate is i$ = 2% in the U.S. and i€ = 6% in the euro
zone, respectively. The spot exchange rate is $1.25 = €1.00 and the one-year forward exchange
rate is $1.20 = €1.00. Show how you can realize a certain dollar profit via covered interest
arbitrage.
A) Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest
euros at i€ = 6%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00.
Gross proceeds will be $1,017,600.
B) Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest
euros at i€ = 6%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net
profit will be $17,600.
C) Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars
in the U.S. at i$ = 2% for one year; translate dollars back to €850,000 at the forward rate of $1.20
= €1.00. Net profit will be €2,000.
D) Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars
in the U.S. at i$ = 2% for one year; translate dollars back to €848,000 at the forward rate of $1.20
= €1.00. Net profit will be $2,400.
18) Currently, interest rate is 2 percent per annum in the U.S. and 6 percent per annum in the
euro zone, respectively. The spot exchange rate is $1.25 = €1.00, and the one-year forward
exchange rate is $1.20 = €1.00. As informed traders recognize the deviation from IRP and start
carrying out covered interest arbitrage transactions to earn a certain profit, how will IRP be
restored as a result?
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A) Interest rate in the euro zone will rise; interest rate in the U.S. will fall; euro will
appreciate in the spot market; euro will appreciate in the forward market
B) Interest rate in the euro zone will fall; interest rate in the U.S. will rise; euro will
depreciate in the spot market; euro will depreciate in the forward market
C) Interest rate in the euro zone will rise; interest rate in the U.S. will fall; euro will
depreciate in the spot market; euro will appreciate in the forward market
D) Interest rate in the euro zone will fall; interest rate in the U.S. will rise; euro will
appreciate in the spot market; euro will depreciate in the forward market
19) An Italian currency dealer has good credit and can borrow either $1,000,000 or €800,000
for one year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year
interest rate is i€ = 6%. The spot exchange rate is $1.25 = €1.00 and the one-year forward
exchange rate is $1.20 = €1.00. Show how you can realize a certain euro profit via covered
interest arbitrage.
A) Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest
euros at i€ = 6%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00.
Gross proceeds will be $1,017,600.
B) Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest
euros at i€ = 6%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net
profit will be $17,600.
C) Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars
in the U.S. at i$ = 2% for one year; translate dollars back to €850,000 at the forward rate of $1.20
= €1.00. Net profit will be €2,000.
D) Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars
in the U.S. at i$ = 2% for one year; translate dollars back to €848,000 at the forward rate of $1.20
= €1.00. Net profit will be $2,400.
20) A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000
for one year. The one-year interest rate in the U.S. is i$ = 6% and in the euro zone the one-year
interest rate is i€ = 2%. The spot exchange rate is $1.20 = €1.00 and the one-year forward
exchange rate is $1.25 = €1.00. Show how you can realize a certain euro profit via covered
interest arbitrage.
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A) Borrow $2,000,000 at 6%; trade $2,000,000 for €1,666,667 at the spot rate; invest
euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.25 = €1.00 for
gross proceeds of $2,125,000. Net profit will be $5,000
B) Borrow $2,000,000 at 6%; trade $2,000,000 for €800,000 at the spot rate; invest
euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net
profit will be $17,600.
C) Borrow €1,600,000 at i€ = 2%; translate euros to dollars at the spot rate, invest
dollars in the U.S. at i$ = 6% for one year; translate dollars back to $2,000,000 at the forward rate
of $1.20 = €1.00. Net profit will be €2,000.
D) Arbitrage opportunity does not exit
21) A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000
for one year. The one-year interest rate in the U.S. is i$ = 6.25% and in the euro zone the one-
year interest rate is i€ = 2%. The spot exchange rate is $1.20 = €1.00 and the one-year forward
exchange rate is $1.25 = €1.00. Show how you can realize a certain euro profit via covered
interest arbitrage.
A) Borrow $2,000,000 at 6.25%; trade $2,000,000 for €1,666,667 at the spot rate; invest
euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.25 = €1.00 for
gross proceeds of $2,125,000. Net profit will be $5,000
B) Borrow $2,000,000 at 6.25%; trade $2,000,000 for €800,000 at the spot rate; invest
euros at i€ = 2%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net
profit will be $17,600.
C) Borrow €1,600,000 at i€ = 2%; translate euros to dollars at the spot rate, invest
dollars in the U.S. at i$ = 6.25% for one year; translate dollars back to $2,000,000 at the forward
rate of $1.20 = €1.00. Net profit will be €2,000.
D) Arbitrage opportunity does not exit
22) Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in
Germany. The spot exchange rate is $1.12/€, and the forward exchange rate with one-year
maturity is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader
finds an arbitrage opportunity, what is the net cash flow in one year?
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A) $10,690
B) $15,000
C) $46,207
D) $21,964
23) How high does the lending rate in the euro zone have to be before an arbitrageur would
not consider borrowing dollars, trading them for euro at the spot rate, investing those euros in the
euro zone, and hedging with a short position in the forward euro contract?
Bid
Ask
Borrowing
Lending
S0($/€)
$1.40-€1.00
$1.43-€1.00
i$
4.20%APR
4.10%APR
F360($/€)
$1.44-€1.00
$1.49-€1.00
i€
A) The bid-ask spreads are too wide for any profitable arbitrage when i€> 0
B) 3.47%
C) −2.09%
D) none of the options
24) Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent
in Germany, and the one-year forward exchange rate is $1.16/€. What must the spot exchange
rate be according to the IRP?
A) $1.1768/€
B) $1.1434/€
C) $1.12/€
D) none of the options
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25) A higher U.S. interest rate (i$) relative to interest rates abroad, ceteris paribus, will result
in
A) a stronger dollar.
B) a weaker dollar.
C) a lower spot exchange rate (expressed as foreign currency per U.S. dollar).
D) a higher spot exchange rate (expressed as U.S. dollar per foreign currency).
26) If the interest rate in the U.S. is i$ = 5 percent for the next year and interest rate in the
U.K. is i£ = 8 percent for the next year, uncovered IRP suggests that
A) the pound is expected to depreciate against the dollar by about 3 percent.
B) the pound is expected to appreciate against the dollar by about 3 percent.
C) the dollar is expected to depreciate against the pound by about 3 percent.
D) exchange rate will remain unchanged.
27) A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one
year. The one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest
rate is i€ = 6%. The one-year forward exchange rate is $1.20 = €1.00; what must the spot rate be
to eliminate arbitrage opportunities?
A) $1.2471 = €1.00
B) $1.20 = €1.00
C) $1.1547 = €1.00
D) none of the options
28) Will an arbitrageur facing the following prices be able to make money?
Borrowing
Lending
Bid
Ask
$
5%
4.5%
Spot
$1.00 = €1.00
$1.01 = €1.00
€
6%
5.5%
Forward
$0.99 = €1.00
$1.00 = €1.00
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A) Yes, borrow $1,000 at 5 percent; trade for € at the ask spot rate $1.01 = €1.00; Invest
€990.10 at 5.5 percent; hedge this with a forward contract on €1,044.55 at $0.99 = €1.00; receive
$1.034.11.
B) Yes, borrow €1,000 at 6 percent; trade for $ at the bid spot rate $1.00 = €1.00; invest
$1,000 at 4.5 percent; hedge this with a forward contract on €1,045 at $1.00 = €1.00.
C) No; the transactions costs are too high.
D) none of the options
29) If IRP fails to hold,
A) pressure from arbitrageurs should bring exchange rates and interest rates back into
line.
B) it may fail to hold due to transactions costs.
C) it may be due to government-imposed capital controls.
D) all of the options
30) Although IRP tends to hold, it may not hold precisely all the time
A) due to transactions costs, like the bid-ask spread only.
B) due to arbitrage transactions only
C) due to capital controls imposed by governments only.
D) due to transactions costs, like the bid-ask spread, as well as capital controls imposed
by governments.
31) The interest rate at which the arbitrager borrows tends to be higher than the rate at which
he lends, reflecting the
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A) capital controls
B) midpoint.
C) bid-ask spread.
D) none of the options
32) Governments sometimes restrict capital flows, inbound and/or outbound. They achieve
this objective by means of
A) jawboning.
B) imposing taxes on capital flows.
C) bans on cross-border capital movements.
D) all of the options
33) Will an arbitrageur facing the following prices be able to make money?
Bid
Ask
Borrowing
Lending
S0($/€)
$1.40 /
€1.00
$1.43 /
€1.00
i$
4.20%
4.10%
F360($/€)
$1.44 /
€1.00
$1.49 /
€1.00
i€
3.65%
3.50%
A) Yes, borrow €1,000,000 at 3.65 percent; trade for $ at the bid spot rate of $1.40 =
€1.00; invest $ at 4.1 percent; hedge the maturity value by going long on a forward contract and
agreeing to buy € at the ask price of $1.49/€ in one year. The net cash flow will be positive in
one year.
B) Yes, borrow $1,000,000 at 4.2 percent; trade for € at the spot ask exchange rate of
$1.43 = €1.00; invest €699,300.70 at 3.5 percent; hedge the maturity value by going short on a
forward and agreeing to sell € at the bid price of $1.44/€ in one year. The net cash flow will be
positive in one year.
C) No; the transactions costs are too high.
D) none of the options
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34) If a foreign county experiences a hyperinflation,
A) its currency will depreciate against stable currencies.
B) its currency may appreciate against stable currencies.
C) its currency may be unaffected; it's difficult to say.
D) none of the options
35) As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to
prevail for the next year in the U.S. is 2 percent and 3 percent in the euro zone. What is the one-
year forward rate that should prevail?
A) €1.00 = $1.2379
B) €1.00 = $1.2623
C) €1.00 = $0.9903
D) $1.00 = €1.2623
36) Purchasing Power Parity (PPP) theory states that
A) A: the exchange rate between currencies of two countries should be equal to the ratio
of the countries' price levels.
B) B: as the purchasing power of a currency sharply declines (due to hyperinflation) that
currency will depreciate against stable currencies.
C) C: the prices of standard commodity baskets in two countries are not related.
D) Both A and B are correct.
37) As of today, the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to
prevail for the next year in the U.S. is 2 percent and 3 percent in the euro zone. What is the one-
year forward rate that should prevail?
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A) €1.00 = $1.6157
B) €1.6157 = $1.00
C) €1.00 = $1.5845
D) $1.00 × 1.03 = €1.60 × 1.02
38) If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,
and the dollar depreciated against the pound by 3 percent, then the real exchange rate, assuming
that PPP initially held, is
A) 0.07.
B) 0.9849.
C) −0.0198.
D) 4.5.
39) In view of the fact that PPP is the manifestation of the law of one price applied to a
standard commodity basket,
A) it will hold only if the prices of the constituent commodities are equalized across
countries in a given currency.
B) it will hold only if the composition of the consumption basket is the same across
countries.
C) both of the options
D) none of the options
40) If PPP holds for tradables and the relative prices between tradables and nontradables are
maintained, then:
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A) PPP can hold in its relative version
B) PPP will increase
C) PPP will decrease
D) none of the options
41) Some commodities never enter into international trade. Examples include
A) nontradables.
B) haircuts.
C) housing.
D) all of the options
42) Generally unfavorable evidence on PPP suggests that
A) substantial barriers to international commodity arbitrage exist.
B) tariffs and quotas imposed on international trade can explain at least some of the
evidence.
C) shipping costs can make it difficult to directly compare commodity prices.
D) all of the options
43) The price of a McDonald's Big Mac sandwich
A) is about the same in the 120 countries that McDonalds does business in.
B) varies considerably across the world in dollar terms.
C) supports PPP.
D) none of the options.
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44) The Fisher effect can be written for the United States as:
1.
A.
is = ρs + E(πs) +ρs × E(πs)
B.
ρs = is + E(πs) + is × E(πs)
C.
A) Option A
B) Option B
C) Option C
D) Option D
45) Forward parity states that
A) any forward premium or discount is equal to the expected change in the exchange
rate.
B) any forward premium or discount is equal to the actual change in the exchange rate.
C) the nominal interest rate differential reflects the expected change in the exchange
rate.
D) an increase (decrease) in the expected inflation rate in a country will cause a
proportionate increase (decrease) in the interest rate in the country.
46) The International Fisher Effect suggests that
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A) any forward premium or discount is equal to the expected change in the exchange
rate.
B) any forward premium or discount is equal to the actual change in the exchange rate.
C) the nominal interest rate differential reflects the expected change in the exchange
rate.
D) an increase (decrease) in the expected inflation rate in a country will cause a
proportionate increase (decrease) in the interest rate in the country.
47) The Fisher effect states that
A) any forward premium or discount is equal to the expected change in the exchange
rate.
B) any forward premium or discount is equal to the actual change in the exchange rate.
C) the nominal interest rate differential reflects the expected change in the exchange
rate.
D) an increase (decrease) in the expected inflation rate in a country will cause a
proportionate increase (decrease) in the interest rate in the country.
48) The main approaches to forecasting exchange rates are
A) Efficient market, fundamental, and technical approaches.
B) Efficient market and technical approaches only.
C) Efficient market and fundamental approaches only.
D) Fundamental and technical approaches only.
49) The benefit to forecasting exchange rates
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A) are greatest during periods of fixed exchange rates.
B) are nonexistent now that the euro and dollar are the biggest game in town.
C) accrue to, and are a vital concern for, MNCs formulating international sourcing,
production, financing, and marketing strategies.
D) all of the options
50) The Efficient Markets Hypothesis states
A) markets tend to evolve to low transactions costs and speedy execution of orders.
B) current asset prices (e.g., exchange rates) fully reflect all the available and relevant
information.
C) current exchange rates cannot be explained by such fundamental forces as money
supplies, inflation rates and so forth.
D) none of the options
51) Good, inexpensive, and fairly reliable predictors of future exchange rates include
A) today's exchange rate.
B) current forward exchange rates
C) esoteric fundamental models that take an econometrician to use and that no one can
explain.
D) today's exchange rate, as well as current forward exchange rates
52) Which of the following is a true statement?
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A) While researchers found it difficult to reject the random walk hypothesis for
exchange rates on empirical grounds, there is no theoretical reason why exchange rates should
follow a pure random walk.
B) While researchers found it easy to reject the random walk hypothesis for exchange
rates on empirical grounds, there are strong theoretical reasons why exchange rates should follow
a pure random walk.
C) While researchers found it difficult to reject the random walk hypothesis for
exchange rates on empirical grounds, there are compelling theoretical reasons why exchange
rates should follow a pure random walk.
D) none of the options
53) If an exchange rate follows a random walk
A) the future exchange rate is unpredictable.
B) the future exchange rate is expected to be the same as the current exchange rate, St =
E(St+ 1).
C) the best predictor of future exchange rates is the forward rate Ft = E(St+ 1|It).
D) the future exchange rate is expected to be the same as the current exchange rate, St =
E(St+ 1), and the best predictor of future exchange rates is the forward rate Ft = E(St+ 1|It).
54) One implication of the random walk hypothesis is
A) given the efficiency of foreign exchange markets, it is difficult to outperform the
market-based forecasts unless the forecaster has access to private information that is not yet
reflected in the current exchange rate.
B) given the efficiency of foreign exchange markets, it is difficult to outperform the
market-based forecasts unless the forecaster has access to private information that is already
reflected in the current exchange rate.
C) given the relative inefficiency of foreign exchange markets, it is difficult to
outperform the technical forecasts unless the forecaster has access to private information that is
not yet reflected in the current futures exchange rate.
D) none of the options
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55) The random walk hypothesis suggests that
A) the best predictor of the future exchange rate is the current exchange rate.
B) the best predictor of the future exchange rate is the current interest rate differential.
C) the best predictor of the future exchange rate is the current inflation differential.
D) none of the options
56) With regard to fundamental forecasting versus technical forecasting of exchange rates
A) the technicians tend to use "cause and effect" models.
B) the fundamentalists tend to believe that "history will repeat itself" is the best model.
C) the fundamentalists tend to believe that exchange rates follow a random walk.
D) none of the options
57) Generating exchange rate forecasts with the fundamental approach involves
A) looking at charts of the exchange rate and extrapolating the patterns into the future.
B) estimation of a cyclical model.
C) substituting the estimated values of the dependent variables into the estimated
structural model to generate the forecast.
D) estimation of a structural model and substitution of the estimated values of the
independent variables into the estimated structural model to generate the forecast.
58) Which of the following issues are difficulties for the fundamental approach to exchange
rate forecasting?
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A) One has to forecast a set of independent variables to forecast the exchange rates.
Forecasting the former will certainly be subject to errors and may not be necessarily easier than
forecasting the latter.
B) The parameter values, that is the α's and β's, that are estimated using historical data
may change over time because of changes in government policies and/or the underlying structure
of the economy. Either difficulty can diminish the accuracy of forecasts even if the model is
correct.
C) The model itself can be wrong.
D) All of the options
59) Researchers have found that the fundamental approach to exchange rate forecasting
A) outperforms the efficient market approach.
B) fails to more accurately forecast exchange rates than either the random walk model
or the forward rate model.
C) fails to more accurately forecast exchange rates than the random walk model but is
better than the forward rate model.
D) outperforms the random walk model, but fails to more accurately forecast exchange
rates than the forward rate model.
60) Academic studies tend to discredit the validity of technical analysis. Which of the
following is true?
A) This can be viewed as support for technical analysis.
B) It can be rational for individual traders to use technical analysis. If enough traders
use technical analysis, the predictions based on technical analysis can become self-fulfilling to
some extent, at least in the short-run.
C) The statement can be explained by the difficulty professors may have in
differentiating between technical analysis and fundamental analysis.
D) none of the options
61) The moving average crossover rule
Version 1 22
A) is a fundamental approach to forecasting exchange rates.
B) states that a crossover of the short-term moving average above the long-term moving
average signals that the foreign currency is appreciating.
C) states that a crossover of the short-term moving average above the long-term moving
average signals that the foreign currency is depreciating.
D) none of the options
62) According to the technical approach, what matters in exchange rate determination
A) is the past behavior of exchange rates.
B) is the velocity of money.
C) is the future behavior of exchange rates.
D) is the beta.
63) Studies of the accuracy of paid exchange rate forecasters
A) tend to support the view that "you get what you pay for".
B) tend to support the view that forecasting is easy, at least with regard to major
currencies like the euro and Japanese yen.
C) tend to support the view that banks do their best forecasting with the yen.
D) none of the options
64) According to the research in the accuracy of paid exchange rate forecasters,
A) as a group, they do not do a better job of forecasting the exchange rate than the
forward rate does.
B) the average forecaster is better at forecasting than the forward rate.
C) the forecasters do a better job of predicting the future exchange rate than the market
does.
D) none of the options
Version 1 23
65) According to the monetary approach, what matters in exchange rate determination are
A) the relative money supplies.
B) the relative velocities of monies.
C) the relative national outputs.
D) all of the options
66) According to the monetary approach, the exchange rate can be expressed as
A)
B)
C)
D) none of the options
67) According to a survey study conducted by Rossi (2013), the exchange rate predictability
depends on:
A) the choice of predictor
B) forecast horizon and evaluation method
C) sample period and model
D) all of the options
68) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.60
=
€
1.00
i$
2
%
F360($/€)
$
1.58
=
€
1.00
i€
4
%
Version 1 24
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
69) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.60
=
€
1.00
i$
2
%
F360($/€)
$
1.58
=
€
1.00
i€
4
%
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
70) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.60
=
€
1.00
i$
2
%
F360($/€)
$
1.58
=
€
1.00
i€
4
%
If you had borrowed $1,000,000, traded them for euro at the spot rate, and invested those euros
in Europe, how many euros will you receive in one year?
71) Use the information below to answer the following question.
Version 1 25
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.60
=
€
1.00
i$
2
%
F360($/€)
$
1.58
=
€
1.00
i€
4
%
If you had €1,000,000, traded them for USD at the spot rate, and invested those dollars in the
U.S., how many USD will you get in one year?
72) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
i€
3
%
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
73) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
i€
3
%
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
Version 1 26
74) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
i€
3
%
If you had borrowed $1,000,000, traded them for euros at the spot rate, and invested those euros
in Europe, how many euros do you receive in one year?
75) Use the information below to answer the following question.
Exchange Rate
Interest Rate
APR
S0($/€)
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
i€
3
%
If you had €1,000,000, traded them for USD at the spot rate, and invested those dollars in the
U.S., how many USD will you get in one year?
Version 1 27
76) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
APR
S0($/€)
$
1.42
=
€
1.00
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
$
1.50
=
€
1.00
i€
3
%
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
77) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
APR
S0($/€)
$
1.42
=
€
1.00
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
$
1.50
=
€
1.00
i€
3
%
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
78) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
APR
Version 1 28
S0($/€)
$
1.42
=
€
1.00
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
$
1.50
=
€
1.00
i€
3
%
If you had borrowed $1,000,000, traded them for euros at the spot rate, and invested those euros
in Europe, how many euros do you receive in one year?
79) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
APR
S0($/€)
$
1.42
=
€
1.00
$
1.45
=
€
1.00
i$
4
%
F360($/€)
$
1.48
=
€
1.00
$
1.50
=
€
1.00
i€
3
%
If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?
80) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
Version 1 29
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
81) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
82) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
If you had borrowed $1,000,000, traded them for euros at the spot rate, and invested those euros
in Europe, how many euros do you receive in one year?
Version 1 30
83) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.42 = €1.00
$1.45 = €1.00
i$
4.25% APR
4% APR
F360($/€)
$1.48 = €1.00
$1.50 = €1.00
i€
3.10% APR
3% APR
If you had €1,000,000, traded those euros for USD at the spot rate, and invested the dollars in
the U.S., how many USD will you get in one year?
84) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.40 = €1.00
$1.43 = €1.00
i$
4.20% APR
4.10% APR
F360($/€)
$1.44 = €1.00
$1.49 = €1.00
i€
3.65% APR
3.50% APR
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?
Version 1 31
85) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.40 = €1.00
$1.43 = €1.00
i$
4.20% APR
4.10% APR
F360($/€)
$1.44 = €1.00
$1.49 = €1.00
i€
3.65% APR
3.50% APR
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?
86) Assume that you are a retail customer. Use the information below to answer the
following question.
Bid
Ask
Borrowing
Lending
S0($/€)
$1.40 = €1.00
$1.43 = €1.00
i$
4.20% APR
4.10% APR
F360($/€)
$1.44 = €1.00
$1.49 = €1.00
i€
3.65% APR
3.50% APR
If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you
receive?
87) Assume that you are a retail customer. Use the information below to answer the
following question.
Version 1 32
Bid
Ask
Borrowing
Lending
S0($/€)
$1.40 = €1.00
$1.43 = €1.00
i$
4.20% APR
4.10% APR
F360($/€)
$1.44 = €1.00
$1.49 = €1.00
i€
3.65% APR
3.50% APR
If you had €1,000,000, traded them for USD at the spot rate, and invested the dollars in the U.S.,
how many USD will you get in one year?
Version 1 33
Answer Key
Test name: chapter 6
Version 1 34
Version 1 35
