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Question 1

Assume that the U.S. one-year interest rate is

5% and the one-year interest rate on euros is 8%. You have $100,000 to invest

and you believe that the international Fisher effect (IFE) holds. The euro’s

spot exchange rate is $1.40. What will be the yield on your investment if you

invest in euros?

Answer

8%

5%

3%

2.78%

1 points

Question 2

Assume that the inflation rate in Singapore is

3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore

dollar should ____ by ____%.

Answer

appreciate;
4.85

depreciate;
3,11

appreciate;
3.11

depreciate;
4.85

1 points

Question 3

Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.

Answer

	2 percentage points above; depreciate by about 2%
	3 percentage points above; depreciate by about 3%
	3 percentage points below; appreciate by about 3%
	3 percentage points below; depreciate by about 3%
	2 percentage points below; appreciate by about 2%

1 points

Question 4

The interest rate in the U.K. is 7%, while the

interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50.

According to the international Fisher effect (IFE), the British pound should

adjust to a new level of:

Answer

$1.47.

$1.53.

$1.43.

$1.57.

1 points

Question 5

Latin American countries have historically

experienced relatively high inflation, and their currencies have weakened. This

information is somewhat consistent with the concept

of:

Answer

interest rate
parity.

locational
arbitrage.

purchasing power
parity.

the exchange rate
mechanism.

1 points

Question 6

Assume that the international Fisher effect

(IFE) holds between the U.S. and the U.K. The U.S. inflation is expected to be

5%, while British inflation is expected to be 3%. The interest rates offered on

pounds are 7% and U.S. interest rates are 7%. What does this say about real

interest rates expected by British investors?

Answer

	real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.
	real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors.
	real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.
	IFE doesn’t hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.

1 points

Question 7

Given a home country and a foreign country,

purchasing power parity (PPP) suggests that:

Answer

	a home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.
	a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
	a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.
	a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

1 points

Question 8

Assume that the U.S. inflation rate is higher

than the New Zealand inflation rate. This will cause U.S. consumers to ____

their imports from New Zealand and New Zealand consumers to ____ their imports

from the U.S. According to purchasing power parity (PPP), this will result in

a(n) ____ of the New Zealand dollar (NZ$).

Answer

reduce; increase;
appreciation

increase; reduce;
appreciation

reduce; increase;
depreciation

reduce; increase;
appreciation

1 points

Question 9

According to the international Fisher effect,

if investors in all countries require the same real rate of return, the

differential in nominal interest rates between any two

countries:

Answer

follows their exchange rate
movement.

is due to their inflation
differentials.

is zero.

is constant over
time.

1 points

Question 10

If interest rate parity holds, then the

one-year forward rate of a currency will be ____ the predicted spot rate of the

currency in one year according to the international Fisher

effect.

Answer

greater
than

less than

equal to

answer is dependent on whether the
forward rate has a discount or
premium

1 points

Question 11

According to the IFE, if British interest

rates exceed U.S. interest rates:

Answer

	the British pound’s value will remain constant.
	the British pound will depreciate against the dollar.
	the British inflation rate will decrease.
	the forward rate of the British pound will contain a premium.
	today’s forward rate of the British pound will equal today’s spot rate.

1 points

Question 12

Which of the following theories suggests that

the percentage change in spot exchange rate of a currency should be equal to the

inflation differential between two countries?

Answer

purchasing power parity
(PPP).

triangular
arbitrage.

international Fisher effect
(IFE).

interest rate parity
(IRP).

1 points

Question 13

Which of the following theories suggests that

the percentage difference between the forward rate and the spot rate depends on

the interest rate differential between two countries?

Answer

purchasing power parity
(PPP).

triangular
arbitrage.

international Fisher effect
(IFE).

interest rate parity
(IRP).

1 points

Question 14

Which of the following theories suggests the

percentage change in spot exchange rate of a currency should be equal to the

interest rate differential between two countries?

Answer

absolute form of
PPP.

relative form of
PPP.

international Fisher effect
(IFE).

interest rate parity
(IRP).

1 points

Question 15

Assume that the one-year interest rate in the

U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect,

British pound’s spot exchange rate should ____ by about ____ over the

year.

Answer

depreciate;
1.9%

appreciate;
1.9%

depreciate;
3.94%

appreciate;
3.94%

1 points

Question 16

A fundamental forecast that uses multiple

values of the influential factors is an example of:

Answer

sensitivity
analysis.

discriminant
analysis.

technical
analysis.

factor
analysis.

1 points

Question 17

Which of the following is not a limitation of

fundamental forecasting?

Answer

	uncertain timing of impact.
	forecasts are needed for factors that have a lagged impact.
	omission of other relevant factors from the model.
	possible change in sensitivity of the forecasted variable to each factor over time.

1 points

Question 18

Which of the following forecasting techniques

would best represent sole use of today’s spot exchange rate of the euro to

forecast the euro’s future exchange rate?

Answer

fundamental
forecasting.

market-based
forecasting.

technical
forecasting.

mixed
forecasting.

1 points

Question 19

If the forward rate was expected to be an

unbiased estimate of the future spot rate, and interest rate parity holds,

then:

Answer

	covered interest arbitrage is feasible.
	the international Fisher effect (IFE) is supported.
	the international Fisher effect (IFE) is refuted.
	the average absolute error from forecasting would equal zero.

1 points

Question 20

If speculators expect the spot rate of the

Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian

dollars, they will ____ Canadian dollars forward and put ____ pressure on the

Canadian dollar forward rate.

Answer

lower; sell;
upward

lower; sell;
downward

higher; sell;
upward

higher; sell;
downward

1 points

Question 21

Sensitivity analysis allows for all of the

following except:

Answer

	accountability for uncertainty.
	focus on a single point estimate of future exchange rates.
	development of a range of possible future values.
	consideration of alternative scenarios.

1 points

Question 22

If speculators expect the spot rate of the

yen in 60 days to be ____ than the 60-day forward rate on the yen, they will

____ the yen forward and put ____ pressure on the yen’s forward

rate.

Answer

higher; buy;
upward

higher; sell;
downward

higher; sell;
upward

lower; buy;
upward

1 points

Question 23

Which of the following forecasting techniques

would best represent the use of today’s forward exchange rate to forecast the

future exchange rate?

Answer

fundamental
forecasting.

market-based
forecasting.

technical
forecasting.

mixed
forecasting.

1 points

Question 24

Small Corporation would like to forecast the

value of the Cyprus pound (CYP) five years from now using forward rates.

Unfortunately, Small is unable to obtain quotes for five-year forward contracts.

However, Small observes that the five-year interest rate in the U.S. is 11%,

while the Cyprus five-year interest rate is 15%. Based on this information, the

Cyprus pound should ____ by ____% over the next five

years.

Answer

appreciate;
16.22

depreciate;
16.22

appreciate;
6.66

depreciate;
6.66

1 points

Question 25

Which of the following forecasting techniques

would best represent the use of relationships between economic factors and

exchange rate movements to forecast the future exchange

rate?

Answer

fundamental
forecasting.

market-based
forecasting.

technical
forecasting.

mixed
forecasting.

1 points

Question 26

Assume that the forward rate is used to

forecast the spot rate. The forward rate of the Canadian dollar contains a 6%

discount. Today’s spot rate of the Canadian dollar is $.80. The spot rate

forecasted for one year ahead is:

Answer

$.860.

$.848.

$.740.

$.752.

1 points

Question 27

If a particular currency is consistently

declining substantially over time, then a market-based forecast will usually

have:

Answer

	underestimated the future exchange rates over time.
	overestimated the future exchange rates over time.
	forecasted future exchange rates accurately.
	forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.

1 points

Question 28

Which of the following is not a method of

forecasting exchange rate volatility?

Answer

	using the absolute forecast error as a percentage of the realized value.
	using the volatility of historical exchange rate movements as a forecast for the future.
	using a time series of volatility patterns in previous periods.
	deriving the exchange rate’s implied standard deviation from the currency option pricing model.

1 points

Question 29

Assume that interest rate parity holds. The

U.S. five-year interest rate is 5% annualized, and the Mexican five-year

interest rate is 8% annualized. Today’s spot rate of the Mexican peso is $.20.

What is the approximate five-year forecast of the peso’s spot rate if the

five-year forward rate is used as a forecast?

Answer

$.131.

$.226.

$.262.

$.140.

$.174.

1 points

Question 30

Assume that the U.S. interest rate is 11

percent, while Australia’s one-year interest rate is 12 percent. Assume interest

rate parity holds. If the one-year forward rate of the Australian dollar was

used to forecast the future spot rate, the forecast would reflect an expectation

of:

Answer

	depreciation in the Australian dollar’s value over the next year.
	appreciation in the Australian dollar’s value over the next year.
	no change in the Australian dollar’s value over the next year.
	information on future interest rates is needed to answer this question.

	appreciate; 4.85
	depreciate; 3,11
	appreciate; 3.11
	depreciate; 4.85

	interest rate parity.
	locational arbitrage.
	purchasing power parity.
	the exchange rate mechanism.

	reduce; increase; appreciation
	increase; reduce; appreciation
	reduce; increase; depreciation
	reduce; increase; appreciation

	follows their exchange rate movement.
	is due to their inflation differentials.
	is zero.
	is constant over time.

	greater than
	less than
	equal to
	answer is dependent on whether the forward rate has a discount or premium

	purchasing power parity (PPP).
	triangular arbitrage.
	international Fisher effect (IFE).
	interest rate parity (IRP).

	absolute form of PPP.
	relative form of PPP.
	international Fisher effect (IFE).
	interest rate parity (IRP).

	depreciate; 1.9%
	appreciate; 1.9%
	depreciate; 3.94%
	appreciate; 3.94%

	sensitivity analysis.
	discriminant analysis.
	technical analysis.
	factor analysis.

	fundamental forecasting.
	market-based forecasting.
	technical forecasting.
	mixed forecasting.

	8%
	5%
	3%
	2.78%

	$1.47.
	$1.53.
	$1.43.
	$1.57.

	lower; sell; upward
	lower; sell; downward
	higher; sell; upward
	higher; sell; downward

	higher; buy; upward
	higher; sell; downward
	higher; sell; upward
	lower; buy; upward

	appreciate; 16.22
	depreciate; 16.22
	appreciate; 6.66
	depreciate; 6.66