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Question 1


  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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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


  1.  

    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.

 
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