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International Finance multiple choice questions

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Question;Q 1;The theory of relative purchasing power;parity states that, between two nations, the;A. inflation rates are smaller in weakening;currencies;B. exchange rate changes reflect the;component country inflation rate differential;C. inflation rates differentials have little;effect on exchange rate changes;D. the interest rate is greater than the;inflation rate while currencies devalue;Q 2;The Big Mac index indicates that the;international price of a Big Mac sandwich is;A. positively related to currency;overvaluation (hi?r Big Mac price = more overvalued);B. negatively related to currency;overvaluation (hi?r Big Mac price = less overvalued);C. unrelated to currency valuation;D. only related to the country?s price of;beef and lettuce;Q 3;The International Fisher Effect is able to;equate exchange rate strengthening/weakening with component country interest;rate differentials due to the direct assumption of;A. carry trade availability always disappearing;due to competition;B. lack of capital mobility among all;countries;C. equality of interest rates between;component countries, once individual inflation rates have been removed.;D. equality of interest rates between;component countries, with individual inflation rates still included;Q 4;The International Fisher Effect (IFE) is;effective in the long-term, with deviations from predictions in the short-term;because;A. capital mobility is available everywhere.;B. real rates are based on observations that;have different lags, leading to short-term offset;C. inflation rates are only reported monthly;D. the Relative PPP, buried within the IFE;construction, is also only a long-term predictor;Q 5;Interest rate parity holds because;A. quotas and tariffs have increased over;time;B. banks are ready to lend and borrow at;differing rates of interest, but charge low transaction costs on foreign;exchange;C. carry trade availability ensures quick;transmittal of cheap interest rates to cheap currencies;D. markets are readily available to trade in;foreign exchange spot and forward contracts, along with the ability to borrow;and lend at component country interest rates;Q 6;Covered Interest Arbitrage is;A. similar to cross-rate arbitrage, with the;only difference being the usage of interest rates;B.an arbitrage that yields riskless profits;from making interest rate predictions;C.similar to carry trades, with the only;difference being the inclusion of a spot transaction;D. the simultaneous trading of foreign;currency now, contracted in the future, and a loan;Q 7;As discussed in class, Foreign Exchange;Expectations Theory relies on;A. market efficiency, and so today?s spot;rate is the best predictor of tomorrow?s spot rate;B. market efficiency, and so today?s forward;rate is the best predictor of tomorrow?s spot rate;C. market efficiency, and researchers have;provided mixed results on market efficiency;D. market efficiency, and researcher have given;definitive results on future spot rate prediction;Q 8;Suppose that on January 1, 2013, the spot;rate on the Australian dollar was US$1.05 and the 180?day forward rate was US$1.10. The;difference between the spot and forward rates suggested that;A. interest rates were higher in the U.S. than;in the Australia;B. the AUD had risen in relation to the;dollar;C. the inflation rate in the Australia was;declining;D. the AUD was expected to fall in value;relative to the dollar;Q 9;Suppose annual inflation rates in the U.S.;and Mexico are expected to be 5% and 60%, respectively, over the next several;years. If the current spot rate for the Mexican peso is $0.077, then the best;estimate of the peso's spot value in 3 years is;A. $0.1173;B. $0.2724;C. $0.0218;D. $0.0505;Q 10;Suppose five?year deposit rates in Country X and Country;Y are 10% and 4%, respectively. If the current spot rate is X0.75/Y, then the;spot rate X/Y five years from now implied by these interest rates is;A. 0.7933;B. 0.7091;C. 0.5666;D 0.9928;Q 11;The direct spot quote for the Canadian;dollar is USD0.93 and the 180?day forward rate is USD0.92. The difference between;the two rates is likely to mean that;A. inflation in the U.S. during the past;year was lower than in Canada;B. interest rates are rising faster in;Canada than in the U.S.;C. prices in Canada are expected to rise;more rapidly than in the U.S.;D. the Canadian dollar's spot rate is;expected to rise in terms of the U.S. dollar;Q 12;If 90-day annualized interest rates in the;U.S. and Switzerland are 8% and 2%, respectively, and the 90?day forward rate for the Swiss franc is;$0.9250, at what current spot rate will interest rate parity hold?;A. $0.8736;B. $0.9114;C. $1.0972;D. $0.9388;Q 13;If USD is quoted at JPY 95.875 spot, a;2-year USD forward of JPY 95.857, and you observe 2-year annualized Japanese;interest rates of 0.15%, you would expect the comparable US interest rate to be;A. 0.159%;B. 0.019%;C. 0.667%;D. 0.333%;Q 14;A U.S.-based currency dealer has good;credit and can borrow $1,000,000, or the current equivalent amount of Euros;for one year. The one-year interest rate in the U.S. is i$ = 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 to;realize a profit via covered interest arbitrage.;A. Borrow $1,000,000 at 2%. Trade $1,000,000;for ?800,000, invest at i? = 6%, translate proceeds back at forward rate of;$1.20 = ?1.00, net proceeds = $1,017,600.;B. Borrow ?800,000 at i? = 6%, translate to;dollars at the spot, invest in the U.S. at i$ = 2% for one year, translate;dollars back into euro at the forward rate of $1.20 = ?1.00. Net profit ?2,000.;C. Borrow ?800,000 at i? = 6%, translate to;dollars at the spot, invest in the U.S. at i$ = 2% for one year, translate;dollars back into euro at the forward rate of $1.20 = ?1.00. Net profit $2,400.;D. B and C;Q 15;An Italian currency dealer has good credit;and can borrow ?800,000, or the current equivalent amount of dollars, for one;year. The one-year interest rate in the U.S. is i$ = 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 to realize a;profit via covered interest arbitrage.;A. Borrow $1,000,000 at 2%. Trade $1,000,000;for ?800,000, invest at i? = 6%, translate proceeds back at forward rate of;$1.20 = ?1.00, gross proceeds = $1,017,600.;B. Borrow ?800,000 at i? = 6%, translate to;dollars at the spot, invest in the U.S. at i$ = 2% for one year, translate;dollars back into euro at the forward rate of $1.20 = ?1.00. Net profit $2,400.;C. Borrow ?800,000 at i? = 6%, translate to;dollars at the spot, invest in the U.S. at i$ = 2% for one year, translate;dollars back into euro at the forward rate of $1.20 = ?1.00. Net profit ?2,000.;D. B and C;Q 16;A 90-day investment is available in the UK;that is expected to yield 12% risklessly, on an annualized basis. 90-day;borrowings are available in the US for 2.5%, on an annualized basis. The;current GBP spot price is USD1.6032. A USD5m carry trade will yield;A. an unknown, but positive amount, if the;spot rate is less than USD1.5662 in 90-days.;B.an unknown, but positive amount, if the;spot rate is more than USD1.6410 in 90-days.;C. an unknown, but positive amount, if the;spot rate is more than USD1.5662 in 90-days.;D. an unknown, but positive amount, if the;spot rate is less than USD1.6410 in 90-days.;Q 17;The annualized 180-day interest rates are;0.075% in the US and -0.15% in Denmark (yes, negative!). If the current spot;rate is DKK5.75 / USD, the 180-day forward should be trading at;A. an annualized premium of 0.22%;B. an annualized premium of 0.11%;C. an annualized discount of 0.11%;D. an annualized discount of 0.22%;Q 18;A subway ride in Moscow costs 28 rubles. A;subway ride in Mexico City costs MXN 2. The spot RUB/MXN exchange rate is;currently RUB2.4325/MXN. The Absolute Purchasing Power Parity Theorem suggests;that, given this information, the exchange rate should be;A. RUB14/MXN, and the Russian Ruble is;currently undervalued relative to the Mexican Peso..;B. RUB14/MXN, and the Russian Ruble is;currently overvalued relative to the Mexican Peso..;C. MXN0.7143/RUB, and the Mexican Peso is;currently overvalued relative to the Mexican Peso..;D. what it is, and the Ruble is neither;under- or overvalued relative to the Mexican Peso.;Q19;Inflation in Singapore is expected to be 5%;next year. Inflation in Hong Kong is expected to be 3.7%. If the current spot;rate is HKD0.1586/SGD, it would be reasonable to expect the HKD to;A. strengthen by 1.28%;B.weaken by 1.28%;C. strengthen by 1.26%;D.weaken by 1.26%;Q 20;A tall latte at Starbucks London is ?2.50.;A tall latte at Starbucks New York is $3.65. The current spot exchange rate is;$1.65/?. The Absolute Purchasing Power Parity Theorem suggests that, given this;information, the exchange rate should be;A. $1.46/?, and the British Pound is;currently overvalued.;B.$1.46/?, and the British Pound is;currently undervalued.;C. $0.6849/?, and the British Pound is;currently overvalued.;D.what it is, and neither currency is;under- or overvalued.

 

Paper#48082 | Written in 18-Jul-2015

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