1. The ________ is the rate at which one currency is converted in another. A) exchange rate B) currency market
C) foreign exchange market D) currency swap rate
2. If a company expects the ________ relative to the ¥, the company might invest $10 million and receive ¥1.2 billion. (Assume an exchange rate of $1= ¥120). A) dollar to appreciate B) dollar to depreciate C) dollar to be undervalued D) yen to be overvalued
3. When foreign exchange dealers expect the dollar to appreciate against another currency, the dollar
A) the dollar is selling at a discount B) the dollar is selling at a premium
C) the dealers expect the dollar to depreciate relative to the foreign currency D) the dollar will buy less foreign exchange
4. When two parties agree to exchange currency and execute the deal at some specific date in the future a ___ occurs. A) spot transaction B) currency swap C) forward exchange D) currency speculation
5. The increase of demand for a currency relative to others A) causes the currency to depreciate B) causes the currency to appreciate
C) causes the currency to go down in value D) creates a volatile currency situation
6. Which of the following is not an important vehicle currency? A) the Japanese yen B) the Swiss franc C) the British pound D) the Euro
7. If Japan is experiencing rampant price inflation, and European Union nations are experiencing a low inflation rate, then
A) the yen would be expected to depreciate relative to the euro B) the yen would be expected to appreciate relative to the euro C) PPP would suggest that Japan would see prices fall D) PPP would suggest that Japan would see prices rise
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8. PPP theory predicts that exchange rates are determined by A) inflation rates B) relative prices
C) supply and demand D) government
9. The formula i = r +π is known as A) PPP
B) the Efficient Market Theory C) the International Fisher Effect D) the Fisher Effect
10. The _______ school of thought does not believe that forward exchange rates are the best possible predictors of future spot rates. A) efficient market B) inefficient market C) Fisher effect
D) International Fisher effect
11. A country's currency is said to be ______ when the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it. A) externally convertible B) freely convertible C) internally convertible D) nonconvertible
12. When neither residents nor nonresidents are allowed to convert a currency into a foreign currency, the currency is said to be
A) internally convertible B) externally convertible C) freely convertible D) nonconvertible
13. PPP is a strong indicator of . A) exchange rates
B) short-run movements
C) long run predictions of exchange rates D) differentials in inflation rates
14. PPP fails in part because it assumes away . A) inflationary cost-push prices
B) transportation costs and trade barriers C) equalization of prices by arbitrage D) none of the above
15. The Fisher Effect affects . A) suspension systems for automobiles
B) price equilibrium for inelasticity of demand C) why nations experience decline in their money D) nominal interest rates and inflation trends
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16. The Inefficient Market School states that the following is inefficient: A) price predictors
B) surplus commodity deficiencies C) foreign exchange market D) none of the above
17. Fundamental Analysis draws on theory for predictions.
A) economic B) market C) exchange D) multivariate
18. Technical Analysis draws on data to make predictions.
A) rate of return B) consumer price C) price and volume D) profit and loss
19. The foreign exchange market is referred to as a market where one country's currency is exchanged for another currency. The currency exchange is usually made through the following methods .
A) buyers and sellers of foreign exchange meet at a physical location.
B) buyers and sellers of foreign exchange meet through a telephone network
C) buyers and sellers of foreign exchange meet through computer communications D) A and B E) B and C
20. Which of the following is not a characteristic of speculation . A) profit motive B) exchange rate fluctuation C) hedging D) risk taking E) deliberate uncovered position
21. A cross rate is an exchange rate between ___ and ___. A) The US dollar and the Japanese yen B) any two non-home currencies C) the Mexican peso and the euro
D) the domestic currency and a foreign currency E) the euro and the Japanese yen
22. Foreign exchange markets are efficient if . A) good information is available at no or little cost B) you have inside information C) markets are highly regulated D) market information is secretive
E) most foreign exchange dealers are speculators
23. The Fisher Effect assumes that the .
A) real interest rate is equal to the nominal interest rate
B) nominal interest rate is equal to the real interest rate plus the inflation rate C) inflation rate is equal to the real interest rate D) nominal interest rate is equal to the inflation rate E) nominal interest rate is lower than the inflation rate
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24. The International Fisher Effect says that the .
A) exchange rate difference reflects the inflation rate difference between two countries B) future spot rate should move in an amount equal to, but in the opposite direction from, the difference in interest rates between two countries C) future spot rate reflects the forward rate D) interest rate is greater than the inflation rate E) all of the above
25. The theory of interest rate parity means that the . A) interest rates are equal in two countries
B) difference between a forward rate and a spot rate equals the difference between a domestic interest rate and a foreign interest rate
C) difference between the spot rate and the future spot rate reflects the interest rate difference between two countries
D) future spot rate reflects the inflation difference between two countries E) all of the above
26. A forward rate is an unbiased predictor of the future spot rate if foreign exchange markets are .
A) controlled by the government B) efficient
C) controlled by speculators
D) are partially controlled by the International Monetary Fund E) none of the above
27. Actual exchange market participants include . A) banks B) companies C) individuals D) governments E) all of the above
28. Central banks __ _.
A) attempt to control the growth of the money supply within their jurisdictions B) serve as their governments’ banker for domestic and international payments C) strive to maintain the value of their own currency against any foreign currency D) A and C
E) all of the above
29. The following will shift the demand schedule for Australian dollars to the right: i) A reduction in the cost of air travel
ii) An increase in Australian interest rates iii) A poor wheat harvest in the US Which of the following is correct? A) I only B) II only
C) I and III only D) I, II and III
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30. Which of the following will shift the demand for US dollar denominated assets to the right?
A) A decrease in the foreign exchange demand for US products B) A fall in US imports
C) The dollar is expected to appreciate D) An increase in European interest rates
31. Which of the following is correct? The most common type of transaction in the foreign exchange market is A) Forward transaction. B) Spot transaction. C) Futures transaction. D) Taking an option.
32. Which of the following is correct? If dollars were cheaper in London than in New York,
A) A dealer would buy dollars in London and then sell them in New York B) A dealer would buy dollars in New York and then sell them in London C) A dealer would sell dollars in London and in New York D) A dealer would buy dollars in London and in New York
33. Which of the following is correct? If the price of Yen in Singapore rose above the price of yen in Hong Kong then:
A) The demand for yen would be higher in Singapore and lower in Hong Kong than would have been the case.
B) The supply for yen would be higher in Singapore and lower in Hong Kong than would have been the case.
C) The supply for yen would be higher in Singapore and the demand for yen would be lower in Hong Kong than would have been the case.
D) The demand for yen would be higher in Hong Kong and the supply of yen would be higher in Singapore than would have been the case.
34. A company that simultaneously buys and sells a given amount of foreign exchange for two different value dates is engaged in . A. a multilateral transaction B. a forward transaction C. a future transaction D. a currency swap
35. The extent to which the income from individual transactions is affected by fluctuations in the foreign exchange values is known as . A) translation exposure B) economic exposure
C) transaction exposure D)geographic exposure
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36. Translation Exposure refers to on the reported financial statements of a company.
A. changes on balance sheets
B. changes in currency exchange rates
C. changes in foreign accounting procedures D. changes on foreign shareholder holdings
37. A US company is expected to receive £100,000 in 120 days. If the company wants to minimize the risk of foreign exchange, then it would . A. buy British pounds forward B. sell British pounds forward C. buy British pounds 120 days from now D. sell British pounds 120 days from now E. sell British pounds in the current spot market
38. Speculation in foreign exchange markets entails . A. covering in the forward market B. covering in the money market C. hedging in the option market D. buying in the current spot market and selling in the future spot market E. covering in the futures market
39. Which of the following is not one of advantages for a flexible exchange rate system? A. countries can maintain independent monetary policy B. exchange rates under a flexible system are unstable C. countries can maintain independent fiscal policy D. flexible exchange rates permit a smooth adjustment to external shocks E. Central banks do not need to maintain large reserves
40. Which of the following is not directly attributable to the collapse of the fixed exchange rate system? A. U.S. balance of payments deficits B. the decrease in the U.S. dollar value C. the decline of international reserves D. Japan's trade surplus E. none of the above
41. The exchange rate system under the Bretton Woods Agreement was a ________ regime.
A. fixed B. floating C. pegged D. dirty float
42. The key strength of the gold standard was A) that it maintained a managed float system B) that it maintained a dirty float system
C) that it was a mechanism for achieving balance of payments equilibrium by all countries D) that all countries of the world maintained a stable currency
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43. Under the Bretton Woods system, the only currency that remained convertible into gold was
A) the U.S. dollar B) the British pound C) the Swiss franc D) The Japanese yen
44. Under a fixed exchange rate system, a country that increases its money supply would see its inflation rate _______ and its trade deficit _______.
A) rise, shrink B) rise, widen C) fall, shrink D) fall, widen
45. For the Bretton Woods system to work, the U.S. needed to have a ______ inflation rate, and avoid a balance of payments ________.
A) high, equilibrium B) high, surplus C) low, deficit D) low, surplus
46. According to IMF research, countries with a pegged exchange rate system had an average annual inflation rate that is ________ as compared to countries following a floating exchange rate system.
A) a little higher
B) significantly higher C) about the same D) lower
47. A currency crisis occurs when
A) there is a loss of confidence in the banking system that leads to a run on banks B) a speculative attack on the exchange rate of a currency results in a sharp depreciation in the value of the currency
C) a country cannot service foreign debt obligations
D) consumer spending patterns significantly affect a country's balance of payments resulting in a negative effect on the country's currency
48. Which of the following is not a cause for banking, foreign debt, and/or currency crises?
A) low relative price inflation
B) a widening current account deficit
C) excessive expansion of domestic borrowing D) asset price inflation
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49. If a country has trouble servicing its foreign government debt obligations it maybe experiencing a
A. banking crisis B. foreign debt crisis C. currency crisis D. financial crisis
50. Which of the following is not a factor in the Asian currency crisis?
A) the debt bomb
B) decreasing capacity C) expanding imports D) the investment boom
51. ______ arises when people behave recklessly because they know they will be saved if things go wrong.
A. bandwagon effects B. moral hazard C. default effects D. Confidence
52. A firm that wants to maintain strategic flexibility and hedge against currency fluctuations can
A) disperse production to different locations in the world B) narrow its product line
C) establish a central exporting operation in a single location D) peg its currency
53. Factors that cause demand and supply schedules for foreign exchange to shift do not include : A. relative inflation rates B. relative interest rates C. different welfare systems D. relative income levels E. government intervention
54. The objectives of the International Monetary Fund (IMF) are . A. to promote international monetary cooperation B. to promote exchange stability C. to create standby reserves D. all of the above E. none of the above
55. A country may link its exchange rate to the value of a major currency, often the US dollar. This is called . A. a currency par B. a currency peg C. a currency composite D. a currency basket E. none of the above
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56. If and when the value of the Japanese yen against the US dollar goes up 15%, it affects the following items . A. the price of imported Japanese cars B. the price of Japanese cameras C. the price of Japanese pearls sold in Troy, Ohio D. the price of a Sharp copier in Detroit E. all of the above
57. A fixed exchange rate ___.
A. is an exchange rate which does not fluctuate or which changes within a predetermined band B. will have a par value
C. requires central banks to absorb currency surpluses and eliminate currency deficiencies D. B and C E. all of the above
58. As compared to how they were between 1945 and 1973, exchange rates today are
A) slightly more volatile B) much more volatile C) less volatile D) in equilibrium
59. A currency devaluation is ___.
A. an official increase in the value of a currency by the government of that currency B. a rise in the value of a currency against other currencies under a floating system C. a decrease in the value of a currency against other currencies under a floating system
D. an official reduction in the par value of a currency under a fixed rate system E. a currency board
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IF Seminar – True of False
1. The rate at which a foreign currency dealer converts one currency into another currency on a particular day is referred to as currency speculation.
2. Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another.
3. A foreign exchange market is a market for converting relative goods or services for their equivalent value across countries in order to do business.
4. PPP theory predicts that changes in relative prices will result in a change in exchange rates.
5. PPP has proven to be a strong and accurate predictor of exchange rates.
6. One of the functions of the foreign exchange market is to provide some insurance against adverse consequences of unpredictable fluctuations in exchange rates.
7. Currency speculation is another property of foreign exchange markets involving short-term movement of funds between trading currencies to profit from exchange rate shifts.
8. The foreign exchange market is headquartered in London with branches linking New York, Chicago, San Francisco, Hong Kong, Tokyo, Singapore, Sydney, Paris, Berlin, and Rome after its formation in the 1950s.
9. The “Big Mac Index” is a barometer of the PPP theory which holds that the price of the same goods in one country is precisely identical in another country.
10. The other side of PPP theory is being able to predict changes in relative prices that will result in exchange rate changes.
11. The international monetary system is the institutional arrangements that countries adopt to govern exchange rates.
12. A system under which the exchange rate for converting one currency into another is fixed is referred to as a pegged exchange rate.
13. The Canadian dollar was never part of the Gold Standard.
14. The Bretton Woods agreement called for a system of floating exchange rates that would be policed by the IMF.
15. The Bretton Woods agreement recognized that a rigid policy of exchange rates would be too inflexible.
16. The International Development Agency (IAD) is the official name for the World Bank.
17. Fixed exchange rates were replaced by a managed-gold system
18. The Jamaica Agreement was about Jamaica joining the IMG
19. The value of the dollar has been determined by both market forces and government intervention.
20. The current system is often referred to as a managed-float system, or a dirty float
21. A currency board is the concept related to having a \"pegged\" exchange rate.
22. The Canadian dollar has been rising against the U.S. dollar and this has helped U.S. studios filming in Canada.
23. The financial crisis that erupted across Southeast Asia during the fall of 1997 has emerged as the biggest challenge ever.
24. One criticism of IMF is that its rescue efforts are exacerbating a problem known to economists as moral hazard.
IF Seminar – Calculation
1. If the spot rate of the Malaysian ringgit is $.30 and the six month forward rate of the ringgit is $.32, what is the forward premium or discount of Malaysian ringgit on an annual basis?
2. Assume: (1) the US annual interest rate = 10%; (2) the Malaysian annual interest rate = 4%; and (3) the 90-day forward rate for the Malaysian ringgit = $0.3864. At what current spot rate will interest rate parity hold?
3. The interest rate on South Korean government securities with one-year maturity is 4 percent and the expected inflation rate for the coming year is 2 percent. The interest rate on U.S. government securities with one-year maturity is 7 percent, and the expected rate of inflation is 5 percent. The current spot exchange rate for Korean won is $1=W 1,200.
(a)The real interest rate of South Korean and US;
(b)Forecast the spot exchange rate one year from today.
4. Two countries, Great Britain and the United States, produce just one good: beef. Suppose the price of beef in the United States is $2.80 per pound and in UK it is ₤3.70 per pound.
(a) According to PPP theory, what should the dollar/pound spot exchange rate be? (b) Suppose the expected inflation rate for the coming year of US is 2% and that of UK is 5%.
- What should the one-year forward dollar per pound exchange rate be? - Is the dollar selling at a premium or discount?
(c) Given your answers to parts (a) and (b), and given that the current interest rate in the United States is 10%, what would you expect the current interest rate to be in UK?
As to forward contract, futures, please analyze the examples in the ppt of Lecture 7.
Answers for IF Seminar
Multiple Choices
1 - 5 ABBCB 6-10 BA BDB 11-15 BDCBD 16-20 C ACEC 21-25 BABBB 26-30 BEE DC 31-33 BADDC 36-40 BBDBD 41-45 ACABC 46-50 DBABB 51-55 BACDB 56-59 EEBD
True or False
1-5 FTFTF 6-10 TTFTT 11-15 TFFFT 16-20 FFFTT 21-24 TFTT
Calculation
1.
[(0.32 - 0.30)/.030] x (360/180) x 100% = 13.3% Malaysian ringgit will premium about 13.3% annually.
2. According to International Fisher Effect,(S2-S1)/S1= i$-iMR (because Malaysian ringgit is indirectly quoted, not directly quoted) [(0.3864 - S)/S) x (360/90)] = 0.10 - 0.04 S =0.3807
The current spot rate is $ 0.3807 per Malaysian ringgit.
3. (a)According to the Fisher effect, nominal rate = real rate + inflation rate. Therefore, real interest rate in South Korean and US = 4%-2%=7%-5%=2% (b) According to International Fisher Effect (S1 - S2)/S2 = i$ - iWon, (1200-S2)/S2=7%-4% S2 = W1165/$. OR,
According to relative PPP theory,
FR=SRx(1+πh)/( 1+πf), SR=1200, πh =2%,πf =5% FR=W1165/$
4. (a) According to PPP, e=P(h)/P(f)= $2.80/₤3.70=$0.76/£,
therefore, the $/£ rate should be $0.76/£.
(b) SR=$0.76/£, the expected inflation rate of US(πh)=2%, that of UK(πf)=5% According to relative PPP theory,
FR = SR x (1+πh)/( 1+πf)
FR = $0.76/£ x (1+0.02)/(1+0.05)
= $0.7383/£ < $0.76/£ (i.e., dollar is expected to appreciate) Therefore, the one-year forward dollar per pound exchange rate should be $0.7383/£, which is selling at a premium.
(c) SR=$0.76/£, FR=$0.7383/£, one year nominal interest rate of US (i$)=10% Here, dollar is directly quoted. According to International Fisher Effect, (S1 - S2)/S2 = i£ - i$
(0.76-0.7383)/ 0.7383= i£ -10% i£ = 12.94%
Therefore, the current interest rate inUK is expected to be around 12.94%.
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