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Question 1

Assume that the U.S. one-year interest rate is5% and the one-year interest rate on euros is 8%. You have $100,000 to investand you believe that the international Fisher effect (IFE) holds. The euro’sspot exchange rate is $1.40. What will be the yield on your investment if youinvest in euros?

Answer

1 points

Question 2

Assume that the inflation rate in Singapore is3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singaporedollar 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 theinterest 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 shouldadjust to a new level of:

Answer

$1.47.

$1.53.

$1.43.

$1.57.

1 points

Question 5

Latin American countries have historicallyexperienced relatively high inflation, and their currencies have weakened. Thisinformation is somewhat consistent with the conceptof:

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 be5%, while British inflation is expected to be 3%. The interest rates offered onpounds are 7% and U.S. interest rates are 7%. What does this say about realinterest 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 higherthan the New Zealand inflation rate. This will cause U.S. consumers to ____their imports from New Zealand and New Zealand consumers to ____ their importsfrom the U.S. According to purchasing power parity (PPP), this will result ina(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, thedifferential in nominal interest rates between any twocountries:

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 theone-year forward rate of a currency will be ____ the predicted spot rate of thecurrency in one year according to the international Fishereffect.

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 interestrates 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 thatthe percentage change in spot exchange rate of a currency should be equal to theinflation 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 thatthe percentage difference between the forward rate and the spot rate depends onthe 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 thepercentage change in spot exchange rate of a currency should be equal to theinterest 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 theU.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 theyear.

Answer

depreciate; 1.9%

appreciate; 1.9%

depreciate; 3.94%

appreciate; 3.94%

1 points

Question 16

A fundamental forecast that uses multiplevalues 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 offundamental 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 techniqueswould best represent sole use of today’s spot exchange rate of the euro toforecast 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 anunbiased 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 theCanadian dollar in 30 days to be ____ than the 30-day forward rate on Canadiandollars, they will ____ Canadian dollars forward and put ____ pressure on theCanadian 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 thefollowing 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 theyen 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 forwardrate.

Answer

higher; buy; upward

higher; sell; downward

higher; sell; upward

lower; buy; upward

1 points

Question 23

Which of the following forecasting techniqueswould best represent the use of today’s forward exchange rate to forecast thefuture exchange rate?

Answer

fundamental forecasting.

market-based forecasting.

technical forecasting.

mixed forecasting.

1 points

Question 24

Small Corporation would like to forecast thevalue 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, theCyprus pound should ____ by ____% over the next fiveyears.

Answer

appreciate; 16.22

depreciate; 16.22

appreciate; 6.66

depreciate; 6.66

1 points

Question 25

Which of the following forecasting techniqueswould best represent the use of relationships between economic factors andexchange rate movements to forecast the future exchangerate?

Answer

fundamental forecasting.

market-based forecasting.

technical forecasting.

mixed forecasting.

1 points

Question 26

Assume that the forward rate is used toforecast 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 rateforecasted for one year ahead is:

Answer

$.860.

$.848.

$.740.

$.752.

1 points

Question 27

If a particular currency is consistentlydeclining substantially over time, then a market-based forecast will usuallyhave:

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 offorecasting 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. TheU.S. five-year interest rate is 5% annualized, and the Mexican five-yearinterest 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 thefive-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 11percent, while Australia’s one-year interest rate is 12 percent. Assume interestrate parity holds. If the one-year forward rate of the Australian dollar wasused to forecast the future spot rate, the forecast would reflect an expectationof:

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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