Question 1

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

Accepted Answer

A)  €1.00 = $1.2379
B)  €1.00 = $1.2623
C)  €1.00 = $0.9903
D)  $1.00 = €1.2623

Question 2

The interest rate at which the arbitrager borrows tends to be higher than the rate at which he lends,reflecting the

Accepted Answer

A)  transaction cost paradigm.
B)  midpoint.
C)  bid-ask spread.
D)  none of the options

Question 3

When Interest Rate Parity (IRP) does not hold

Accepted Answer

A)  there is usually a high degree of inflation in at least one country.
B)  the financial markets are in equilibrium.
C)  there are opportunities for covered interest arbitrage.
D)  the financial markets are in equilibrium and there are opportunities for covered interest arbitrage.

Question 4

Generally unfavorable evidence on PPP suggests that

Accepted Answer

A)  substantial barriers to international commodity arbitrage exist.
B)  tariffs and quotas imposed on international trade can explain at least some of the evidence.
C)  shipping costs can make it difficult to directly compare commodity prices.
D)  all of the options

Question 5

Assume that you are a retail customer (i.e.,you buy at the ask and sell at the bid).Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Bid}} & \text { ASK} & \text { APR } \
 S_{0}(\$ / €) & \$ 1.42= €1.00 & \$1.45= €1.00  &i \$  4\% \
F_{360}(\$ / €) & \$ 1.48= € 1.00&  \$1.50= €1.00 & i €3\%
\end{array}$ If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

The answer of Assume that you are a retail customer...

Question 6

Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Exchange Rate }} & \text { Interest Rate } & \text { APR } \
 S_{0}(\$ / €) & \$ 1.60= €1.00 &i \$  & 2 \% \
F_{360}(\$ / €) & \$ 1.58= € 1.00& i € & 4 \%
\end{array}$ If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

The answer of Use the information below to answer the...

Question 7

Assume that you are a retail customer.Use the information below to answer the following question.
 $$\begin{array} { r c c c c c } 
& \text { Bid }& \text { Ask }& \text { Borrowing } &\text { Lending }\
S _ { 0 } ( \$ / € ) & \$ 1.42 = € 1.00 & \$ 1.45 = € 1.00  &\text { i\$ } 4.25 \% \mathrm { APR } & 4 \% \mathrm { APR } \
F _ { 360 } ( \$ / \epsilon ) & \$ 1.48 = € 1.00 & \$ 1.50 = € 1.00 & \text { i€ } 3.10 \% \mathrm { APR } & 3 \% \mathrm { APR }
\end{array}$$ If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Accepted Answer

$$\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17$$

Question 8

Studies of the accuracy of paid exchange rate forecasters

Accepted Answer

A)  tend to support the view that "you get what you pay for".
B)  tend to support the view that forecasting is easy,at least with regard to major currencies like the euro and Japanese yen.
C)  tend to support the view that banks do their best forecasting with the yen.
D)  none of the options

Question 9

Will an arbitrageur facing the following prices be able to make money?   Bid  Ask  Borrowing  Lending F0($/€) $1.40−€1.00$1.43−€1.00i$4.20%APR4.10%APRF36($) $1.44−€1.00$1.49−€1.00i€3.65%APR3.50%APR\begin{array}{rcccccc}\hline & 	ext { Bid } & 	ext { Ask } & & 	ext { Borrowing } & 	ext { Lending } \F_{0}(\$ / €)  & \$ 1.40-€ 1.00 & \$ 1.43-€ 1.00 & & i \$ 4.20 \% \mathrm{APR} & 4.10 \% \mathrm{APR} \F_{36}(\$)  & \$ 1.44-€ 1.00 & \$ 1.49-€ 1.00 & & i €  3.65 \% \mathrm{APR} & 3.50 \% \mathrm{APR}\end{array}F0​($/€) F36​($) ​ Bid $1.40−€1.00$1.44−€1.00​ Ask $1.43−€1.00$1.49−€1.00​​ Borrowing i$4.20%APRi€3.65%APR​ Lending 4.10%APR3.50%APR​​

Accepted Answer

A)  Yes,borrow €1,000,000 at 3.65 percent; trade for $ at the bid spot rate $1.40 = €1.00; invest at 4.1 percent; hedge this with a long position in a forward contract.
B)  Yes,borrow $1,000,000 at 4.2 percent; trade for € at the spot ask exchange rate $1.43 = €1.00; invest €699,300.70 at 3.5 percent; hedge this by going SHORT in forward (agree to sell € @ BID price of $1.44/€ in one year) .Cash flow in 1 year $237.76.
C)  No; the transactions costs are too high.
D)  none of the options

Question 10

Good,inexpensive,and fairly reliable predictors of future exchange rates include

Accepted Answer

A)  today's exchange rate.
B)  current forward exchange rates (e.g.,the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today) .
C)  esoteric fundamental models that take an econometrician to use and no one can explain.
D)  today's exchange rate,as well as current forward exchange rates (e.g.the six-month forward rate is a pretty good predictor of the spot rate that will prevail six months from today) .

Question 11

The benefit to forecasting exchange rates

Accepted Answer

A)  are greatest during periods of fixed exchange rates.
B)  are nonexistent now that the euro and dollar are the biggest game in town.
C)  accrue to,and are a vital concern for,MNCs formulating international sourcing,production,financing,and marketing strategies.
D)  all of the options

Question 12

According to the monetary approach,the exchange rate can be expressed as

Accepted Answer

A)  S =  M$M£\frac { M _ { \$ } } { M _ { £ } }M£​M$​​  ×  V$V£\frac { V _ { \$ } } { V _ { £ } }V£​V$​​  ×  yty$\frac { y _ { t } } { y _ { \$ } }y$​yt​​ 
B)    P$P _ { \$ }P$​  =  M$V$y$\frac { M _ { \$ } V _ { \$ } } { y _ { \$ } }y$​M$​V$​​ 
C)  S =  M$M£\frac { M _ { \$ } } { M _ { £ } }M£​M$​​  ×  V$V£\frac { V _ { \$ } } { V _ { £ } }V£​V$​​  ×  y$y£\frac { y _ { \$ } } { y _ { £ } }y£​y$​​ 
D)  none of the options

Question 13

The main approaches to forecasting exchange rates are

Accepted Answer

A)  Efficient market,Fundamental,and Technical approaches.
B)  Efficient market and Technical approaches.
C)  Efficient market and Fundamental approaches.
D)  Fundamental and Technical approaches.

Question 14

If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,and the dollar depreciated against the pound by 3 percent,then the real exchange rate,assuming that PPP initially held,is

Accepted Answer

A)  0.07.
B)  0.9849.
C)  −0.0198.
D)  4.5.

Question 15

Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Exchange Rate }} & \text { Interest Rate } & \text { APR } \
 S_{0}(\$ / €) & \$ 1.45= €1.00 &i \$  & 4\% \
F_{360}(\$ / €) & \$ 1.48= € 1.00& i € & 3\%
\end{array}$ If you had €1,000,000 and traded it for USD at the spot rate,how many USD will you get?

Accepted Answer

The answer of Use the information below to answer the...

Question 16

Assume that you are a retail customer (i.e.,you buy at the ask and sell at the bid).Use the information below to answer the following question.
 $\begin{array}{rccccc} 
&{\text { Bid}} & \text { ASK} & \text { APR } \
 S_{0}(\$ / €) & \$ 1.42= €1.00 & \$1.45= €1.00  &i \$  4\% \
F_{360}(\$ / €) & \$ 1.48= € 1.00&  \$1.50= €1.00 & i €3\%
\end{array}$ If you had borrowed $1,000,000 and traded for euro at the spot rate,how many € do you receive?

Accepted Answer

$$\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17$$

Question 17

If a foreign county experiences a hyperinflation,

Accepted Answer

A)  its currency will depreciate against stable currencies.
B)  its currency may appreciate against stable currencies.
C)  its currency may be unaffected-it's difficult to say.
D)  none of the options

Question 18

The Fisher effect can be written for the United States as: A.i$ = ?$ + E(?$) + ?$ × E(?$) B.?$ = i$ + E(?$) + i$ × E(?$) C.q =  1+π$(1+e) (1+π£) \frac { 1 + \pi _ { \$ } } { ( 1 + e )  \left( 1 + \pi _ { £ } \right)  }(1+e) (1+π£​) 1+π$​​  D.  F($/€) S($/€) \frac { F ( \$ / € )  } { S ( \$ / € )  }S($/€) F($/€) ​  =  1+i$1+i€\frac { 1 + i _ { \$ } } { 1 + i _ { € } }1+i€​1+i$​​

Accepted Answer

A)  Option A
B)  Option B
C)  Option C
D)  Option D  A

Question 19

A formal statement of IRP is

Accepted Answer

A)    F($/€) S($/€) \frac { F ( \$ / € )  } { S ( \$ / € )  }S($/€) F($/€) ​  =  1+i$1+i€\frac { 1 + i _ { \$ } } { 1 + i _ { € } }1+i€​1+i$​​  .
B)    F($/€) S($/€) \frac { F ( \$ / € )  } { S ( \$ / € )  }S($/€) F($/€) ​  =  1+i1+i$\frac { 1 + i } { 1 + i _ { \$ } }1+i$​1+i​  .
C)    F($/€) −S($/€) S($/€) \frac { F ( \$ / € )  - S ( \$ / € )  } { S ( \$ / € )  }S($/€) F($/€) −S($/€) ​  =  1+i$1+i€\frac { 1 + i _ { \$ } } { 1 + i _ { € } }1+i€​1+i$​​  .
D)  F($ / €) - S($ / €) =  i$i _ { \$ }i$​  -  iϵi _ { \epsilon }iϵ​  .

Question 20

Covered Interest Arbitrage (CIA) activities will result in

Accepted Answer

A)  unstable international financial markets.
B)  restoring equilibrium prices quickly.
C)  a disintermediation.
D)  no effect on the market.

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

Correct Answer
verified

The interest rate at which the arbitrager borrows tends to be higher than the rate at which he lends,reflecting the

Correct Answer
verified

When Interest Rate Parity (IRP) does not hold

Correct Answer
verified

Generally unfavorable evidence on PPP suggests that

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
\[\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17\]

Studies of the accuracy of paid exchange rate forecasters

Correct Answer
verified

Correct Answer
verified

Good,inexpensive,and fairly reliable predictors of future exchange rates include

Correct Answer
verified

The benefit to forecasting exchange rates

Correct Answer
verified

According to the monetary approach,the exchange rate can be expressed as

Correct Answer
verified

The main approaches to forecasting exchange rates are

Correct Answer
verified

If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,and the dollar depreciated against the pound by 3 percent,then the real exchange rate,assuming that PPP initially held,is

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
\[\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17\]

If a foreign county experiences a hyperinflation,

Correct Answer
verified

Correct Answer
verified
A

A formal statement of IRP is

Correct Answer
verified

Covered Interest Arbitrage (CIA) activities will result in

Correct Answer
verified

Exam 6: International Parity Relationships and Forecasting Foreign Exchange Rates

As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

Correct AnswerverifiedShow Answer

The interest rate at which the arbitrager borrows tends to be higher than the rate at which he lends,reflecting the

Correct AnswerverifiedShow Answer

When Interest Rate Parity (IRP) does not hold

Correct AnswerverifiedShow Answer

Generally unfavorable evidence on PPP suggests that

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answerverified\[\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17\]

Studies of the accuracy of paid exchange rate forecasters

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Good,inexpensive,and fairly reliable predictors of future exchange rates include

Correct AnswerverifiedShow Answer

The benefit to forecasting exchange rates

Correct AnswerverifiedShow Answer

According to the monetary approach,the exchange rate can be expressed as

Correct AnswerverifiedShow Answer

The main approaches to forecasting exchange rates are

Correct AnswerverifiedShow Answer

If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K.,and the dollar depreciated against the pound by 3 percent,then the real exchange rate,assuming that PPP initially held,is

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answerverified\[\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17\]

If a foreign county experiences a hyperinflation,

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

A formal statement of IRP is

Correct AnswerverifiedShow Answer

Covered Interest Arbitrage (CIA) activities will result in

Correct AnswerverifiedShow Answer

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\[\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17\]

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\[\$ 1,000,000 \times \frac { € 1 } { \$ 1.45 } = € 689,655.17\]

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