International Finance multiple choice

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.