1. In which market will a company arrange to receive currency for a transaction
ID: 1189252 • Letter: 1
Question
1. In which market will a company arrange to receive currency for a transaction at a future date?
Select one:
a. the forward market
b. the currency futures market
c. the arbitrage market
d. the forward spot market
2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market
Select one:
a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.
b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.
c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.
d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.
3. Given the following data (t is current time; t+1 is time after one period)
Et = ¥ 110 = $1
Et+1 = ¥ 95 = $1
Current Interest rate in the US = iUS= 8%
If the interest parity condition is expected to hold, interest rates in Japan (iJapan) should equal approximately:
Select one:
a. 3.38%
b. 8%
c. -5.64%
d. None of the above.
4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,
Select one:
a. the British pound will depreciate by 4%.
b. the British pound will appreciate by 2%.
c. the British pound will depreciate by 2%.
d. the British pound will appreciate by 4%.
5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the
Select one:
a. U.S. interest rates will rise.
b. U.S. dollar will appreciate against the Canadian dollar.
c. U.S. dollar will depreciate against the Canadian dollar.
6. Purchasing Power Parity (PPP) implies that
Select one:
a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.
b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.
c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.
d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.
7. The current account balance will fall if
Select one:
a. the real exchange rate depreciates and disposable income goes up
b. the real exchange rate appreciates or disposable income goes up
c. the real exchange rate depreciates or disposable income goes down
d. the real exchange rate appreciates and disposable income goes down
8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is
Select one:
a. 0.6 U.S. dollars per 1 English pound.
b. 1.67 U.S. dollars per 1 English pound.
c. 0.6 English pounds per I U.S. dollar.
d. 1.67 English pounds per 1 U.S. dollar.
9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should
Select one:
a. buy the French wine and sell it in the U.S. and make a profit.
b. buy the U.S. wine and sell it in France and make a profit.
c. It doesn't matter either way; there is no profit in the deal.
d. None of the above.
10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?
Select one:
a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.
b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.
c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.
d. A and B only.
Explanation / Answer
(1) (c)
A currency futures market offers standardized contracts for future contracts in currencies (Note: In a forward market, all kinds of such contracts are exchanged, but currency futures market specifically deals with currency futures only)
(2) (d)
If dollar is overvalues relative to Peso, then a traveler to Mexico will be able to convert her dollars for more number of Pesos in Mexico, so can buy more goods in Mexico with the larger number of Pesos exchange from dollars.
(3) (d)
Interest rate parity states that change in interest rate between 2 countries will equal the change in exchange rate between their currencies.
Current value of Yen = 1/110 = $0.0091
Next period value of Yen = 1/95 = $0.0105
So, Yen appreciated by 15.38%.
According to IRP, this means Japan's interest rate will decrease by 15.38%, to [8 x (100 - 15.38)%] = 6.77%
(4) (b)
According to IRP, Interest rate differential = Exchange rate differential
Since British interest rate - Japanese Interest rate = 3% - 1% = 2%,
British pound will appreciate by 2%.
(5) (b)
If Canada grows fasters, its import demand will be higher and so, foreign exchange demand will be higher. Canadian Dollar will depreciate & US dollar will appreciate.
(6) (c)
PPP implies that in short run, identical goods will have identical price in all countries.
(7) (d)
Current account balance (Exports - Imports) will fall if
Exports decrease (caused by an exchange rate appreication), or imports decrease (Caused by lower disposable income.
(8) (b)
6 Pounds = $10
1 Pound = $10 / 6 = $1.67
(9) (b)
Price of wine in France = 350 Euros = 350 x $1.2 = $420
Price of same wine in US = $400
So it's profitable to buy in US & sell in France, making profit of $20.
(10) (d)
Options (A) & (B) describe the currency management in fixed exchange rate system.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.