49) The interplay between interest rate differentials and exchange rates such th

Question

49) The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the:

A. arbitrage markets theory.
B. purchasing power parity theory.
C. balance of payments quantum theory.
D. interest rate parity theory.



50) If the quote for a forward exchange contract is greater than the computed price, the forward contract is:

A. at equilibrium.
B. overvalued.
C. undervalued.
D. a good buy.



51) A spot transaction occurs when one currency is:

A. traded for another at an agreed-upon future price.
B. deposited in a foreign bank.
C. immediately exchanged for another currency.
D. exchanged for another currency at a specified price.



52) Buying and selling in more than one market to make a riskless profit is called:

A. cannot be determined from the above information.
B. profit maximization.
C. arbitrage.
D. international trading.



53) An important (additional) consideration for a direct foreign investment is:

A. political risk.
B. maximizing the firm’s profits.
C. attaining a high international P/E ratio.
D. all of the above.



54) One reason for international investment is to reduce:

A. beta risk.
B. portfolio risk.
C. price-earnings (P/E) ratios.
D. advantages in a foreign country.

Explanation / Answer

49. D 50.B 51. C 52.C 53.A 54.B

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