国际金融Finance_Test_Bank_8
国际金融IFinanceTestBank5之欧阳家百创编
Chapter 5—Currency Derivatives欧阳家百（2021.03.07）1.Kalons, Inc. is a U.S.-based MNC that frequently imports raw materialsfrom Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging2.Graylon, Inc., based in Washington, exports products to a German firm andwill receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on3.The one-year forward rate of the British pound is quoted at $1.60, and thespot rate of the British pound is quoted at $1.63. The forward ____ is4.The 90-day forward rate for the euro is $1.07, while the current spot rate ofthe euro is $1.05. What is the annualized forward premium or discount5.Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalesesubsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to6.In the U.S., the typical currency futures contract is based on a currency8.Currency options sold through an options exchange:11.Which of the following is the most likely strategy for a U.S. firm that willbe receiving Swiss francs in the future and desires to avoid exchange12.Which of the following is the most unlikely strategy for a U.S. firm thatwill be purchasing Swiss francs in the future and desires to avoid13.If your firm expects the euro to substantially depreciate, it could speculateby ____ euro call options or ____ euros forward in the forward14.When you own ____, there is no obligation on your part; however, when15.The greater the variability of a currency, the ____ will be the premium ofa call option on this currency, and the ____ will be the premium of a16.When currency options are not standardized and traded over-the-counter,17.The shorter the time to the expiration date for a currency, the ____ will bethe premium of a call option, and the ____ will be the premium of a put18.Assume that a speculator purchases a put option on British pounds (with astrike price of $1.50) for $.05 per unit. A pound option represents31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the21.If you expect the euro to depreciate, it would be appropriate to ____ for22.If you expect the British pound to appreciate, you could speculate by ____pound call options or ____ pound put options.。
国际金融 International Finance Test Bank_09
Chapter 9—Forecasting Exchange Rates1. Which of the following forecasting techniques would best represent the use of today's forwardexchange rate to forecast the future exchange rate?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: B PTS: 12. Which of the following forecasting techniques would best represent sole use of today's spot exchangerate of the euro to forecast the euro's future exchange rate?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: B PTS: 13. Which of the following forecasting techniques would best represent the use of relationships betweeneconomic factors and exchange rate movements to forecast the future exchange rate?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: A PTS: 14. Which of the following forecasting techniques would best represent the sole use of the pattern ofhistorical currency values of the euro to predict the euro's future currency value?a. fundamental forecasting.b. market-based forecasting.c. technical forecasting.d. mixed forecasting.ANS: C PTS: 15. If a particular currency is consistently declining substantially over time, then a market-based forecastwill usually have:a. underestimated the future exchange rates over time.b. overestimated the future exchange rates over time.c. forecasted future exchange rates accurately.d. forecasted future exchange rates inaccurately but without any bias toward consistentunderestimating or overestimating.ANS: B PTS: 16. According to the text, the analysis of currencies forecasted with use of the forward rate suggests that:a. currencies exhibited about the same mean forecast errors as a percent of the realized value.b. the Canadian dollar can be forecasted by U.S. firms with greater accuracy than othercurrencies.c. the Swiss franc can be forecasted by U.S. firms with greater accuracy than othercurrencies.d. none of the aboveANS: B PTS: 17. Assume the following information:Predicted Value of Realized Value ofPeriod New Zealand Dollar New Zealand Dollar1 $.52 $.502 .54 .603 .44 .404 .51 .50Given this information, the mean absolute forecast error as a percentage of the realized value is about:a. 1.5%.b. 26%.c. 6%.d. 6.5%.e. none of the aboveANS: DSOLUTION: [|$.52 - $.50|/$.50 + |$.54 - $.60|/$.60 + |$.44 - $.40|/$.40 + |$.51 -$.50|/$.50)]/4= [.04 + .10 + .10 + .02]/4= .065 = 6.50%PTS: 18. If it was determined that the movement of exchange rates was not related to previous exchange ratevalues, this implies that a ____ is not valuable for speculating on expected exchange rate movements.a. technical forecast techniqueb. fundamental forecast techniquec. all of the aboved. none of the aboveANS: A PTS: 19. Which of the following is true?a. Forecast errors cannot be negative.b. Forecast errors are negative when the forecasted rate exceeds the realized rate.c. Absolute forecast errors are negative when the forecasted rate exceeds the realized rate.d. None of the above.ANS: D PTS: 110. Which of the following is true according to the text?a. Forecasts in recent years have been very accurate.b. Use of the absolute forecast error as a percent of the realized value is a good measure touse in detecting a forecast bias.c. Forecasting errors are smaller when focused on longer term periods.d. None of the above.ANS: D PTS: 111. A fundamental forecast that uses multiple values of the influential factors is an example of:a. sensitivity analysis.b. discriminant analysis.c. technical analysis.d. factor analysis.ANS: A PTS: 112. When the value from the prior period of an influential factor affects the forecast in the future period,this is an example of a(n):a. lagged input.b. instantaneous input.c. simultaneous input.d. B and CANS: A PTS: 113. Assume a forecasting model uses inflation differentials and interest rate differentials to forecast theexchange rate. Assume the regression coefficient of the interest rate differential variable is -.5, and the coefficient of the inflation differential variable is .4. Which of the following is true?a. The interest rate variable is inversely related to the exchange rate, and the inflationvariable is directly (positively) related to the interest rate variable.b. The interest rate variable is inversely related to the exchange rate, and the inflationvariable is directly related to the exchange rate.c. The interest rate variable is directly related to the exchange rate, and the inflation variableis directly related to the exchange rate.d. The interest rate variable is directly related to the exchange rate, and the inflation variableis directly related to the interest rate variable.ANS: B PTS: 114. Which of the following is not a limitation of fundamental forecasting?a. uncertain timing of impact.b. forecasts are needed for factors that have a lagged impact.c. omission of other relevant factors from the model.d. possible change in sensitivity of the forecasted variable to each factor over time.e. none of the aboveANS: B PTS: 115. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and theMexican five-year interest 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 the five-year forward rate is used as a forecast?a. $.131.b. $.226.c. $.262.d. $.140.e. $.174.ANS: ESOLUTION: (1.05)5/(1.08)5- 1 = -13%; $.20[1 + (-13%)] = $.174PTS: 116. Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollarcontains a 6% discount. Today's spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:a. $.860.b. $.848.c. $.740.d. $.752.e. none of the aboveANS: DSOLUTION: $.80 ⨯ [1 + (-6%)] = $.752PTS: 117. If today's exchange rate reflects all relevant public information about the euro's exchange rate, but notall relevant private information, then ____ would be refuted.a. weak-form efficiencyb. semistrong-form efficiencyc. strong-form efficiencyd. A and Be. B and CANS: D PTS: 118. According to the text, research generally supports ____ in foreign exchange markets.a. weak-form efficiencyb. semistrong-form efficiencyc. strong-form efficiencyd. A and Be. B and CANS: D PTS: 119. Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent.Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:a. depreciation in the Australian dollar's value over the next year.b. appreciation in the Australian dollar's value over the next year.c. no change in the Australian dollar's value over the next year.d. information on future interest rates is needed to answer this question.ANS: A PTS: 120. If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rateparity holds, then:a. covered interest arbitrage is feasible.b. the international Fisher effect (IFE) is supported.c. the international Fisher effect (IFE) is refuted.d. the average absolute error from forecasting would equal zero.ANS: B PTS: 121. Which of the following is not a forecasting technique mentioned in your text?a. accounting-based forecasting.b. technical forecasting.c. fundamental forecasting.d. market-based forecasting.ANS: A PTS: 122. The following regression model was estimated to forecast the value of the Malaysian ringgit (MYR):MYR t = a0 + a1INC t- 1 + a2INF t- 1 + μt,where MYR is the quarterly change in the ringgit, INF is the previous quarterly percentage change in the inflation differential, and INC is the previous quarterly percentage change in the income growth differential. Regression results indicate coefficients of a0 = .005; a1 = .4; and a2 = .7. The most recent quarterly percentage change in the inflation differential is -5%, while the most recent quarterlypercentage change in the income differential is 3%. Using this information, the forecast for thepercentage change in the ringgit is:a. 4.60%.b. -1.80%.c. 5.2%.d. -4.60%.e. none of the aboveANS: BSOLUTION: MYR t = .005 + (.4)(.03) + (.7)(-.05) = -1.80%PTS: 123. The following regression model was estimated to forecast the value of the Indian rupee (INR):INR t = a0 + a1INT t + a2INF t- 1 + μt,where INR is the quarterly change in the rupee, INT is the real interest rate differential in period t between the U.S. and India, and INF is the inflation rate differential between the U.S. and India in the previous period. Regression results indicate coefficients of a0 = .003; a1 = -.5; and a2 = .8. Assume that INF t - 1 = 2%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:Probability Possible Outcome30% -2%40% -3%30% -4%The expected change in the Indian rupee in period t is:a. 3.40%.b. 0.40%.c. 3.10%.d. 1.70%.e. none of the aboveANS: ASOLUTION: E[INT t] = (-.02)(.3) + (-.03)(.4) + (-.04)(.3) = -3.00%INR t = .003 + (-.5)(-.03) + (.8)(.02) = 3.40%PTS: 124. Huge Corporation has just initiated a market-based forecast system using the forward rate as anestimate of the future spot rate of the Japanese yen (¥) and the Australian dollar (A$). Listed below are the forecasted and realized values for the last period:Currency Forecasted Value Realized ValueAustralian dollar $.60 $.55Japanese yen $.0067 $.0069According to this information and using the absolute forecast error as a percentage of the realized value, the forecast of the yen by Huge Corp. is ____ the forecast of the Australian dollar.a. more accurate thanb. less accurate thanc. more biased thand. the same asANS: ASOLUTION: Absolute forecast error for the Australian dollar = (|.60 - .55|)/.55 = 9.09%Absolute forecast error for the Japanese yen = (|.0067 - .0069|)/.0069 =2.90%Therefore, Huge Corp. has estimated the Japanese yen more accurately byapproximately 6.19%.PTS: 125. Gamma Corporation has incurred large losses over the last ten years due to exchange rate fluctuationsof the Egyptian pound (EGP), even though the company has used a market-based forecast based on the forward rate. Consequently, management believes its forecasts to be biased. The following regression model was estimated to determine if the forecasts over the last ten years were biased:S t = a0 + a1F t -1 + μt,where S t is the spot rate of the pound in year t and F t- 1 is the forward rate of the pound in year t -1.Regression results reveal coefficients of a0 = 0 and a1 = 1.3. Thus, Gamma has reason to believe that its past forecasts have ____ the realized spot rate.a. overestimatedb. underestimatedc. correctly estimatedd. none of the aboveANS: B PTS: 126. Which of the following is not a method of forecasting exchange rate volatility?a. using the absolute forecast error as a percentage of the realized value.b. using the volatility of historical exchange rate movements as a forecast for the future.c. using a time series of volatility patterns in previous periods.d. deriving the exchange rate's implied standard deviation from the currency option pricingmodel.ANS: A PTS: 127. If a foreign currency is expected to ____ substantially against the parent's currency, the parent mayprefer to ____ the remittance of subsidiary earnings.a. weaken; delayb. weaken; expeditec. appreciate; expedited. none of the aboveANS: B PTS: 128. If an MNC invests excess cash in a foreign county, it would like the foreign currency to ____; if anMNC issues bonds denominated in a foreign currency, it would like the foreign currency to ____.a. appreciate; depreciateb. appreciate; appreciatec. depreciate; depreciated. depreciate; appreciateANS: A PTS: 129. Severus Co. has to pay 5 million Canadian dollars for supplies it recently received from Canada.Today, the Canadian dollar has appreciated by 2 percent against the U.S. dollar. Severus hasdetermined that whenever the Canadian dollar appreciates against the U.S. dollar by more than 1percent, it experiences a reversal of 40 percent on the following day. Based on this information, the Canadian dollar is expected to ____ tomorrow, and Severus would prefer to make payment ____.a. depreciate by .8%; todayb. depreciate by .8%; tomorrowc. appreciate by .8%; todayd. appreciate by .8%; tomorrowANS: BSOLUTION: e t +1 = (2%) ⨯ (-40%) = -0.8%PTS: 130. Corporations tend to make only limited use of technical forecasting because it typically focuses on thenear future, which is not very helpful for developing corporate policies.a. Trueb. FalseANS: T PTS: 131. Sulsa Inc. uses fundamental forecasting. Using regression analysis, it has determined the followingequation for the euro:euro t = b0 + b1INF t- 1 + b2INC t- 1= .005 + .9INF t- 1 + 1.1INC t- 1The most recent quarterly percentage change in the inflation differential between the U.S. and Europe was 2 percent, while the most recent quarterly percentage change in the income growth differential between the U.S. and Europe was -1 percent. Based on this information, the forecast for the euro is a(n) ____ of ____%.a. appreciation; 3.4b. depreciation; 3.4c. appreciation; 0.7d. appreciation; 1.2ANS: DSOLUTION: euro t = .005 + .9(.02) + 1.1(-.01) = 1.2%PTS: 132. The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rateis expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.a. 1.02b. 1.03c. 1.04d. none of the aboveANS: CSOLUTION:E(S t + 1) = $1.03(1.0097) = $1.04PTS: 133. If the one-year forward rate for the euro is $1.07, while the current spot rate is $1.05, the expectedpercentage change in the euro is ____%.a. 1.90b. 2.00c. -1.87d. none of the aboveANS: ASOLUTION: E(e) = 1.07/1.05 - 1 = 1.90%PTS: 134. If both interest rate parity and the international Fisher effect hold, then between the forward rate andthe spot rate, the ____ rate should provide more accurate forecasts for currencies in ____-inflation countries.a. spot; highb. spot; lowc. forward; highd. forward; lowANS: C PTS: 135. If a foreign country's interest rate is similar to the U.S. rate, the forward rate premium or discount willbe ____, meaning that the forward rate and spot rate will provide ____ forecasts.a. substantial; similarb. substantial; very differentc. close to zero; similard. close to zero; very differentANS: C PTS: 136. Factors such as economic growth, inflation, and interest rates are an integral part of ____ forecasting.a. technicalb. fundamentalc. market-basedd. none of the aboveANS: B PTS: 137. Silicon Co. has forecasted the Canadian dollar for the most recent period to be $0.73. The realizedvalue of the Canadian dollar in the most recent period was $0.80. Thus, the absolute forecast error as a percentage of the realized value was ____%.a. 9.6b. -9.6c. 8.8d. -8.8ANS: CSOLUTION:PTS: 138. The absolute forecast error of a currency is ____, on average, in periods when the currency is more____.a. lower; volatileb. higher; stablec. lower; stabled. none of the aboveANS: C PTS: 139. If the foreign exchange market is ____ efficient, then historical and current exchange rate informationis not useful for forecasting exchange rate movements.a. weak-formb. semistrong-formc. strong formd. all of the aboveANS: D PTS: 140. Foreign exchange markets are generally found to be at least ____ efficient.a. weak-formb. semistrong-formc. strong formd. none of the aboveANS: B PTS: 141. MNCs can forecast exchange rate volatility to determine the potential range surrounding theirexchange rate forecast.a. Trueb. FalseANS: T PTS: 142. If the pattern of currency values over time appears random, then technical forecasting is appropriate.a. Trueb. FalseANS: F PTS: 143. Inflation and interest rate differentials between the U.S. and foreign countries are examples ofvariables that could be used in fundamental forecasting.a. Trueb. FalseANS: T PTS: 144. A regression analysis of the Australian dollar value on the inflation differential between the U.S. andAustralia produced a coefficient of .8. Thus, for every 1% increase in the inflation differential, the Australian dollar is expected to depreciate by .8%.a. Trueb. FalseANS: F PTS: 145. The most sophisticated forecasting techniques provide consistently accurate forecasts.a. Trueb. FalseANS: F PTS: 146. If the forward rate is used as an indicator of the future spot rate, the spot rate is expected to appreciateor depreciate by the same amount as the forward premium or discount, respectively.a. Trueb. FalseANS: T PTS: 147. Research indicates that currency forecasting services almost always outperform forecasts based on theforward rate.a. Trueb. FalseANS: F PTS: 148. When measuring forecast performance of different currencies, it is often useful to adjust for theirrelative sizes. Thus, percentages, rather than nominal amounts, are often used to compute forecast errors.a. Trueb. FalseANS: T PTS: 149. The closer graphical points are to the perfect forecast line, the better is the forecast.a. Trueb. FalseANS: T PTS: 150. Foreign exchange markets appear to be strong-form efficient.a. Trueb. FalseANS: F PTS: 151. A motivation for forecasting exchange rate volatility is to obtain a range surrounding the forecast.a. Trueb. FalseANS: T PTS: 152. Two methods to assess exchange rate volatility are the volatility of historical exchange ratemovements and the exchange rate's implied standard deviation from the currency option pricingmodel.a. Trueb. FalseANS: T PTS: 153. Market-based forecasting involves the use of historical exchange rate data to predict future values.a. Trueb. FalseANS: F PTS: 154. Fundamental models examine moving averages over time and thus allow the development of aforecasting rule.a. Trueb. FalseANS: F PTS: 155. A forecasting technique based on fundamental relationships between economic variables and exchangerates, such as inflation, is referred to as technical forecasting.a. Trueb. FalseANS: F PTS: 156. Usually, fundamental forecasting is used for short-term forecasts, while technical forecasting is usedfor longer-term forecasts.a. Trueb. FalseANS: F PTS: 157. If points are scattered evenly on both sides of the perfect forecast line, then the forecast appears to bevery accurate.a. Trueb. FalseANS: F PTS: 158. If foreign exchange markets are strong-form efficient, then all relevant public and private informationis already reflected in today's exchange rates.a. Trueb. FalseANS: T PTS: 159. Exchange rates one year in advance are typically forecasted with almost perfect accuracy for the majorcurrencies, but not for currencies of smaller countries.a. Trueb. FalseANS: F PTS: 160. The potential forecast error is larger for currencies that are more volatile.a. Trueb. FalseANS: T PTS: 161. A forecast of a currency one year in advance is typically more accurate than a forecast one week inadvance since the currency reverts to equilibrium over a longer term period.a. Trueb. FalseANS: F PTS: 162. In general, any key managerial decision that is based on forecasted exchange rates should relycompletely on one forecast rather than alternative exchange rate scenarios.a. Trueb. FalseANS: F PTS: 163. Monson Co., based in the U.S., exports products to Japan denominated in yen. If the forecasted valueof the yen is substantially ____ than the forward rate, Monson Co. will likely decide ____ thepayments.a. higher; to hedgeb. lower; not to hedgec. higher; not to hedged. none of the aboveANS: C PTS: 164. When a U.S.-based MNC wants to determine whether to establish a subsidiary in a foreign country, itwill always accept that project if the foreign currency is expected to appreciate.a. Trueb. FalseANS: F PTS: 165. The following is not a limitation of technical forecasting:a. It's not suitable for long-term forecasts of exchange rates.b. It doesn't provide point estimates or a range of possible future values.c. It cannot be applied to currencies that exhibit random movements.d. It cannot be applied to currencies that exhibit a continuous trend for short-term forecast.ANS: D PTS: 166. The following regression model was estimated to forecast the percentage change in the AustralianDollar (AUD):AUD t = a0 + a1INT t + a2INF t- 1 + μt,where AUD is the quarterly change in the Australian Dollar, INT is the real interest rate differential in period t between the U.S. and Australia, and INF is the inflation rate differential between the U.S. and Australia in the previous period. Regression results indicate coefficients of a0 = .001; a1 = -.8; and a2 = .5. Assume that INF t- 1 = 4%. However, the interest rate differential is not known at the beginning of period t and must be estimated. You have developed the following probability distribution:Probability Possible Outcome20% -3%80% -4%There is a 20% probability that the Australian dollar will change by ____, and an 80% probability it will change by ____.a. 4.5%; 6.1%;b. 6.1%; 4.5%c. 4.5%; 5.3%d. None of the aboveANS: CSOLUTION: Probability 20% = .001 + (-.8)(-.03) + (.5)(.04) = 4.5%Probability 80% = .001 + (-.8)(-.04) + (.5)(.04) = 5.3%PTS: 167. Purchasing power parity is used in:a. technical forecasting.b. fundamental forecasting.c. market-based accounting.d. all of the above.ANS: B PTS: 168. If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on theyen, they will ____ the yen forward and put ____ pressure on the yen's forward rate.a. higher; buy; upwardb. higher; sell; downwardc. higher; sell; upwardd. lower; buy; upwardANS: A PTS: 169. If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forwardrate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on theCanadian dollar forward rate.a. lower; sell; upwardb. lower; sell; downwardc. higher; sell; upwardd. higher; sell; downwardANS: B PTS: 170. Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasingpower parity is used to forecast the future spot rate, the forecast would reflect an expectation of:a. appreciation of yen's value over the next year.b. depreciation of yen's value over the next year.c. no change in yen's value over the next year.d. information about interest rates is needed to answer this question.ANS: A PTS: 171. Assume that U.S. interest rates are 6%, while British interest rates are 7%. If the international Fishereffect holds and is used to determine the future spot rate, the forecast would reflect an expectation of:a. appreciation of pound's value over the next year.b. depreciation of pound's value over the next year.c. no change in pound's value over the next year.d. not enough information to answer this question.ANS: B PTS: 172. If the foreign exchange market is ____ efficient, then technical analysis is not useful in forecastingexchange rate movements.a. weak-formb. semistrong-formc. strong formd. all of the aboveANS: D PTS: 173. If today's exchange rate reflects any historical trends in Canadian dollar exchange rate movements, butnot all relevant public information, then the Canadian dollar market is:a. weak-form efficient.b. semistrong-form efficient.c. strong-form efficient.d. all of the above.ANS: A PTS: 174. Leila Corporation used the following regression model to determine if the forecasts over the last tenyears were biased:S t = a0 + a1F t- 1 + μt,where S t is the spot rate of the yen in year t and F t- 1 is the forward rate of the yen in year t -1.Regression results reveal coefficients of a0 = 0 and a1 = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.a. overestimatedb. underestimatedc. correctly estimatedd. none of the aboveANS: A PTS: 175. Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assumethat Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is $.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-yearforward rate is used as a forecast?a. $.840b. $.890c. $.856d. $.854ANS: CSOLUTION: {[(1.05)(1.06)(1.07)]/[(1.03)(1.05)(1.08)]} ⨯ $.84 = $.856PTS: 176. Which of the following is not one of the major reasons for MNCs to forecast exchange rates?a. to decide in which foreign market to invest the excess cash.b. to decide where to borrow at the lowest cost.c. to determine whether to require the subsidiary to remit the funds or invest them locally.d. to speculate on the exchange rate movements.ANS: D PTS: 177. Sensitivity analysis allows for all of the following except:a. accountability for uncertainty.b. focus on a single point estimate of future exchange rates.c. development of a range of possible future values.d. consideration of alternative scenarios.ANS: B PTS: 178. If graphical points lie above the perfect forecast line, than the forecast overestimated the future value.a. Trueb. FalseANS: F PTS: 179. A regression model was applied to explain movements in the Canadian dollar's value over time. Thecoefficient for the inflation differential between the U.S. and Canada was -0.2. The coefficient of the interest rate differential between the U.S. and Canada produced a coefficient of 0.8. Thus, theCanadian dollar depreciates when the inflation differential ____ and the interest rate differential ____.a. increases; increasesb. decreases; increasesc. increases; decreasesd. increases; decreasesANS: C PTS: 180. If the pattern of currency values over time appears random, then technical forecasting is appropriate.a. Trueb. FalseANS: F PTS: 181. Market-based forecasting is based on fundamental relationships between economic variables andexchange rates.。
国际金融InternationalFinanceTestBank_18
国际金融InternationalFinanceTestBank_18Chapter 18—Long-Term Financing1. Ideally, a firm desires to denominate bonds in a currency that:a. exhibits a low interest rate and is expected to appreciate.b. exhibits a low interest rate and is expected to depreciate.c. exhibits a high interest rate and is expected to depreciate.d. exhibits a high interest rate and is expected to appreciate.ANS: B PTS: 12. Floating-rate bonds are often issued with a floating coupon rate that is tied to LIBOR.a. Trueb. FalseANS: T PTS: 13. A U.S. firm could issue bonds denominated in euros and partially hedge against exchange rate riskby:a. invoicing its exports in U.S. dollars.b. requesting that any imports ordered by the firm be invoiced in U.S. dollars.c. invoicing its exports in euros.d. requesting that any imports ordered by the firm be invoiced in the currency denominatingthe bonds.ANS: C PTS: 14. Firm X conducts all business transactions in U.S. dollars. If it issues two sets of bonds, eachdenominated in a different foreign currency, it can:a. reduce exchange rate risk relative to issuing a bond denominated in U.S. dollars.b. reduce exchange rate risk relative to issuing a bond denominated in a single foreigncurrency.c. A and Bd. none of the aboveANS: B PTS: 15. Simulation is useful in the bond-denomination decision since it can:a. precisely compute the cost of financing with bonds denominated in a single foreigncurrency.b. precisely compute the cost of financing with bonds denominated in a portfolio of foreigncurrencies.c. assess the probability that a bond denominated in a foreign currency will be less costlythan a bond denominated in the home currency.d. A and BANS: C PTS: 16. An interest rate swap between two firms of different countries enables the exchange of ____ for____.a. fixed-rate payments; floating-rate paymentsb. stock; interest deductions on taxesc. interest payments on loans; ownership of debt of less developed countriesd. interest payments on loans; stockANS: A PTS: 17. If U.S. firms issue bonds in ____, the dollar outflows to cover fixed coupon payments increase asthe dollar ____.a. a foreign currency; weakensb. dollars; strengthensc. a foreign currency; strengthensd. dollars; weakensANS: A PTS: 18. The yields offered on newly issued bonds denominated in dollars have:a. consistently increased over the last 10 years.b. consistently decreased over the last 10 years.c. remained stable.d. none of the aboveANS: D PTS: 19. When ignoring exchange rate risk, bond yields:a. are the same for all currencies.b. are consistently higher for all non-U.S. bonds than U.S. bonds.c. are consistently lower for all non-U.S. bonds than U.S. bonds.d. none of the aboveANS: D PTS: 110. A U.S. firm has received a large amount of cash inflows periodically in Swiss francs as a result ofexporting goods to Switzerland. It has no other business outside the U.S. It could best reduce its exposure to exchange rate risk by:a. issuing Swiss franc-denominated bonds.b. purchasing Swiss franc-denominated bonds.c. purchasing U.S. dollar-denominated bonds.d. issuing U.S. dollar-denominated bonds.ANS: A PTS: 111. A U.S. firm has a Canadian subsidiary that remits some of its earnings to the parent on an annualbasis. The firm has no other foreign business. The firm could best reduce its exposure to exchange rate risk by issuing bonds denominated in:a. U.S. dollars.b. Canadian dollars.c. multiple currencies.d. euros.ANS: B PTS: 112. If the currency denominating a foreign bond depreciates against the firm's home currency, thefunds needed to make coupon payments will increase.a. Trueb. FalseANS: F PTS: 113. An interest rate swap is commonly used by an issuer of fixed-rate bonds to:a. convert to floating-rate debt.b. hedge exchange rate risk.c. lock in the interest payments on debt.d. remove the default risk of its debt.ANS: A PTS: 114. A currency swap between two firms of different countries enables the exchange of ____ for ____at periodic intervals.a. stock; one currencyb. stock; a portfolio of foreign currenciesc. one currency; stock optionsd. one currency; another currencyANS: D PTS: 115. Assume a U.S.-based subsidiary wants to raise $1,000,000 by issuing a bond denominated inPakistani rupees (PKR). The current exchange rate of the rupee is $.02. Thus, the MNC needs____ rupees to obtain the $1,000,000 needed.a. 50,000,000b. 20,000c. 1,000,000d. none of the aboveANS: ASOLUTION: $1,000,000/$.02 = PKR50,000,000PTS: 116. An MNC issues ten-year bonds denominated in 500,000 Philippines pesos (PHP) at par. The bondshave a coupon rate of 15%. If the peso remains stable at its current level of $.025 over the lifetime of the bonds and if the MNC holds the bonds until maturity, the financing cost to the MNC will be:a. 10.0%.b. 12.5%.c. 15.0%.d. none of the aboveANS: CSOLUTION: Since the bonds are issued at par, and since the exchange rate remains stableover the life of the bonds and the bonds are held untilmaturity, the financingcost will be exactly the coupon rate of the bond.PTS: 117. New Hampshire Corp. has decided to issue three-year bonds denominated in 5,000,000 Russianrubles at par. The bonds have a coupon rate of 17%. If the ruble is expected to appreciate from its current level of $.03 to $.032, $.034, and $.035 in years 1, 2,and 3, respectively, what is thefinancing cost of these bonds?a. 17%.b. 23.18%.c. 22.36%.d. 23.39%.ANS: DSOLUTION:Annual Cost ofYear 1 Year 2 Year 3 Financing Payments in rubles 850,000 850,000 5,850,000Forecasted exchange rate of ruble $.032 $.034$.035Payments in dollars $27,200 $28,900 $204,750 23.39% PTS: 118. In a(n) ____ swap, two parties agree to exchange payments associated with bonds; in a(n) ____swap, two parties agree to periodically exchange foreign currencies.a. interest rate; currencyb. currency; interest ratec. interest rate; interest rated. currency; currencyANS: A PTS: 119. Good Company prefers variable to fixed rate debt. Bad Company prefers fixed to variable ratedebt. Assume the following information for Good and Bad Companies:Fixed Rate Bond Variable Rate Bond Good Company 10% LIBOR + 1%Bad Company 12% LIBOR + 1.5%Given this information:a. an interest rate swap will probably not be advantageous to Good Company because it canissue both fixed and variable debt at more attractive rates than Bad Company.b. an interest rate swap attractive to both parties could result if Good Company agreed toprovide Bad Company with variable rate payments at LIBOR + 1% in exchange for fixedrate payments of 10.5%.c. an interest rate swap attractive to both parties could result if Bad Company agreed toprovide Good Company with variable rate payments at LIBOR + 1% in exchange for fixedrate payments of 10.5%.d. none of the aboveANS: B PTS: 120. ____ are beneficial because they may reduce transaction costs. However, MNCs may not be ableto obtain all the funds that they need.a. Private placementsb. Domestic equity offeringsc. Global equity offeringsd. Global debt offeringsANS: A PTS: 121. Most MNCs obtain equity funding:a. in foreign countries.b. in their home country.c. through global offerings.d. through private placements.ANS: B PTS: 122. Some firms may be uncomfortable issuing bonds denominated in foreign currencies becauseexchange rates are ____ difficult to predict over ____ time horizons.a. less; longb. more; shortc. more; longd. none of the aboveANS: C PTS: 123. If the foreign currency that was borrowed appreciates over time, an MNC will need fewer funds tocover the coupon or principal payments. [Assume the MNC has no other cash flows in thatcurrency.]a. Trueb. FalseANS: F PTS: 124. U.S.-based MNCs whose foreign subsidiary generates large earnings may be able to offsetexposure to exchange rate risk by issuing bonds denominated in the subsidiary's local currency.a. Trueb. FalseANS: T PTS: 125. Countries in emerging markets such as in Latin America tend to have ____ interest rates, and sothe yields offered on bonds issued in those countries is ____.a. low; highb. high; lowc. high; highd. none of the aboveANS: C PTS: 126. MNCs can use ____ to reduce exchange rate risk. This occurs when two parties providesimultaneous loans with an agreement to repay at a specified point in the future.a. forward contractsb. currency swapsc. parallel loansd. none of the aboveANS: C PTS: 127. An upward-sloping yield curve for a foreign country means that annualized yields there are ____for short-term debt than for long-term debt. The yield curve in this country reflects ____.a. higher; several periodsb. lower; several periodsc. higher; a specific point in timed. lower; a specific point in timeANS: D PTS: 128. The ____ for a given country represents the annualizedyield offered on debt for variousmaturities.a. LIBORb. yield curvec. parallel loand. interest rate swapANS: B PTS: 129. When an MNC finances in a currency that matches its long-term cash inflows using a relatively____ maturity, the MNC is exposed to ____ risk.a. short; interest rateb. long; interest ratec. short; exchange rated. none of the aboveANS: B PTS: 130. Some MNCs use a country's yield curve to compare annualized rates among debt maturities, sothat they can choose a maturity that has a relatively low rate.a. Trueb. FalseANS: T PTS: 131. As a(n) ____ to an interest rate swap, a financial institution simply arranges a swap between twoparties.a. ultrapartyb. brokerc. counterpartyd. none of the aboveANS: B PTS: 132. In general, the ____ rate payer in a plain vanilla swapbelieves interest rates are going to ____.a. fixed; declineb. floating; declinec. floating; increased. none of the aboveANS: B PTS: 133. In a(n) ____ swap, the fixed rate payer has the right to terminate the swap.a. callableb. putablec. amortizingd. zero-couponANS: A PTS: 134. In a(n) ____ swap, the notional value is increased over time.a. amortizingb. basisc. zero-coupond. accretionANS: D PTS: 135. A ____ gives its owner the right to enter into a swap.a. basis swapb. swaptionc. callable swapd. putable swapANS: B PTS: 136. Because bonds denominated in foreign currencies rarely have lower yields, U.S. corporationsrarely consider issuing bonds denominated in those currencies.a. Trueb. FalseANS: F PTS: 137. The actual financing cost of a U.S. corporation issuing a bond denominated in euros is affected bythe euro's value relative to the U.S. dollar during the financing period.a. Trueb. FalseANS: T PTS: 138. A floating coupon rate is an advantage to the bond issuer during periods of increasing interestrates.a. Trueb. FalseANS: F PTS: 139. An MNC issuing pound-denominated bonds may be completely insulated from exchange rate riskassociated with the bond if its foreign subsidiary makes the coupon and principal payments of the bond with its pound receivables.a. Trueb. FalseANS: T PTS: 140. If an MNC uses a long-term forward contract to hedge the exchange rate risk associated with abond denominated in euros, it would sell euros forward.a. Trueb. FalseANS: F PTS: 141. Currency swaps, whereby two parties exchangecurrencies at a specified point in time for aspecified price, are often used by MNCs to hedge against interest rate risk.a. Trueb. FalseANS: F PTS: 142. A limitation of interest rate swaps is that there is a risk to each swap participant that thecounterparticipant could default on his payments.a. Trueb. FalseANS: T PTS: 143. Many MNCs simultaneously swap interest payments and currencies.a. Trueb. FalseANS: T PTS: 144. A parallel loan represents simultaneous loans provided by two parties with an agreement to repayat a specified point in the future.a. Trueb. FalseANS: T PTS: 145. Since yield curves are identical across countries, MNCs rarely consider them when deciding on thematurity of bonds denominated in a foreign currency.a. Trueb. FalseANS: F PTS: 146. Because bonds denominated in foreign currencies rarelyhave lower yields, U.S. corporationsrarely consider issuing bonds denominated in those currencies.a. Trueb. FalseANS: F PTS: 147. If the currency denominating a foreign bond depreciates against the firm's home currency over thelifetime of the bond, the funds needed to make coupon payments will increase.a. Trueb. FalseANS: F PTS: 148. Even if the interest rate associated with a foreign country is higher than the domestic interest rate,the financing costs of a foreign bond will always be lower than the financing rate of a domestic bond as long as the currency depreciates over the lifetime of a bond.a. Trueb. FalseANS: F PTS: 149. If the currency of a foreign currency-denominated bond ____, the funds needed to make couponpayments will ____.a. appreciates; increaseb. depreciates; decreasec. appreciates; decreased. depreciates; increasee. A and BANS: E PTS: 150. Generally, the financing costs associated with a foreign currency-denominated bond will be ____volatile than the financing costs of a domestic bond because of ____.a. more; exchange rate movementsb. less; exchange rate movementsc. less; global economic conditionsd. none of the aboveANS: A PTS: 151. ____ swaps are often used by companies to hedge against ____ rate risk.a. Currency; interestb. Interest; interestc. Interest; exchanged. Currency; exchangee. B and DANS: E PTS: 152. ____ are commonly used to hedge interest rate risk.a. Currency swapsb. Parallel loansc. Interest rate swapsd. Forward contractse. None of the aboveANS: C PTS: 153. In a(n) ____ swap, the notional value is reduced over time.a. accretionb. amortizingc. forwardd. zero-coupone. putableANS: B PTS: 154. A(n) ____ swap is entered into today, but the swap payments start at a specific future point intime.a. accretionb. amortizingc. forwardd. zero-coupone. putableANS: C PTS: 155. A callable swap gives the ____ payer the right to terminate the swap; the MNC would exercise thisright if interest rates ____ substantially.a. floating-rate; riseb. floating-rate; fallc. fixed-rate; rised. fixed-rate; falle. none of the aboveANS: D PTS: 1。
国际金融financetestbank4教学文案
国际金融Fi na n c e Te s t Ba nk4Chapter 4—Exchange Rate Determination加息会降低通货膨胀本国货币就增值涨价了，出口就会减少进口就会增加1. The value of the Australian dollar (A$) today is $0.73. Yesterday, thevalue of the Australian dollar was $0.69. The Australian dollar ____ by ____%.a. depreciated; 5.80b. depreciated; 4.00c. appreciated; 5.80d. appreciated; 4.00ANS: CSOLUTION: ($0.73 $0.69)/$0.69 =5.80%PTS: 12. If a currency's spot rate market is ____, its exchange rate is likely to be____ to a single large purchase or sale transaction.a. liquid; highly sensitiveb. illiquid; insensitivec. illiquid; highly sensitived. none of the above.ANS: C PTS: 13. ____ is not a factor that causes currency supply and demand schedulesto change.a. Relative inflation ratesb. Relative interest ratesc. Relative income levelsd. Expectationse. All of the above are factorsthat cause currency supplyand demand schedules tochange.ANS: E PTS: 14. A large increase in the income level in Mexico along with no growth inthe U.S. income level is normally expected to cause (assuming nochange in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.a. increase; appreciateb. increase; depreciatec. decrease; depreciated. decrease; appreciateANS: B PTS: 15. An increase in U.S. interest rates relative to German interest rateswould likely ____ the U.S. demand for euros and ____ the supply of euros for sale.a. reduce; increaseb. increase; reducec. reduce; reduced. increase; increaseANS: A PTS: 16. Investors from Germany, the United States, and the U.K. frequentlyinvest in each other based on prevailing interest rates. If Britishinterest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.a. fewer; depreciateb. fewer; appreciatec. more; depreciated. more; appreciateANS: A PTS: 17. When the "real" interest rate is relatively low in a given country, thenthe currency of that country is typically expected to be:a. weak, since the country'squoted interest rate would behigh relative to the inflationrate.b. strong, since the country'squoted interest rate would below relative to the inflationrate.c. strong, since the country'squoted interest rate would behigh relative to the inflationrate.d. weak, since the country'squoted interest rate would below relative to the inflationrate.ANS: D PTS: 18. Assume that the inflation rate becomes much higher in the U.K.relative to the U.S. This will place ____ pressure on the value of theBritish pound. Also, assume that interest rates in the U.K. begin torise relative to interest rates in the U.S. The change in interest rateswill place ____ pressure on the value of the British pound.a. upward; downwardb. upward; upwardc. downward; upwardd. downward; downwardANS: C PTS: 19. In general, when speculating on exchange rate movements, thespeculator will borrow the currency that is expected to appreciate andinvest in the country whose currency is expected to depreciate.a. Trueb. FalseANS: F PTS: 110. Baylor Bank believes the New Zealand dollar will appreciate over thenext five days from $.48 to $.50. The following annual interest ratesapply:Currency Lending Rate Borrowing Rate Dollars 7.10% 7.50%6.80%7.25%New Zealand dollar(NZ$)Baylor Bank has the capacity to borrow either NZ$10 million or $5million. If Baylor Bank's forecast is correct, what will its dollar profitbe from speculation over the five-day period (assuming it does not useany of its existing consumer deposits to capitalize on its expectations)?a. $521,325.b. $500,520.c. $104,262.d. $413,419.e. $208,044.ANS: ESOLUTION:1. Borrow $5 million.2. Convert to NZ$:$5,000,000/$.48 =NZ$10,416,667.3. Invest the NZ$ at anannualized rate of 6.80% overfive days.NZ$10,416,667 [1+ 6.80% (5/360)]= NZ$10,426,5054. Convert the NZ$ back todollars:NZ$10,426,505$.50 = $5,213,2525. Repay the dollars borrowed.The repayment amount is:$5,000,000 [1 +7.5% (5/360)]= $5,000,000[1.00104]= $5,005,2086. After repaying the loan, theremaining dollar profit is:$5,213,252$5,005,208 = $208,044 PTS: 111. Assume the following information regarding U.S. and Europeanannualized interest rates:Currency Lending Rate Borrowing Rate U.S. Dollar ($) 6.73% 7.20%Eu ro (?) 6.80% 7.28%Trensor Bank can borrow either $20 million or ?20 million. Thecurrent spot rate of the euro is $1.13. Furthermore, Trensor Bankexpects the spot rate of the euro to be $1.10 in 90 days. What isTrensor Bank's dollar profit from speculating if the spot rate of theeuro is indeed $1.10 in 90 days?a. $579,845.b. $583,800.c. $588,200.d. $584,245.e. $980,245.ANS: ASOLUTION:1. Borrow ?20 million.2. Convert the ?20 million to?20,000,000 $1.13 =$22,600,000.3. Invest the $22,600,000 at anannualized rate of 6.73% for90 days.$22,600,000 [1 +6.73% (90/360)]= $22,980,2454. Determine euros owed:?20,000,000 [1 + 7.28%(90/360)] = ?20,364,000.5. Determine dollars needed torepay euro loan:?20,364,000 $1.10 =$22,400,400.6. The dollar profit is$22,980,245 $22,400,400= $579,845.PTS: 112. The equilibrium exchange rate of pounds is $1.70. At an exchangerate of $1.72 per pound:a. U.S. demand for pounds wouldexceed the supply of poundsfor sale and there would be ashortage of pounds in theforeign exchange market.b. U.S. demand for pounds wouldbe less than the supply ofpounds for sale and therewould be a shortage of poundsin the foreign exchangemarket.c. U.S. demand for pounds wouldexceed the supply of poundsfor sale and there would be asurplus of pounds in theforeign exchange market.d. U.S. demand for pounds wouldbe less than the supply ofpounds for sale and therewould be a surplus of poundsin the foreign exchangemarket.e. U.S. demand for pounds wouldbe equal to the supply ofpounds for sale and therewould be a shortage of poundsin the foreign exchangemarket.ANS: D PTS: 113. Assume that Swiss investors have francs available to invest insecurities, and they initially view U.S. and British interest rates asequally attractive. Now assume that U.S. interest rates increase whileBritish interest rates stay the same. This would likely cause:a. the Swiss demand for dollarsto decrease and the dollar willdepreciate against the pound.b. the Swiss demand for dollarsto increase and the dollar willdepreciate against the Swissfranc.c. the Swiss demand for dollarsto increase and the dollar willappreciate against the Swissfranc.d. the Swiss demand for dollarsto decrease and the dollar willappreciate against the pound.ANS: C PTS: 114. The real interest rate adjusts the nominal interest rate for:a. exchange rate movements.b. income growth.c. inflation.d. government controls.e. none of the aboveANS: C PTS: 115. If U.S. inflation suddenly increased while European inflation stayed thesame, there would be:a. an increased U.S. demand foreuros and an increased supplyof euros for sale.b. a decreased U.S. demand foreuros and an increased supplyof euros for sale.c. a decreased U.S. demand foreuros and a decreased supplyof euros for sale.d. an increased U.S. demand foreuros and a decreased supplyof euros for sale.ANS: D PTS: 116. If inflation in New Zealand suddenly increased while U.S. inflationstayed the same, there would be:a. an inward shift in the demandschedule for NZ$ and anoutward shift in the supplyschedule for NZ$.b. an outward shift in thedemand schedule for NZ$ andan inward shift in the supplyschedule for NZ$.c. an outward shift in thedemand schedule for NZ$ andan outward shift in the supplyschedule for NZ$.d. an inward shift in the demandschedule for NZ$ and aninward shift in the supplyschedule for NZ$.ANS: A PTS: 117. If the U.S. and Japan engage in substantial financial flows but littletrade, ____ directly influences their exchange rate the most. If the U.S.and Switzerland engage in much trade but little financial flows, ____directly influences their exchange rate the most.a. interest rate differentials;interest rate differentialsb. inflation and interest ratedifferentials; interest ratedifferentialsc. income and interest ratedifferentials; inflationdifferentialsd. interest rate differentials;inflation and incomedifferentialse. inflation and incomedifferentials; interest ratedifferentialsANS: D PTS: 118. If inflation increases substantially in Australia while U.S. inflationremains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar.a. upwardb. downwardc. either upward or downward(depending on the degree ofthe increase in Australianinflation)d. none of the above; there willbe no impactANS: B PTS: 119. Assume that British corporations begin to purchase more suppliesfrom the U.S. as a result of several labor strikes by British suppliers.This action reflects:a. an increased demand forBritish pounds.b. a decrease in the demand forBritish pounds.c. an increase in the supply ofBritish pounds for sale.d. a decrease in the supply ofBritish pounds for sale.ANS: C PTS: 120. The exchange rates of smaller countries are very stable because themarket for their currency is very liquid.a. Trueb. FalseANS: F PTS: 121. The phrase "the dollar was mixed in trading" means that:a. the dollar was strong in someperiods and weak in otherperiods over the last month.b. the volume of trading wasvery high in some periods andlow in other periods.c. the dollar was involved insome currency transactions,but not others.d. the dollar strengthenedagainst some currencies andweakened against others.ANS: D PTS: 122. Assume that the U.S. places a strict quota on goods imported fromChile and that Chile does not retaliate. Holding other factors constant,this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.a. increase; increaseb. increase; declinec. decline; declined. decline; increaseANS: C PTS: 123. Any event that increases the U.S. demand for euros should result ina(n) ____ in the value of the euro with respect to ____, other thingsbeing equal.a. increase; U.S. dollarb. increase; nondollar currenciesc. decrease; nondollar currenciesd. decrease; U.S. dollarANS: A PTS: 124. Any event that reduces the U.S. demand for Japanese yen shouldresult in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.a. increase; U.S. dollarb. increase; nondollar currenciesc. decrease; nondollar currenciesd. decrease; U.S. dollarANS: D PTS: 125. Any event that increases the supply of British pounds to be exchangedfor U.S. dollars should result in a(n) ____ in the value of the Britishpound with respect to ____, other things being equal.a. increase; U.S. dollarb. increase; nondollar currenciesc. decrease; nondollar currenciesd. decrease; U.S. dollarANS: D PTS: 126. Any event that reduces the supply of Swiss francs to be exchanged forU.S. dollars should result in a(n) ____ in the value of the Swiss francwith respect to ____, other things being equal.a. increase; U.S. dollarb. increase; nondollar currenciesc. decrease; nondollar currenciesd. decrease; U.S. dollarANS: A PTS: 127. Assume that the U.S. experiences a significant decline in income, whileJapan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assumethat interest rates and other factors are not affected.)a. upwardb. downwardc. nod. upward and downward(offsetting)ANS: B PTS: 128. News of a potential surge in U.S. inflation and zero Chilean inflationplaces ____ pressure on the value of the Chilean peso. The pressure will occur ____.a. upward; only after the U.S.inflation surgesb. downward; only after the U.S.inflation surgesc. upward; immediatelyd. downward; immediatelyANS: C PTS: 129. Assume that Canada places a strict quota on goods imported from theU.S. and that the U.S. does not retaliate. Holding other factorsconstant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of theCanadian dollar to ____.a. increase; increaseb. increase; declinec. decline; declined. decline; increaseANS: D PTS: 130. Assume that Japan places a strict quota on goods imported from theU.S. and the U.S. places a strict quota on goods imported from Japan.This event should immediately cause the U.S. demand for Japaneseyen to ____, and the supply of Japanese yen to be exchanged for U.S.dollars to ____.a. increase; increaseb. increase; declinec. decline; declined. decline; increaseANS: C PTS: 131. Which of the following is not mentioned in the text as a factoraffecting exchange rates?a. relative interest rates.b. relative inflation rates.c. government controls.d. expectations.e. all of the above are mentionedin the text as factors affectingexchange rates.ANS: E PTS: 132. If a country experiences high inflation relative to the U.S., its exportsto the U.S. should ____, its imports should ____, and there is ____pressure on its currency's equilibrium value.a. decrease; increase; upwardb. decrease; decrease; upwardc. increase; decrease; downwardd. decrease; increase; downwarde. increase; decrease; upwardANS: D PTS: 133. If a country experiences an increase in interest rates relative to U.S.interest rates, the inflow of U.S. funds to purchase its securities should____, the outflow of its funds to purchase U.S. securities should ____,and there is ____ pressure on its currency's equilibrium value.a. increase; decrease; downwardb. decrease; increase; upwardc. increase; decrease; upwardd. decrease; increase; downwarde. increase; increase; upwardANS: C PTS: 134. An increase in U.S. inflation relative to Singapore inflation placesupward pressure on the Singapore dollar.a. Trueb. FalseANS: T PTS: 135. When expecting a foreign currency to depreciate, a possible way tospeculate on this movement is to borrow dollars, convert the proceedsto the foreign currency, lend in the foreign country, and use theproceeds from this investment to repay the dollar loan.a. Trueb. FalseANS: F PTS: 136. Since supply and demand for a currency are constant (primarily dueto government intervention), currency values seldom fluctuate.a. Trueb. FalseANS: F PTS: 137. Relatively high Japanese inflation may result in an increase in thesupply of yen for sale and a reduction in the demand for yen.a. Trueb. FalseANS: T PTS: 138. The main effect of interest rate movements on exchange rates isthrough their effect on international trade.a. Trueb. FalseANS: F PTS: 139. Country X frequently engages in trade flows with the U.S. (such asimports and exports). Country Y frequently engages in capital flowswith the U.S. (such as financial investments). Everything else heldconstant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.a. Trueb. FalseANS: F PTS: 140. Increases in relative income in one country vs. another result in anincrease in the first country's currency value.a. Trueb. False41. Trade-related foreign exchange transactions are more responsive tonews than financial flow transactions.a. Trueb. FalseANS: F PTS: 142. Signals regarding future actions of market participants in the foreignexchange market sometimes result in overreactions.a. Trueb. FalseANS: T PTS: 143. The markets that have a smaller amount of foreign exchange tradingfor speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.a. Trueb. FalseANS: T PTS: 144. Liquidity of a currency can affect the extent to which speculation canimpact the currency's value.a. Trueb. False45. Forecasting a currency's future value is difficult, because it is difficultto identify how the factors affecting the currency value will change,and how they will interact to impact the currency's value.a. Trueb. FalseANS: T PTS: 146. The standard deviation should be applied to values rather thanpercentage movements when comparing volatility among currencies.a. Trueb. FalseANS: F PTS: 147. Movements of foreign currencies tend to be more volatile for shortertime horizons.a. Trueb. FalseANS: F PTS: 148. If a currency's spot market is ____, its exchange rate is likely to be ____to a single large purchase or sale transaction.a. liquid; highly sensitiveb. illiquid; insensitivec. liquid; insensitived. none of the aboveANS: C PTS: 149. The value of euro was $1.30 last week. During last week the eurodepreciated by 5%. What is the value of euro today?a. $1.365b. $1.235c. $1.330d. $1.30ANS: BSOLUTION: $1.3 (1 .05) = $1.235 PTS: 150. Government controls can only affect the supply of a given currencyfor sale and not the demand.a. Trueb. FalseANS: F PTS: 151. If one foreign currency will appreciate against the dollar, then allforeign currencies will appreciate against the dollar but by differentdegrees.a. Trueb. FalseANS: F PTS: 152. Assume that the income levels in U.K. start to rise, while U.S. incomelevels remain unchanged. This will place ____ pressure on the value of British pound. Also, assume that U.S. interest rates rise, while theBritish pound remains unchanged. This will place ____ pressure on the value of British pound.a. downward; downwardb. upward; downwardc. upward; upwardd. downward; upwardANS: D PTS: 153. If the Fed announces that it will decrease the U.S. interest rates, andEuropean Central Bank takes no action, then the value of euro will____ against the value of U.S. dollar. The Fed's action is called ____intervention.a. appreciate; directb. depreciate; directc. appreciate; indirectd. depreciate; indirectANS: C PTS: 154. Assume that the total value of investment transactions between U.S.and Mexico is minimal. Also assume that total dollar value of tradetransactions between these two countries is very large. Now assumethat Mexico's inflation has suddenly increased, and Mexican interestrates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____pronounced than the interest rate effect.a. downward; moreb. upward; morec. downward; lessd. upward; lessANS: A PTS: 155. If U.S. experiences a sudden surge in inflation and surge in interestrates while Japanese inflation and interest rates remain unchanged,the value of Japanese yen will ____ against the U.S. dollar.a. appreciateb. depreciatec. remain unchangedd. cannot be determined fromthe information provided.ANS: D PTS: 156. If the Japanese yen is expected to appreciate against the U.S. dollarand interest rates in the U.S. and Japan are similar, banks may tryspeculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.a. yen; dollarsb. yen; yenc. dollars; yend. dollars; dollarsANS: C PTS: 157. British investors frequently invest in the U.S. or Italy, depending onthe prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to beexchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.a. increase; downwardb. decrease; upwardc. increase; upwardd. decrease; downwardANS: B PTS: 158. The equilibrium exchange rate of the Swiss franc is $0.90. At anexchange rate $.83:a. U.S. demand for Swiss francswould exceed the supply offrancs for sale and therewould be a shortage of francsin the foreign exchangemarket.b. U.S. demand for Swiss francswould be less than the supplyof francs for sale and therewould be a shortage of francsin the foreign exchangemarket.c. U.S. demand for Swiss francswould exceed the supply offrancs for sale and therewould be a surplus of francs inthe foreign exchange market.d. U.S. demand for Swiss francswould be less than the supplyof francs for sale and therewould be a surplus of Swissfrancs in the foreign exchangemarket.ANS: A PTS: 159. Financial flow foreign exchange transactions are more responsive tonews than trade-related transactions.a. Trueb. FalseANS: T PTS: 160. Assume that the British government eliminates all controls on importsby British companies. Other things being equal, the U.S. demand forpounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.a. increase; increase; increaseb. decrease; increase; decreasec. remain unchanged; increase;decreased. remain unchanged; increase;increaseANS: C PTS: 161. Country X frequently engages in trade flows with the U.S. (such asimports and exports). Country Y frequently engages in capital flowswith the U.S. (such as financial investments). Everything else heldconstant, an increase in U.S. inflation would affect the exchange rateof Country Y's currency more than the exchange rate of Country X'scurrency.a. Trueb. FalseANS: F PTS: 162. Assume that U.S. inflation is expected to surge in the near future. Theexpectation of surge in inflation will most likely place ____ pressure on U.S. dollar immediately.a. upwardb. downwardc. nod. cannot be determinedANS: A PTS: 163. When the Japanese yen appreciates against the U.S. dollar, this meansthat the U.S. dollar is strengthening relative to the yen.a. Trueb. FalseANS: F PTS: 164. Illiquid currencies tend to exhibit less volatile exchange ratemovements than liquid currencies.a. Trueb. FalseANS: F PTS: 165. The supply curve for a currency is downward sloping since U.S.corporations would be encouraged to purchase more foreign goodswhen the foreign currency is worth less.a. Trueb. FalseANS: F PTS: 166. Relatively high Japanese inflation may result in an increase in thesupply of yen for sale and a reduction in the demand for yen, otherthings being equal.a. Trueb. FalseANS: T PTS: 167. If the British government desires an appreciation in its currency withrespect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds.a. Trueb. FalseANS: F PTS: 168. Country X frequently engages in trade flows with the U.S. (such asimports and exports). Country Y frequently engages in financial flows with the U.S. (such as financial investments). Everything else heldconstant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.a. Trueb. FalseANS: F PTS: 169. Illiquid currencies tend to exhibit ____ volatile exchange ratemovements, as the equilibrium prices of their currencies adjust to ____changes in supply and demand conditions.a. less; even minorb. less; only largec. more; even minord. more; only largee. none of the aboveANS: C PTS: 170. Which of the following is not mentioned in the text as a factoraffecting exchange rates?a. Relative interest ratesb. Relative inflation ratesc. Government controlsd. Expectationse. All of the above are mentionedin the text as factors affectingexchange rates.ANS: E PTS: 171. Which of the following events would most likely result in anappreciation of the U.S. dollar?a. U.S. inflation is very high.b. The Fed indicates that it willraise U.S. interest rates.c. Future U.S. interest rates areexpected to decline.d. Japan is expected to increaseinterest rates in the nearfuture.ANS: B PTS: 172. Which of the following interactions will likely have the least effect onthe dollar's value? Assume everything else is held constant.a. A reduction in U.S. inflationaccompanied by an increase inreal U.S. interest ratesb. A reduction in U.S. inflationaccompanied by an increase innominal U.S. interest ratesc. An increase in U.S. inflationaccompanied by an increase innominal, but not real, U.S.interest ratesd. An increase in Singapore'sinflation accompanied by anincrease in real U.S. interestratese. An increase in Singapore'sinterest rates accompanied byan increase in U.S. inflation.ANS: C PTS: 173. If a country experiences high inflation relative to the U.S., its exportsto the U.S. should ____, its imports should ____, and there is ____pressure on its currency's equilibrium value.a. decrease; increase; upwardb. decrease; decrease; upwardc. increase; decrease; downwardd. decrease; increase; downwarde. increase; decrease; upwardANS: D PTS: 174. If a country experiences an increase in interest rates relative to U.S.interest rates, the inflow of U.S. funds to purchase its securities should____, the outflow of its funds to purchase U.S. securities should ____,and there is ____ pressure on its currency's equilibrium value.a. increase; decrease; downwardb. decrease; increase; upwardc. increase; decrease; upwardd. decrease; increase; downwarde. increase; increase; upward ANS: C PTS: 1。
国际金融Finance_Test_Bank_7
Chapter 7—International Arbitrage and Interest Rate Parity1. Due to ____, market forces should realign the relationship between the interest rate differential of twocurrencies and the forward premium (or discount) on the forward exchange rate between the twocurrencies.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrageANS: C PTS: 12. Due to ____, market forces should realign the spot rate of a currency among banks.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrageANS: D PTS: 13. Due to ____, market forces should realign the cross exchange rate between two foreign currenciesbased on the spot exchange rates of the two currencies against the U.S. dollar.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrageANS: B PTS: 14. If interest rate parity exists, then ____ is not feasible.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrageANS: C PTS: 15. In which case will locational arbitrage most likely be feasible?a. One bank's ask price for a currency is greater than another bank's bid price for thecurrency.b. One bank's bid price for a currency is greater than another bank's ask price for thecurrency.c. One bank's ask price for a currency is less than another bank's ask price for the currency.d. One bank's bid price for a currency is less than another bank's bid price for the currency.ANS: B PTS: 16. When using ____, funds are not tied up for any length of time.a. covered interest arbitrageb. locational arbitragec. triangular arbitraged. B and CANS: D PTS: 17. When using ____, funds are typically tied up for a significant period of time.a. covered interest arbitrageb. locational arbitragec. triangular arbitraged. B and CANS: A PTS: 18. Assume that the interest rate in the home country of Currency X is a much higher interest rate than theU.S. interest rate. According to interest rate parity, the forward rate of Currency X:a. should exhibit a discount.b. should exhibit a premium.c. should be zero (i.e., it should equal its spot rate).d. B or CANS: A PTS: 19. If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of theBritish pound (in U.S. dollars) is the same as the pound's spot rate, then:a. U.S. investors could possibly benefit from covered interest arbitrage.b. British investors could possibly benefit from covered interest arbitrage.c. neither U.S. nor British investors could benefit from covered interest arbitrage.d. A and BANS: B PTS: 110. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of theBritish pound is the same as its spot rate:a. U.S. investors could possibly benefit from covered interest arbitrage.b. British investors could possibly benefit from covered interest arbitrage.c. neither U.S. nor British investors could benefit from covered interest arbitrage.d. A and BANS: A PTS: 111. Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rateson euros. Which of the following forces should result from the act of this covered interest arbitrage?a. downward pressure on the euro's spot rate.b. downward pressure on the euro's forward rate.c. downward pressure on the U.S. interest rate.d. upward pressure on the euro's interest rate.ANS: B PTS: 112. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interestrate. Which of the following forces results from the act of this covered interest arbitrage?a. upward pressure on the Swiss franc's spot rate.b. upward pressure on the U.S. interest rate.c. downward pressure on the Swiss interest rate.d. upward pressure on the Swiss franc's forward rate.ANS: D PTS: 113. Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?a. spot rate of peso increases; forward rate of peso decreases.b. spot rate of peso decreases; forward rate of peso increases.c. spot rate of peso decreases; forward rate of peso decreases.d. spot rate of peso increases; forward rate of peso increases.ANS: A PTS: 114. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume thebid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $15,385.b. $15,625.c. $22,136.d. $31,250.ANS: ASOLUTION: $1,000,000/$.325 = NZ$3,076,923 ⨯ $.33 = $1,015,385. Thus, the profit is$15,385.PTS: 115. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S.interest rate, the:a. larger will be the forward discount of the foreign currency.b. larger will be the forward premium of the foreign currency.c. smaller will be the forward premium of the foreign currency.d. smaller will be the forward discount of the foreign currency.ANS: A PTS: 116. Assume the following information:You have $1,000,000 to invest:Current spot rate of pound = $1.3090-day forward rate of pound = $1.283-month deposit rate in U.S. = 3%3-month deposit rate in Great Britain = 4%If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?a. $1,024,000.b. $1,030,000.c. $1,040,000.d. $1,034,000.e. none of the aboveANS: ASOLUTION: $1,000,000/$1.30 = 769,231 pounds ⨯ (1.04) = 800,000 pounds ⨯ 1.28 =$1,024,000PTS: 117. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parityexists, then:a. British investors who invest in the United Kingdom will achieve the same return as U.S.investors who invest in the U.S.b. U.S. investors will earn a higher rate of return when using covered interest arbitrage thanwhat they would earn in the U.S.c. U.S. investors will earn 15% whether they use covered interest arbitrage or invest in theU.S.d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in theU.S.ANS: D PTS: 118. Assume the following information:U.S. investors have $1,000,000 to invest:1-year deposit rate offered on U.S. dollars = 12%1-year deposit rate offered on Singapore dollars = 10%1-year forward rate of Singapore dollars = $.412Spot rate of Singapore dollar = $.400Given this information:a. interest rate parity exists and covered interest arbitrage by U.S. investors results in thesame yield as investing domestically.b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in ayield above what is possible domestically.c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yieldabove what is possible domestically.d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in ayield below what is possible domestically.ANS: BSOLUTION: $1,000,000/$.400 = S$2,500,000 ⨯ (1.1)= S$2,750,000 ⨯ $.412 = $1,133,000Yield = ($1,133,000 - $1,000,000)/$1,000,000 = 13.3%This yield exceeds what is possible domestically.PTS: 119. Assume the following information:Current spot rate of New Zealand dollar = $.41Forecasted spot rate of New Zealand dollar 1 year from now = $.43One-year forward rate of the New Zealand dollar = $.42Annual interest rate on New Zealand dollars = 8%Annual interest rate on U.S. dollars = 9%Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.a. about 11.97b. about 9.63c. about 11.12d. about 11.64e. about 10.63ANS: ESOLUTION: $500,000/$.41 = NZ$1,219,512 ⨯ (1.08)= NZ$1,317,073 ⨯ .42 = $553,171Yield = ($553,171 - $500,000)/$500,000 = 10.63%PTS: 120. Assume the following bid and ask rates of the pound for two banks as shown below:Bid AskBank A $1.41 $1.42Bank B $1.39 $1.40As locational arbitrage occurs:a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B willincrease.b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B willdecrease.c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B willdecrease.d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B willincrease.ANS: D PTS: 121. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bidrate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $11,764.b. -$11,964.c. $36,585.d. $24,390.e. $18,219.ANS: DSOLUTION: $1,000,000/$.41 = S2,439,024 ⨯ $.42 = $1,024,390PTS: 122. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreigninterest rate, the:a. larger will be the forward discount of the foreign currency.b. larger will be the forward premium of the foreign currency.c. smaller will be the forward premium of the foreign currency.d. smaller will be the forward discount of the foreign currency.ANS: B PTS: 123. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given thisinformation, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.a. appreciate; depreciateb. depreciate; appreciatec. depreciate; depreciated. appreciate; appreciatee. remain stable; appreciateANS: A PTS: 124. Assume the following information:Spot rate today of Swiss franc = $.601-year forward rate as of today for Swiss franc = $.63Expected spot rate 1 year from now = $.64Rate on 1-year deposits denominated in Swiss francs = 7%Rate on 1-year deposits denominated in U.S. dollars = 9%From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.a. 5.00b. 12.35c. 15.50d. 14.13e. 11.22ANS: BSOLUTION: $1,000,000/$.60 = SF1,666,667 ⨯ (1.07)= SF1,783,333 ⨯ $.63 = $1,123,500Yield = ($1,123,500 - $1,000,000)/$1,000,000 = 12.35%PTS: 125. Assume the following information for a bank quoting on spot exchange rates:Exchange rate of Singapore dollar in U.S. $ = $.32Exchange rate of pound in U.S. $ = $1.50Exchange rate of pound in Singapore dollars = S$4.50Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should appreciate.d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should depreciate, and the pound value in Singapore dollars should appreciate.ANS: D PTS: 126. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value ofthe Canadian dollar in pounds?a. 2.0.b. 2.40.c. .80.d. .50.e. none of the aboveANS: DSOLUTION: $.80/$1.60 = 0.50PTS: 127. Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parityexists. Which of the following is true?a. Americans using covered interest arbitrage earn the same rate of return as Germans whoattempt covered interest arbitrage.b. Americans who invest in the U.S. earn the same rate of return as Germans who attemptcovered interest arbitrage.c. Americans who invest in the U.S. earn the same rate of return as Germans who invest inGermanyd. A and Be. None of the aboveANS: E PTS: 128. Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franchas a 4% premium. Given this information:a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as ifthey invested in Switzerland.b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than ifthey invested in the U.S.c. A and Bd. none of the aboveANS: B PTS: 129. Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forwardrate. Covered interest arbitrage puts ____ pressure on the pound's spot rate, and ____ pressure on the pound's forward rate.a. downward; downwardb. downward; upwardc. upward; downwardd. upward; upwardANS: C PTS: 130. Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order tomaintain interest rate parity.a. discount; increaseb. discount; decreasec. premium; increased. premium; decreaseANS: D PTS: 131. Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rateof the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $7,067.b. $8,556.c. $10,114.d. $12,238.ANS: ASOLUTION: $1,000,000/$.566 = SF1,766,784 ⨯ $.57 = $1,007,067. Thus, the profit is$7,067.PTS: 132. Assume the following information:You have $1,000,000 to invest:Current spot rate of pound = $1.6090-day forward rate of pound = $1.573-month deposit rate in U.S. = 3%3-month deposit rate in U.K. = 4%If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?a. $1,020,500.b. $1,045,600.c. $1,073,330.d. $1,094,230.e. $1,116,250.ANS: ASOLUTION: $1,000,000/$1.60 = 625,000 pounds ⨯ (1.04) = 650,000 pounds ⨯ 1.57 =$1,020,500PTS: 133. Assume the following information:U.S. investors have $1,000,000 to invest:1-year deposit rate offered by U.S. banks = 12%1-year deposit rate offered on Swiss francs = 10%1-year forward rate of Swiss francs = $.62Spot rate of Swiss franc = $.60Given this information:a. interest rate parity exists and covered interest arbitrage by U.S. investors results in thesame yield as investing domestically.b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in ayield above what is possible domestically.c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yieldabove what is possible domestically.d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in ayield below what is possible domestically.ANS: BSOLUTION: $1,000,000/$.60 = SF1,666,667 ⨯ (1.1) = SF1,833,333 ⨯ $.62 = $1,136,667Yield = ($1,136,667 - $1,000,000)/$1,000,000 = 13.7%This yield exceeds what is possible domestically.PTS: 134. Assume the following information:Current spot rate of Australian dollar = $.64Forecasted spot rate of Australian dollar 1 year from now = $.591-year forward rate of Australian dollar = $.62Annual interest rate for Australian dollar deposit = 9%Annual interest rate in the U.S. = 6%Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.a. about 6.00b. about 9.00c. about 7.33d. about 8.14e. about 5.59ANS: ESOLUTION: $500,000/$.64 = A$781,250 ⨯ (1.09)= A$851,563 ⨯ $.62 = $527,969Yield = ($527,969 - $500,000)/$500,000 = 5.59%PTS: 135. Assume the following bid and ask rates of the pound for two banks as shown below:Bid AskBank C $1.61 $1.63Bank D $1.58 $1.60As locational arbitrage occurs:a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D willincrease.b. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D willdecrease.c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D willdecrease.d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D willincrease.ANS: D PTS: 136. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume thebid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $10,003.b. $12,063.c. $14,441.d. $16,393.e. $18,219.ANS: DSOLUTION: $1,000,000/$.61 = A$1,639,344 ⨯ $.62 = $1,016,393. Thus, the profit is$16,393.PTS: 137. Assume the following information for a bank quoting on spot exchange rates:Exchange rate of Singapore dollar in U.S. $ = $.60Exchange rate of pound in U.S. $ = $1.50Exchange rate of pound in Singapore dollars = S$2.6Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should appreciate.d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should depreciate, and the pound value in Singapore dollars should appreciate.ANS: B PTS: 138. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank Bquotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for aninvestor who has $500,000 available to conduct locational arbitrage?a. $2,041,667.b. $9,804.c. $500.d. $1,639.ANS: DSOLUTION: $500,000/$.305 = MYR1,639,344 ⨯ $.306 = $501,639. Thus, the profit is$1,639.PTS: 139. Which of the following is an example of triangular arbitrage initiation?a. buying a currency at one bank's ask and selling at another bank's bid, which is higher thanthe former bank's ask.b. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South Africanrand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for therand is $.20.c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South Africanrand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.d. converting funds to a foreign currency and investing the funds overseas.ANS: C PTS: 140. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchangefor Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?a. A$39.93.b. A$25,043.48.c. A$553.00.d. none of the aboveANS: ASOLUTION: $.023/$.576 ⨯ THB1,000 = A$39.93.PTS: 141. National Bank quotes the following for the British pound and the New Zealand dollar:Quoted Bid Price Quoted Ask Price Value of a British pound (£) in $ $1.61 $1.62Value of a New Zealand dollar (NZ$) in $ $.55 $.56Value of a British pound inNew Zealand dollars NZ$2.95 NZ$2.96 Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?a. $77.64.b. $197.53.c. $15.43.d. $111.80.ANS: CSOLUTION: $10,000/$1.62 = £6,172.84 ⨯ 2.95= NZ$18,209.88 ⨯ $.55= $10,015.43.Thus, the profit is $15.43.PTS: 142. Assume the following information:You have $900,000 to invest:Current spot rate of Australian dollar (A$) = $.62180-day forward rate of the Australian dollar = $.64180-day interest rate in the U.S. = 3.5%180-day interest rate in Australia = 3.0%If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?a. $56,903.b. $61,548.c. $27,000.d. $31,500.ANS: ASOLUTION: $900,000/$.62 = A$1,451,612 ⨯ (1.03) = A$1,495,161 ⨯ $.64 = $956,903.Thus, the profit is $56,903.PTS: 143. Assume the following information:You have $400,000 to invest:Current spot rate of Sudanese dinar (SDD) = $.0057090-day forward rate of the dinar = $.0056990-day interest rate in the U.S. = 4.0%90-day interest rate in Sudan = 4.2%If you conduct covered interest arbitrage, what amount will you have after 90 days?a. $416,000.00.b. $416,800.00.c. $424,242.86.d. $416,068.77.e. none of the aboveANS: DSOLUTION: $400,000/$.0057 = SDD70,175,438.60 ⨯ (1.042)= SDD73,122,807.02 ⨯ $.00569= $416,068.77PTS: 1Exhibit 7-1Assume the following information:You have $300,000 to invest:The spot bid rate for the euro (€) is $1.08The spot ask quote for the euro is $1.10The 180-day forward rate (bid) of the euro is $1.08The 180-day forward rate (ask) of the euro is $1.10The 180-day interest rate in the U.S. is 6%The 180-day interest rate in Europe is 8%44. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180days?a. $318,109.10.b. $330,000.00.c. $312,218.20.d. $323,888.90.e. none of the aboveANS: ASOLUTION: $300,000/$1.10 = €277,777.80 ⨯ (1.08)= €294,444.40 ⨯ $1.08= $318,109.10PTS: 145. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180days? Is covered interest arbitrage feasible in this situation?a. 7.96%; feasibleb. 6.04%; feasiblec. 6.04%; not feasibled. 4.07%; not feasiblee. 10.00%; feasibleANS: BSOLUTION: $318,109.10/$300,000 1 = 6.04%. Since this rate is slightly higher than theU.S. interest rate of 6%, covered interest arbitrage is feasible.PTS: 146. According to interest rate parity (IRP):a. the forward rate differs from the spot rate by a sufficient amount to offset the inflationdifferential between two currencies.b. the future spot rate differs from the current spot rate by a sufficient amount to offset theinterest rate differential between two currencies.c. the future spot rate differs from the current spot rate by a sufficient amount to offset theinflation differential between two currencies.d. the forward rate differs from the spot rate by a sufficient amount to offset the interest ratedifferential between two currencies.ANS: D PTS: 147. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____.a. premium; increaseb. discount; decreasec. discount; increased. premium; decreaseANS: C PTS: 148. If the cross exchange rate of two nondollar currencies implied by their individual spot rates withrespect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage ispossible.a. Trueb. FalseANS: F PTS: 149. For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid ratefor a currency.a. Trueb. FalseANS: F PTS: 150. Assume locational arbitrage is possible and involves two different banks. The realignment that wouldoccur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate.a. Trueb. FalseANS: T PTS: 151. Triangular arbitrage tends to force a relationship between the interest rates of two countries and theirforward exchange rate premium or discount.a. Trueb. FalseANS: F PTS: 152. The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro's forward rate shouldexhibit a premium of about 3%.a. Trueb. FalseANS: F PTS: 153. Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referredto as interest rate parity.a. Trueb. FalseANS: F PTS: 154. Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically,market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold toconduct locational arbitrage.a. Trueb. FalseANS: T PTS: 155. Locational arbitrage involves investing in a foreign country and covering against exchange rate risk byengaging in forward contracts.a. Trueb. FalseANS: F PTS: 156. To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor wouldconvert dollars to the foreign currency, invest in the foreign country, and simultaneously sell theforeign currency forward.a. Trueb. FalseANS: T PTS: 157. If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrageshould be equal to the rate available in the foreign country.a. Trueb. FalseANS: F PTS: 158. If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.a. Trueb. FalseANS: F PTS: 159. Forward rates are driven by the government rather than market forces.a. Trueb. FalseANS: F PTS: 160. The foreign exchange market is an over-the-counter market.a. Trueb. FalseANS: F PTS: 161. The yield curve of every country has its own unique shape.a. Trueb. FalseANS: T PTS: 162. Assume the following information:U.S. investors have $1,000,000 to invest:1-year deposit rate offered by U.S. banks = 10%1-year deposit rate offered on British pounds = 13.5%1-year forward rate of Swiss francs = $1.26Spot rate of Swiss franc = $1.30Given this information:a. interest rate parity exists and covered interest arbitrage by U.S. investors results in thesame yield as investing domestically.b. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in ayield above what is possible domestically.c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yieldabove what is possible domestically.d. interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in ayield below what is possible domestically.ANS: ASOLUTION: $1,000,000/$1.30 = 793,651 pounds ⨯ (1.135) = 900,794 ⨯ $1.26 =$1,100,076.Yield: ($1,100,076 - $1,000,000)/($1,000,000) = 10%.PTS: 163. If quoted exchange rates are the same across different locations, then ____ is not feasible.a. triangular arbitrageb. covered interest arbitrage。
国际金融International Finance Test Bank_12
Chapter 12—Managing Economic Exposure and Translation Exposure1. Depreciation of the euro relative to the U.S. dollar will cause a U.S.-based multinational firm'sreported earnings (from the consolidated income statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.a. be reduced; purchasingb. be reduced; sellingc. increase; sellingd. increase; purchasingANS: B PTS: 12. Springfield Co., based in the U.S., has a cost from orders of foreign material that exceeds its foreignrevenue. All foreign transactions are denominated in the foreign currency of concern. This firm would ____ a stronger dollar and would ____ a weaker dollar.a. benefit from; be unaffected byb. benefit from; be adversely affected byc. be unaffected by; be adversely affected byd. be unaffected by; benefit frome. benefit from; benefit fromANS: B PTS: 13. Whitewater Co. is a U.S. company with sales to Canada amounting to C$8 million. Its cost ofmaterials attributable to the purchase of Canadian goods is C$6 million. Its interest expense onCanadian loans is C$4 million. Given these exact figures above, the dollar value of Whitewater's"earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of Whitewater's cash flows would ____ if the Canadian dollar appreciates.a. increase; increaseb. decrease; increasec. decrease; decreased. increase; decreasee. increase; be unaffectedANS: D PTS: 14. Sycamore (a U.S. firm) has no subsidiaries and presently has sales to Mexican customers amounting toMXP98 million, while its peso-denominated expenses amount to MXP41 million. If it shifts itsmaterial orders from its Mexican suppliers to U.S. suppliers, it could reduce peso-denominatedexpenses by MXP12 million and increase dollar-denominated expenses by $800,000. This strategywould ____ the Sycamore's exposure to changes in the peso's movements against the U.S. dollar.Regardless of whether the firm shifts expenses, it is likely to perform better when the peso is valued ____ relative to the dollar.a. reduce; highb. reduce; lowc. increase; lowd. increase; highANS: D PTS: 15. Which of the following is an example of economic exposure but not an example of transactionexposure?a. An increase in the dollar's value hurts a U.S. firm's domestic sales because foreigncompetitors are able to increase their sales to U.S. customers.b. An increase in the pound's value increases the U.S. firm's cost of British pound payables.c. A decrease in the peso's value decreases a U.S. firm's dollar value of peso receivables.d. A decrease in the Swiss franc's value decreases the dollar value of interest payments on aSwiss deposit sent to a U.S. firm by a Swiss bank.ANS: A PTS: 16. Rockford Co. is a U.S. manufacturing firm that produces goods in the U.S. and sells all products toretail stores in the U.K.; the goods are denominated in pounds. It finances a small portion of itsbusiness with pound-denominated loans from British banks. Which of the following is true? (Assume that the amount of products to be sold is guaranteed by contracts.)a. The dollar value of sales is higher if the pound depreciates against the dollar.b. The dollar value of sales is unaffected by the pound's exchange rate.c. A and Bd. None of the aboveANS: D PTS: 17. If a U.S. firm's expenses are more susceptible to exchange rate movements than revenue, the firm will____ if the dollar ____.a. benefit; weakensb. be unaffected; weakensc. be unaffected; strengthensd. benefit; strengthensANS: D PTS: 18. Laketown Co. has some expenses and revenue in euros. If its expenses are more sensitive to exchangerate movements than revenue, it could reduce economic exposure by ____. If its revenues are more sensitive than expenses, it could reduce economic exposure by ____.a. decreasing foreign revenues; decreasing foreign expensesb. decreasing foreign revenues; increasing foreign expensesc. increasing foreign revenues; decreasing foreign revenuesd. decreasing foreign expenses; increasing foreign revenuesANS: D PTS: 19. Any restructuring of operations that ____ the difference between a foreign currency's inflows andoutflows may ____ economic exposure.a. reduces; increaseb. increases; reducec. reduces; reduced. A and Be. none of the aboveANS: C PTS: 110. It is generally least difficult to effectively hedge various types of:a. translation exposure.b. transaction exposure.c. economic exposure.d. A and CANS: B PTS: 111. With regard to hedging translation exposure, translation losses ____, and gains on forward contractsused to hedge translation exposure ____.a. are not tax deductible; are taxedb. are tax deductible; are taxedc. are not tax deductible; are not taxedd. are tax deductible; are not taxedANS: A PTS: 112. If a firm does not have foreign subsidiaries, it is not subject to ____.a. transaction exposureb. economic exposurec. A and Bd. translation exposureANS: D PTS: 113. If the Singapore dollar appreciates against the U.S. dollar over this year, the consolidated earnings of aU.S. company with a subsidiary in Singapore will be ____ as a result of the exchange rate movement.a. negativeb. adversely affectedc. favorably affectedd. unaffectedANS: C PTS: 114. Assume a U.S. firm uses a forward contract to hedge all of its translation exposure. Also assume thatthe firm underestimated what its foreign earnings would be. Assume that the foreign currencydepreciated over the year. The firm would generate a translation ____, which would be ____ than the gain generated by the forward contract.a. loss; smallerb. loss; largerc. gain; largerd. gain; smallerANS: B PTS: 115. A perfect hedge (full coverage) on translation exposure can usually be achieved when:a. using the money market hedge.b. using the forward hedge.c. using the futures hedge.d. none of the above, since a perfect hedge is nearly impossible.ANS: D PTS: 116. Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen.The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by:a. closing down most of its plants in the U.S.b. producing more automobiles in the U.S.c. relying completely on Japanese suppliers for its parts.d. pricing its exports in dollars.ANS: B PTS: 117. Wisconsin Inc. conducts business in Zambia. Years ago, Wisconsin established a subsidiary in Zambiathat has consistently generated very large profits denominated in Zambian kwacha. Wisconsin wishes to restructure its operations to reduce economic exposure. Which of the following is not a feasible way of accomplishing this?a. increase Zambian supply orders.b. increase Zambian sales.c. restructure debt to increase debt payments in Zambia.d. reduce Zambian sales.ANS: B PTS: 118. Which of the following firms is not exposed to translation exposure?a. Firm X, with a fully owned subsidiary that periodically remits earnings generated in GreatBritain to the U.S.-based parent.b. Firm Y, with a fully owned subsidiary that periodically generates foreign losses inSweden. The parent covers at least some of these losses.c. Firm Z, with a fully owned subsidiary that generates substantial earnings in Germany. Thesubsidiary never remits earnings but reinvests them in Germany.d. All of the above firms are exposed to translation exposure.ANS: D PTS: 119. ____ represents any impact of exchange rate fluctuations on a firm's future cash flows.a. Translation exposureb. Economic exposurec. Transaction exposured. None of the aboveANS: B PTS: 120. An effective way for an MNC to assess its economic exposure is to review the firm's:a. income statement.b. liquidity.c. retained earnings.d. level of stockholders' equity.ANS: A PTS: 121. If revenues and costs are equally sensitive to exchange rate movements, MNCs may reduce theireconomic exposure by restructuring their operations to shift the sources of costs or revenues to other locations so that:a. cash inflows exceed cash outflows in each foreign currency.b. cash outflows exceed cash inflows in each foreign currency.c. cash inflows match cash outflows in each foreign currency.d. none of the aboveANS: C PTS: 122. Managing economic exposure is generally perceived to be ____ managing transaction exposure.a. more difficult thanb. less difficult thanc. just as difficult asd. none of the aboveANS: A PTS: 123. As opposed to transaction exposure, managing economic exposure involves developing a(n) ____solution.a. short-termb. long-termc. immediated. none of the aboveANS: B PTS: 124. Cierra, Inc. is attempting to assess its degree of economic exposure in euros. In order to do so, it hasapplied regression analysis to determine whether the percentage change in its total cash flow is related to the percentage change in the euro. A ____ and statistically significant slope coefficient resulting from this analysis implies that the cash flows are ____ related to the percentage changes in the euro.a. positive; positivelyb. positive; negativelyc. negative; positivelyd. B and Ce. none of the aboveANS: A PTS: 125. Assume that an MNC's cash flows are positively related to the movements in a foreign currency. If theMNC expects the foreign currency to weaken, it could purchase the currency forward to reduce its degree of economic exposure.a. Trueb. FalseANS: F PTS: 126. An MNC is attempting to reduce its economic exposure by financing a portion of its business withloans in the foreign currency. If the foreign currency weakens, the MNC will need ____ of the foreign currency to cover the loan payment, while the MNC's foreign currency revenues will convert to ____ dollars.a. more; fewerb. more; morec. less; fewerd. less; moreANS: C PTS: 127. An MNC expects to sell fixed assets it utilizes in Europe in the distant future. In order to hedge thesale of these assets in the distant future, the MNC could create a(n) ____ that ____ the expected value of the assets in the future.a. asset; matchesb. asset; exceedsc. liability; matchesd. liability; is less thanANS: C PTS: 128. Long-term forward contracts are a possible way to hedge the distant sale of fixed assets in foreigncountries, but they may not be available for many emerging market currencies.a. Trueb. FalseANS: T PTS: 129. ____ exposure occurs when an MNC translates each subsidiary's financial data to its home currencyfor consolidated financial statements.a. Translationb. Transactionc. Economicd. None of the aboveANS: A PTS: 130. ____ is (are) not a limitation of hedging translation exposure.a. Inaccurate stock price forecastsb. Inadequate forward contracts for some currenciesc. Taxation on gains from forward contractsd. Increased transaction exposureANS: A PTS: 131. To hedge translation exposure, MNCs could ____ that their foreign subsidiaries receive as earnings tocreate a cash outflow in the currency to offset the earnings received in that currency.a. purchase the currency forwardb. sell the currency forwardc. purchase futures contracts of the currencyd. A or Ce. none of the aboveANS: B PTS: 132. Translation losses are ____, while gains on forward contracts used to hedge translation exposure are____.a. tax deductible; not taxedb. not tax deductible; not taxedc. not tax deductible; taxedd. tax deductible; taxedANS: D PTS: 133. In general, it is more difficult to effectively hedge economic or translation exposure than to hedgetransaction exposure.a. Trueb. FalseANS: T PTS: 134. A foreign subsidiary with more susceptible expenses than revenue to exchange rate movements will befavorably affected by an appreciation of the foreign currency.a. Trueb. FalseANS: F PTS: 135. U.S. firms can attempt to hedge their translation exposure of their European subsidiaries with aforward purchase of euros.a. Trueb. FalseANS: F PTS: 136. Hedging translation exposure with forward contracts can backfire if the currency being hedgeddepreciates.a. Trueb. FalseANS: F PTS: 137. A limitation of hedging translation exposure is that translation losses are not tax deductible, whereasgains on forward contracts used to hedge translation exposure are taxed.a. Trueb. FalseANS: T PTS: 138. The translation gain (or loss) is simply a paper gain (or loss). Conversely, the gain (or loss) resultingfrom a hedge strategy is a real gain (or loss).a. Trueb. FalseANS: T PTS: 139. All MNCs are subject to translation exposure.a. Trueb. FalseANS: F PTS: 140. U.S.-based MNCs invoicing in Asian currencies and incurring expenses in Asian currencies wereprobably less affected by the weakness of Asian currencies than U.S.-based MNCs that invoice in Asian currencies but do not incur expenses in those currencies.a. Trueb. FalseANS: T PTS: 141. The management of economic exposure is normally focused completely on transactions that will occurin the next three months.a. Trueb. FalseANS: F PTS: 142. Transaction exposure results when an MNC translates each subsidiary's financial data to its homecurrency for consolidated financial statements.a. Trueb. FalseANS: F PTS: 143. Although forward contracts may reduce translation exposure at the expense of increasing transactionexposure, they are sometimes used to hedge translation exposure.a. Trueb. FalseANS: T PTS: 144. Vermont Co. has foreign expenses denominated in euros that exceed foreign revenues. Appreciation ofthe euro relative to the U.S. dollar will cause this firm's reported earnings (from the consolidatedincome statement) to ____. If a firm desired to protect against this possibility, it could stabilize its reported earnings by ____ euros forward in the foreign exchange market.a. decrease; purchasingb. decrease; sellingc. increase; sellingd. increase; purchasingANS: A PTS: 145. Sarakose Co. is a U.S. company with sales to Canada amounting to C$5 million. Its cost of materialsattributable to the purchase of Canadian goods is C$7 million. Its interest expense on Canadian loans is C$5 million. The dollar value of Sarakose's "earnings before interest and taxes" would ____ if the Canadian dollar appreciates; the dollar value of its cash flows would ____ if the Canadian dollarappreciates.a. increase; increaseb. decrease; increasec. decrease; decreased. increase; decreasee. increase; be unaffectedANS: C PTS: 146. If a U.S. firm has much more revenue than expenses denominated in euros, the firm will likely ____ ifthe euro ____.a. benefit; weakensb. be unaffected; weakensc. be unaffected; strengthensd. benefit; strengthensANS: D PTS: 147. Assume that Atlanta Co. is producing motorcycles and selling them to U.S. customers. Atlanta Co.obtains all of its supplies from American firms and has no competition in the U.S. It has one major competitor in Japan. Now assume that Phoenix Co. is producing office furniture and obtains itssupplies from a Canadian firm. Based on this information, Atlanta Co. has ____ exposure and Phoenix Co. has ____ exposure.a. transaction; translationb. translation; transactionc. economic; transactiond. economic; translationANS: C PTS: 148. Orlando Co. produces home appliances and sells them in the U.S. It outsources the production of theappliances to a Chinese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in Mexico. Based on this information, Orlando Co. is subject to ____ exposure.a. economicb. transactionc. translationd. economic and transactionANS: A PTS: 149. Tennessee Co. conducts business in the U.S. and Canada. The net cash flows from Canadianoperations are expected to be C$500,000 next year. The Canadian dollar is valued at about $.90. The net cash flows from U.S. operations are supposed to be $200,000. To reduce sensitivity of its net cash flows without reducing its volume of business in Canada, Tennessee Co. could:a. purchase Canadian supplies.b. increase its borrowings in U.S.c. decrease prices on Canadian goods.d. decrease its borrowed funds in Canada.ANS: A PTS: 150. Mercury Co. has a subsidiary based in Italy and is exposed to translation exposure. Mercury forecaststhat its earnings next year will be €10 million. Mercury decides to hedge the expected earni ngs by selling €10 million forward. During the next year, the euro appreciated. Mercury's consolidatedearnings were ____ affected by the euro's movement, and Mercury's hedge position was ____ affected by the euro's movement.a. favorably; favorablyb. favorably; adverselyc. adversely; favorablyd. adversely; adverselyANS: B PTS: 151. All MNCs are subject to transaction exposure.a. Trueb. FalseANS: F PTS: 152. A foreign subsidiary with more revenue than expenses denominated in a foreign currency will befavorably affected by appreciation of the foreign currency.a. Trueb. FalseANS: T PTS: 153. Economic exposure represents any impact of exchange rate fluctuations on a firm's future cash flowsand thus includes transaction exposure.a. Trueb. FalseANS: T PTS: 154. In general, it is more difficult to effectively hedge economic or translation exposure than to hedgetransaction exposure.a. Trueb. FalseANS: T PTS: 155. To reduce economic exposure when a foreign currency has a greater impact on cash inflows, an MNCcould reduce its level of foreign sales, increase its foreign supply orders, or restructure debt to increase debt payments in the foreign currency.a. Trueb. FalseANS: T PTS: 156. When a foreign currency has a greater impact on cash outflows than on cash inflows, one possibility inrestructuring operations is to reduce foreign sales.a. Trueb. FalseANS: F PTS: 157. Even if translation exposure does not affect cash flows, it is a concern of many MNCs.a. Trueb. FalseANS: T PTS: 158. Translation exposure results when an MNC translates each subsidiary's financial data to its homecurrency for consolidated financial statements.a. Trueb. FalseANS: T PTS: 159. Implementing a forward or money market hedge to hedge translation exposure may increasetransaction exposure.a. Trueb. FalseANS: T PTS: 160. Which of the following statements is incorrect?a. Transaction exposure represents only the exchange rate risk when converting net foreigncash inflows to U.S. dollars or when purchasing foreign currencies to send payments.b. Economic exposure represents any impact of exchange rate fluctuations on a firm's futurecash flows.c. Firms can simply focus on hedging their foreign currency payables and/or receivables tohedge economic exposure.d. The management of economic exposure tends to serve as a long-term solution rather thanjust a short-term solution.ANS: C PTS: 161. Thornton Corporation has extensive liabilities denominated in Cyprus pounds resulting from importsfrom Cyprus. However, Thornton's revenues are denominated solely in U.S. dollars. Which of the following is probably not true?a. Thornton would benefit from a depreciation of the Cyprus pound.b. Thornton has at least some transaction exposure.c. Thornton has at least some economic exposure.d. Thornton has at least some translation exposure.e. All of the above are true.ANS: D PTS: 162. A U.S.-based MNC has a subsidiary in Barbados that generates substantial net cash inflowsdenominated in Barbados dollars. Given this information, the MNC would ____ from a(n) ____ of the Barbados dollar.a. benefit; appreciationb. benefit; depreciationc. not benefit; appreciationd. none of the aboveANS: A PTS: 163. Campbell Company has a subsidiary located in Jamaica. The subsidiary has generated losses for thelast five years and is expected to generate losses for the next ten years. Campbell is reluctant to divest of this subsidiary, however. Given this information, Campbell would ____ from a(n) ____ of the Jamaican dollar.a. benefit; appreciationb. benefit; depreciationc. not benefit; appreciationd. not benefit; depreciatione. B and CANS: E PTS: 164. ____ is (are) a limitation of hedging translation exposure.a. Inaccurate earnings forecastsb. Inadequate forward contracts for some currenciesc. Accounting distortionsd. Increased transaction exposuree. All of the aboveANS: E PTS: 1。
国际金融Finance_Test_Bank_
Chapter 6—Government Influence on Exchange Rates1. To force the value of the pound to appreciate against the dollar, theANS: A PTS: 1ANS: D PTS: 1ANS: B PTS: 14. To force the value of the British pound to depreciate against the dollar,ANS: C PTS: 15. Consider two countries that trade with each other, called X and Y.According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country BANS: C PTS: 16. A primary result of the Bretton Woods Agreement was:ANS: C PTS: 1ANS: B PTS: 1ANS: C PTS: 19. Under a managed float exchange rate system, the Fed may attempt tostimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced byANS: B PTS: 110. The value of the Canadian dollar, Japanese yen, and Australian dollarANS: C PTS: 1ANS: C PTS: 112. The currency of Country X is pegged to the currency of Country Y.Assume that Country Y's currency depreciates against the currency ofCountry Z. It is likely that Country X will export ____ to Country Z andANS: C PTS: 113. Assume Countries A, B, and C produce goods that are substitutes of eachother and that these countries engage in trade with each other. Assumethat Country A's currency floats against Country B's currency, and thatCountry C's currency is pegged to B's. If A's currency depreciates against B,ANS: C PTS: 114. Assume a central bank exchanges its currency for other foreigncurrencies in the foreign exchange market, but does not adjust for theANS: C PTS: 115. If the Fed desires to weaken the dollar without affecting the dollarANS: A PTS: 116. Which of the following is an example of direct intervention in foreignANS: C PTS: 117. A strong dollar places ____ pressure on inflation, which in turn placesANS: B PTS: 118. The Fed may use a stimulative monetary policy with least concern aboutANS: B PTS: 119. A weaker dollar places ____ pressure on U.S. inflation, which in turnplaces ____ pressure on U.S. interest rates, which places ____ pressureANS: C PTS: 1ANS: D PTS: 1ANS: B PTS: 122. The exchange rate mechanism (ERM) refers to the method of linking ____ANS: B PTS: 1ANS: A PTS: 1ANS: A PTS: 125. The risk-free interest rates among countries that have adopted the euroANS: A PTS: 1ANS: D PTS: 127. It has been argued that the exchange rate can be used as a policy tool.Assume that the U.S. government would like to reduce unemployment.ANS: A PTS: 128. It has been argued that the exchange rate can be used as a policy tool.Assume that the U.S. government would like to reduce inflation. WhichANS: B PTS: 129. To strengthen the dollar using sterilized intervention, the Fed wouldANS: C PTS: 130. As foreign exchange activity has grown, a given degree of central bankANS: C PTS: 1ANS: B PTS: 132. Which of the following countries was probably the least affectedANS: D PTS: 1ANS: A PTS: 134. China's yuan is presently:ANS: B PTS: 1ANS: B PTS: 1ANS: D PTS: 137. From a financial management perspective, which of the following is trueANS: C PTS: 1ANS: C PTS: 1ANS: A PTS: 140. Under a fixed exchange rate system, U.S. inflation would have a greaterimpact on inflation in other countries than it would under a freelyfloating exchange rate system.a. Trueb. FalseANS: T PTS: 141. An advantage of a fixed exchange rate system is that governments arenot required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.a. Trueb. FalseANS: F PTS: 142. Under the system known as the "dirty" float, official boundaries for theexchange rate exist, but they are wider than they are under a fixedexchange rate system.a. Trueb. FalseANS: F PTS: 143. Under a pegged exchange rate system, the home currency's value ispegged to a foreign currency.a. Trueb. FalseANS: T PTS: 144. A major advantage of the euro is the complete elimination of exchangerate risk on transactions between participating European countries,which encourages more trade and capital flows within Europe.a. Trueb. FalseANS: T PTS: 145. The European countries conforming to the euro are completely insulatedfrom movements in the euro's value with respect to other currencies.a. Trueb. FalseANS: F PTS: 146. The establishment of the euro allows for more consistent economicconditions across countries but eliminates the power of any individualEuropean country to solve local economic problems with its own unique monetary policy.a. Trueb. FalseANS: T PTS: 147. The Asian crisis is generally believed to have started in Japan.a. Trueb. FalseANS: F PTS: 148. A possible reason why China was less affected by the Asian crisis is thatits government exerts more influence on private enterprise than thegovernments of other Asian countries.a. Trueb. FalseANS: T PTS: 149. Currency devaluation can boost a country's exports, but currencyrevaluation can increase foreign competition.a. Trueb. FalseANS: T PTS: 150. Market forces are the determinant of exchange rates in a freely floatingexchange rate system.a. Trueb. FalseANS: T PTS: 151. If a government wishes to stimulate its economy in the form of increasedforeign demand for its country's products, it could attempt to weaken its currency.a. Trueb. FalseANS: T PTS: 152. In a sterilized exchange rate arrangement, a country's home currencyvalue is pegged to a foreign currency or to some unit of account.a. Trueb. FalseANS: F PTS: 153. The Bank of England is responsible for setting the monetary policy for theEuropean countries participating in the euro.a. Trueb. FalseANS: F PTS: 154. The Fed's indirect method of intervention is to trade dollars for oragainst other currencies.a. Trueb. FalseANS: F PTS: 155. China is commonly criticized for keeping the yuan's value at superficiallyhigh levels.a. Trueb. FalseANS: F PTS: 156. The Bretton Woods Agreement created a system under which exchangerates are determined by market forces without intervention by variousgovernments.a. Trueb. FalseANS: F PTS: 157. Nonsterilized intervention is intervention by a central bank in the foreignexchange market without adjusting for the change in money supply.a. Trueb. FalseANS: T PTS: 158. The euro is pegged to other currencies of European countries that havenot adopted the euro.a. Trueb. FalseANS: T PTS: 159. The Smithsonian Agreement was an agreement to allow currencies ofmajor countries to float without any barriers.a. Trueb. FalseANS: F PTS: 160. An example of indirect intervention by the Bank of Japan would be forthe Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.a. Trueb. FalseANS: T PTS: 161. A strong home currency can harm exports; exporters typically benefitfrom a weaker home country currency.a. Trueb. FalseANS: T PTS: 162. An advantage of freely floating exchange rates is that a country withfloating exchange rates is more insulated from unemployment problems in other countries.a. Trueb. FalseANS: T PTS: 163. All European countries now use the euro as their currency.a. Trueb. FalseANS: F PTS: 164. A country with a currency board does not have control over its localinterest rates.a. Trueb. FalseANS: T PTS: 165. Dollarization refers to the replacement of local currency with U.S.dollars.a. Trueb. FalseANS: T PTS: 166. A country with fixed exchange rates often faces constraints on growth.a. Trueb. FalseANS: T PTS: 167. The Bretton Woods Agreement called for the establishment of a singleEuropean currency.a. Trueb. FalseANS: F PTS: 168. The European Central Bank is responsible for monetary policy in allcountries that adopted the euro as its currency.a. Trueb. FalseANS: T PTS: 169. A currency peg is insulated from economic or political conditions, suchthat the exchange rate in the market will only change if the country'sgovernment breaks the peg and sets a new exchange rate.a. Trueb. FalseANS: F PTS: 170. If foreign investors fear that a peg may be broken because of fundoutflows from that country, they may attempt to purchase more of that currency before the peg is broken.a. Trueb. FalseANS: F PTS: 171. Normally, when a pegged exchange rate is broken because of a crisis inthat country, there is downward pressure on the local currency of that country.a. Trueb. FalseANS: T PTS: 172. Which one of the following is a disadvantage of a fixed exchange rateANS: C PTS: 173. The Smithsonian Agreement called for a devaluation of the U.S. dollar byANS: D PTS: 174. Which of the following did not occur as a result of Bretton WoodsANS: D PTS: 175. Assume that Japan and the United States frequently trade with eachother. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount ofANS: A PTS: 176. Which one is not a disadvantage of a freely floating exchange rateANS: C PTS: 1ANS: C PTS: 178. If a U.S. firm plans to frequently purchases goods from Hong Kong overthe next several years, it does not have to worry about exchange rate risk.a. Trueb. FalseANS: F PTS: 179. If the French government wants to decrease inflation in France, it willexchange foreign currency for euros.a. Trueb. FalseANS: F PTS: 1ANS: D PTS: 1ANS: B PTS: 182. Assuming no credit risk, the interest rates among countries in theeurozone should be similar.a. Trueb. FalseANS: T PTS: 1ANS: A PTS: 184. Which of the following is the most likely reason for revaluation of aANS: A PTS: 185. To weaken the dollar using sterilized intervention, the Fed will ____ U.S.ANS: B PTS: 186. The monetary policy implemented by the European Central Bank alwaysresults in favorable effects on all countries in the eurozone.a. Trueb. FalseANS: F PTS: 187. If the Fed desires to strengthen the dollar without affecting the dollarANS: D PTS: 188. Assume that the Fed intervenes by exchanging dollars for euros in theforeign exchange market. This will cause an ____ U.S. dollars and anANS: C PTS: 189. If the Fed ____ the interest rates when inflationary expectations remainunchanged, the most likely result is that the value of dollar will ____ andANS: A PTS: 190. A central bank may attempt to stimulate a stagnant economy byweakening the value of the currency.a. Trueb. FalseANS: T PTS: 191. A common way to reduce inflation is to weaken the value of the domesticcurrency.a. Trueb. FalseANS: F PTS: 192. If a speculator expects that the Fed will intervene by exchanging dollarsfor Japanese yen, she would most likely ____ to capitalize on thisANS: C PTS: 193. If a speculator expects that the Fed will intervene by exchanging eurosfor U.S. dollars, she would most likely ____ to capitalize on thisANS: A PTS: 194. If the Fed decides to weaken the dollar utilizing unsterilized intervention,it should be aware that this action may backfire because it will increase money supply and thus increase inflation.a. Trueb. FalseANS: T PTS: 195. A strong dollar places ____ pressure on U.S. inflation, which in turnplaces ____ pressure on U.S. interest rates, which in turn place ____ANS: B PTS: 196. The currency of Country X is pegged to the currency of Country Y.Assume that Country Y's currency appreciates against the currency ofCountry Z. It is likely that Country X will export ____ to Country Z andANS: D PTS: 197. If the Bank of England announces that it will start to frequently intervenein order to reduce the fluctuations of British pound, the premiums on call and put options will increase.a. Trueb. FalseANS: F PTS: 198. One of the best-known pegged exchange rate arrangements that wasestablished by several European countries in April 1972 and was difficultANS: B PTS: 199. Direct intervention is usually more effective than indirect intervention.a. Trueb. FalseANS: F PTS: 1100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation.a. Trueb. FalseANS: T PTS: 1101. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freelyfloating exchange rate system.a. Trueb. FalseANS: T PTS: 1102. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market tomaintain exchange rates within specified boundaries.a. Trueb. FalseANS: F PTS: 1103. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.a. Trueb. FalseANS: T PTS: 1104. Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixedexchange rate system.a. Trueb. FalseANS: F PTS: 1105. In order to stimulate a stagnant economy, a government operating undera managed float may attempt to weaken its currency.a. Trueb. FalseANS: T PTS: 1106. Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.a. Trueb. FalseANS: T PTS: 1107. Using indirect intervention, the Fed attempts to affect the dollar's value indirectly by influencing the factors that determine it, such as interest rates.a. Trueb. FalseANS: T PTS: 1108. While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raiseprices.a. Trueb. FalseANS: T PTS: 1109. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that resultfrom a strong home currency.a. Trueb. FalseANS: T PTS: 1110. Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economicproblems.a. Trueb. FalseANS: F PTS: 1ANS: B PTS: 1ANS: D PTS: 1113. Among the reasons for government intervention are:ANS: D PTS: 1ANS: A PTS: 1115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening inANS: B PTS: 1116. Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The FedANS: E PTS: 1ANS: C PTS: 1。
国际金融Finance_Test_Bank_
Chapter 6—Government Influence on Exchange Rates1. To force the value of the pound to appreciate against the dollar, theFederal Reserve should:a. sell dollars for pounds in theforeign exchange market and theEuropean Central Bank (ECB) shouldsell dollars for pounds in theforeign exchange market.b. sell pounds for dollars in theforeign exchange market and theEuropean Central Bank (ECB) shouldsell dollars for pounds in theforeign exchange market.c. sell pounds for dollars in theforeign exchange market and theEuropean Central Bank (ECB) shouldnot intervene.d. sell dollars for pounds in theforeign exchange market and theEuropean Central Bank (ECB) shouldsell pounds for dollars in theforeign exchange market.ANS: A PTS: 12. A weak dollar is normally expected to cause:a. high unemployment and high inflationin the U.S.b. high unemployment and low inflationin the U.S.c. low unemployment and low inflationin the U.S.d. low unemployment and high inflationin the U.S.ANS: D PTS: 13. A strong dollar is normally expected to cause:a. high unemployment and high inflationin the U.S.b. high unemployment and low inflationin the U.S.c. low unemployment and low inflationin the U.S.d. low unemployment and high inflationin the U.S.ANS: B PTS: 14. To force the value of the British pound to depreciate against the dollar,the Federal Reserve should:a. sell dollars for pounds in theforeign exchange market and the Bankof England should sell dollars forpounds in the foreign exchangemarket.b. sell pounds for dollars in theforeign exchange market and the Bankof England should sell dollars forpounds in the foreign exchangemarket.c. sell pounds for dollars in theforeign exchange market and the Bankof England should sell pounds fordollars in the foreign exchangemarket.d. sell dollars for pounds in theforeign exchange market and the Bankof England should sell pounds fordollars in the foreign exchangemarket.ANS: C PTS: 15. Consider two countries that trade with each other, called X and Y.According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system.a. floating rate; fixed rateb. floating rate; floating ratec. fixed rate; fixed rated. fixed rate; floating rateANS: C PTS: 16. A primary result of the Bretton Woods Agreement was:a. the establishment of the EuropeanMonetary System (EMS).b. establishing specific rules for whentariffs and quotas could be imposedby governments.c. establishing that exchange rates ofmost major currencies were to beallowed to fluctuate 1% above orbelow their initially set values.d. establishing that exchange rates ofmost major currencies were to beallowed to fluctuate freely withoutboundaries (although the centralbanks did have the right to intervenewhen necessary).ANS: C PTS: 17. A primary result of the Smithsonian Agreement was:a. the establishment of the EuropeanMonetary System (EMS).b. establishing that exchange rates ofmost major countries were to beallowed to fluctuate 2.25% above orbelow their initially set values.c. establishing specific rules for whentariffs and quotas could be imposedby governments.d. establishing that exchange rates ofmost major currencies were to beallowed to fluctuate freely withoutboundaries (although the centralbanks did have the right to intervenewhen necessary).ANS: B PTS: 18. Under a fixed exchange rate system:a. a foreign exchange market does notexist.b. central bank intervention in theforeign exchange market is notnecessary.c. central bank intervention in theforeign exchange market is oftennecessary.d. central bank intervention in theforeign exchange market is notallowed.ANS: C PTS: 19. Under a managed float exchange rate system, the Fed may attempt tostimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries.a. weakening; increaseb. weakening; decreasec. strengthening; increased. strengthening; decreaseANS: B PTS: 110. The value of the Canadian dollar, Japanese yen, and Australian dollarwith respect to the U.S. dollar are part of a:a. pegged system.b. fixed system.c. managed float system.d. crawling peg system.ANS: C PTS: 111. The interest rate of a country with a currency board:a. is less stable than it would bewithout a currency board.b. is typically below the interest rateof the currency to which it is tied.c. will move in tandem with the interestrate of the currency to which it istied.d. is completely independent of theinterest rate of the currency towhich it is tied.ANS: C PTS: 112. The currency of Country X is pegged to the currency of Country Y. Assumethat Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.a. more; moreb. less; lessc. more; lessd. less; moreANS: C PTS: 113. Assume Countries A, B, and C produce goods that are substitutes of eachother and that these countries engage in trade with each other. Assumethat Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.a. decrease; increaseb. decrease; decreasec. increase; decreased. increase; increaseANS: C PTS: 114. Assume a central bank exchanges its currency for other foreigncurrencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:a. pegged intervention.b. indirect intervention.c. nonsterilized intervention.d. sterilized intervention.e. A and DANS: C PTS: 115. If the Fed desires to weaken the dollar without affecting the dollarmoney supply, it should:a. exchange dollars for foreigncurrencies, and sell some of itsexisting Treasury security holdingsfor dollars.b. exchange foreign currencies fordollars, and sell some of itsexisting Treasury security holdingsfor dollars.c. exchange dollars for foreigncurrencies, and buy existingTreasury securities with dollars.d. exchange foreign currencies fordollars, and buy existing Treasurysecurities with dollars.ANS: A PTS: 116. Which of the following is an example of direct intervention in foreignexchange markets?a. lowering interest rates.b. increasing the inflation rate.c. exchanging dollars for foreigncurrency.d. imposing barriers on internationaltrade.ANS: C PTS: 117. A strong dollar places ____ pressure on inflation, which in turn places____ pressure on the dollar.a. upward; upwardb. downward; upwardc. upward; downwardd. downward; downwardANS: B PTS: 118. The Fed may use a stimulative monetary policy with least concern aboutcausing inflation if the dollar's value is expected to:a. remain stable.b. strengthen.c. weaken.d. none of the above will have an impacton inflation.ANS: B PTS: 119. A weaker dollar places ____ pressure on U.S. inflation, which in turnplaces ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices.a. upward; downward; upwardb. upward; downward; downwardc. upward; upward; downwardd. downward; upward; upwarde. downward; downward; upwardANS: C PTS: 120. The euro is the currency:a. adopted in all western Europeancountries as of 1999.b. adopted in all eastern Europeancountries as of 1999.c. adopted in all European countries asof 1999.d. none of the aboveANS: D PTS: 121. The euro has not been adopted by:a. Slovenia.b. the U.K.c. Germany.d. France.ANS: B PTS: 122. The exchange rate mechanism (ERM) refers to the method of linking ____currencies to each other within boundaries.a. Latin Americanb. Europeanc. Asiand. North AmericanANS: B PTS: 123. Countries that have adopted the euro must agree on a single ____ policy.a. monetaryb. fiscalc. worker compensationd. foreign relationsANS: A PTS: 124. Countries that have adopted the euro tend to have very similar ____.a. interest ratesb. inflation ratesc. income tax ratesd. budget deficitsANS: A PTS: 125. The risk-free interest rates among countries that have adopted the euroshould:a. not necessarily be similar torisk-free rates in other countries.b. equal the U.S. risk-free rate.c. equal the risk-free rates in otherEuropean countries.d. equal the risk-free rates in Asiancountries.ANS: A PTS: 126. Which of the following is true regarding the euro?a. Exchange rate risk betweenparticipating European currenciesis completely eliminated,encouraging more trade and capitalflows across European borders.b. It allows for more consistenteconomic conditions acrosscountries.c. It prevents each country fromconducting its own monetary policy.d. All of the above are true.ANS: D PTS: 127. It has been argued that the exchange rate can be used as a policy tool.Assume that the U.S. government would like to reduce unemployment.Which of the following is an appropriate action given this scenario?a. Weaken the dollarb. Strengthen the dollarc. Buy dollars with foreign currency inthe foreign exchange marketd. Implement a tight monetary policyANS: A PTS: 128. It has been argued that the exchange rate can be used as a policy tool.Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?a. Sell dollars for foreign currencyb. Buy dollars with foreign currencyc. Lower interest ratesd. None of the aboveANS: B PTS: 129. To strengthen the dollar using sterilized intervention, the Fed would____ dollars and simultaneously ____ Treasury securities.a. buy; sellb. sell; buyc. buy; buyd. sell; sellANS: C PTS: 130. As foreign exchange activity has grown, a given degree of central bankintervention has become:a. more effective.b. more frequent.c. less effective.d. none of the aboveANS: C PTS: 131. When using indirect intervention, a central bank is likely to focuson:a. inflation.b. interest rates.c. income levels.d. expectations of future exchangerates.ANS: B PTS: 132. Which of the following countries was probably the least affected(directly or indirectly) by the Asian crisis?a. Thailand.b. Indonesia.c. Russia.d. China.e. Malaysia.ANS: D PTS: 133. Which of the following is not true regarding Thailand?a. Thailand was one of the slowestgrowing countries before the Asiancrisis.b. High levels of spending and lowlevels of saving placed upwardpressure on prices of real estate,products, and on Thailand's localinterest rate.c. Thailand's baht was linked to thedollar prior to July 1997, which madeThailand an attractive site forforeign investors.d. Thai banks provided many loans thatwere very risky in their attempt tomake use of all of their funds.e. All of the above are true.ANS: A PTS: 134. China's yuan is presently:a. allowed to fluctuate freely withoutany central bank intervention.b. allowed to fluctuate but withcentral bank intervention.c. pegged to the dollar.d. pegged to the euro.ANS: B PTS: 135. During the period 1944-1971, the U.S. used a ____ system.a. euro exchange rateb. fixedc. dirty floatd. flexibleANS: B PTS: 136. Which of the following are examples of currency controls?a. import restrictions.b. prohibition of remittance of funds.c. ceilings on granting credit toforeign firms.d. all of the aboveANS: D PTS: 137. From a financial management perspective, which of the following is trueregarding the introduction of the Euro?a. U.S.-based MNCs are not subject toexchange rate risk when they havetransactions in euros.b. The euro is pegged to all otherEuropean currencies.c. Transactions costs decline for MNCsthat conduct transactions withinEurope.d. The euro replaced the British pound.ANS: C PTS: 138. Which of the following countries have not adopted the euro?a. Germanyb. Italyc. Switzerlandd. FranceANS: C PTS: 139. Which of the following are true about the Southeast Asian currencycrisis?a. It was preceded by several years oflarge capital inflows to Asia.b. It was preceded by a five-yearrecession in Asia.c. Asian interest rates declined duringthe crisis.d. Asian exchange rates were pegged tothe Japanese yen to resolve thecrisis.ANS: A PTS: 140. Under a fixed exchange rate system, U.S. inflation would have a greaterimpact on inflation in other countries than it would under a freely floating exchange rate system.a. Trueb. FalseANS: T PTS: 141. An advantage of a fixed exchange rate system is that governments arenot required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.a. Trueb. FalseANS: F PTS: 142. Under the system known as the "dirty" float, official boundaries forthe exchange rate exist, but they are wider than they are under a fixed exchange rate system.a. Trueb. FalseANS: F PTS: 143. Under a pegged exchange rate system, the home currency's value ispegged to a foreign currency.a. Trueb. FalseANS: T PTS: 144. A major advantage of the euro is the complete elimination of exchangerate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.a. Trueb. FalseANS: T PTS: 145. The European countries conforming to the euro are completely insulatedfrom movements in the euro's value with respect to other currencies.a. Trueb. FalseANS: F PTS: 146. The establishment of the euro allows for more consistent economicconditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy.a. Trueb. FalseANS: T PTS: 147. The Asian crisis is generally believed to have started in Japan.a. Trueb. FalseANS: F PTS: 148. A possible reason why China was less affected by the Asian crisis isthat its government exerts more influence on private enterprise than the governments of other Asian countries.a. Trueb. FalseANS: T PTS: 149. Currency devaluation can boost a country's exports, but currencyrevaluation can increase foreign competition.a. Trueb. FalseANS: T PTS: 150. Market forces are the determinant of exchange rates in a freelyfloating exchange rate system.a. Trueb. FalseANS: T PTS: 151. If a government wishes to stimulate its economy in the form of increasedforeign demand for its country's products, it could attempt to weaken its currency.a. Trueb. FalseANS: T PTS: 152. In a sterilized exchange rate arrangement, a country's home currencyvalue is pegged to a foreign currency or to some unit of account.a. Trueb. FalseANS: F PTS: 153. The Bank of England is responsible for setting the monetary policy forthe European countries participating in the euro.a. Trueb. FalseANS: F PTS: 154. The Fed's indirect method of intervention is to trade dollars for oragainst other currencies.a. Trueb. FalseANS: F PTS: 155. China is commonly criticized for keeping the yuan's value atsuperficially high levels.a. Trueb. FalseANS: F PTS: 156. The Bretton Woods Agreement created a system under which exchange ratesare determined by market forces without intervention by variousgovernments.a. Trueb. FalseANS: F PTS: 157. Nonsterilized intervention is intervention by a central bank in theforeign exchange market without adjusting for the change in money supply.a. Trueb. FalseANS: T PTS: 158. The euro is pegged to other currencies of European countries that havenot adopted the euro.a. Trueb. FalseANS: T PTS: 159. The Smithsonian Agreement was an agreement to allow currencies of majorcountries to float without any barriers.a. Trueb. FalseANS: F PTS: 160. An example of indirect intervention by the Bank of Japan would be forthe Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.a. Trueb. FalseANS: T PTS: 161. A strong home currency can harm exports; exporters typically benefitfrom a weaker home country currency.a. Trueb. False62. An advantage of freely floating exchange rates is that a country withfloating exchange rates is more insulated from unemployment problems in other countries.a. Trueb. FalseANS: T PTS: 163. All European countries now use the euro as their currency.a. Trueb. FalseANS: F PTS: 164. A country with a currency board does not have control over its localinterest rates.a. Trueb. FalseANS: T PTS: 165. Dollarization refers to the replacement of local currency with U.S.dollars.a. Trueb. FalseANS: T PTS: 166. A country with fixed exchange rates often faces constraints on growth.a. Trueb. FalseANS: T PTS: 167. The Bretton Woods Agreement called for the establishment of a singleEuropean currency.a. Trueb. False68. The European Central Bank is responsible for monetary policy in allcountries that adopted the euro as its currency.a. Trueb. FalseANS: T PTS: 169. A currency peg is insulated from economic or political conditions, suchthat the exchange rate in the market will only change if the country's government breaks the peg and sets a new exchange rate.a. Trueb. FalseANS: F PTS: 170. If foreign investors fear that a peg may be broken because of fundoutflows from that country, they may attempt to purchase more of that currency before the peg is broken.a. Trueb. FalseANS: F PTS: 171. Normally, when a pegged exchange rate is broken because of a crisisin that country, there is downward pressure on the local currency of that country.a. Trueb. FalseANS: T PTS: 172. Which one of the following is a disadvantage of a fixed exchange ratesystem:a. Importers are insulated from therisk that the currency willappreciate over time.b. Management of an MNC is lessdifficult.c. The government might change thevalue of the currency.d. Exporters are insulated from therisk that the currency willdepreciate over time.ANS: C PTS: 173. The Smithsonian Agreement called for a devaluation of the U.S. dollarby about ____ percent.a. 2.25b. 6c. 10d. 8ANS: D PTS: 174. Which of the following did not occur as a result of Bretton WoodsAgreement?a. Each currency was valued in terms ofgold.b. Values of all currencies were fixedwith respect to each other.c. Currencies were allowed to fluctuateno more than 1% above or below theinitially set rates.d. The United States experienced nobalance-of-trade deficits.ANS: D PTS: 175. Assume that Japan and the United States frequently trade with eachother. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.a. upward; reduce; unchangedb. upward; increase; higherc. downward; reduce; unchangedd. downward; increase; higherANS: A PTS: 176. Which one is not a disadvantage of a freely floating exchange ratesystem?a. It can adversely affect a countrythat has high unemployment.b. It can adversely affect a countrythat has high inflation.c. The government may intervene tochange the value of a given currency.d. The exchange rate risk is high andmay be costly to manage.ANS: C PTS: 177. A "dirty" float represents a system of:a. freely floating exchange rates.b. fixed exchange rates.c. floating exchange rates, but thecentral bank can manipulate thecurrency.d. fixed exchange rates, but thecentral bank can manipulate thecurrency.ANS: C PTS: 178. If a U.S. firm plans to frequently purchases goods from Hong Kong overthe next several years, it does not have to worry about exchange rate risk.a. Trueb. FalseANS: F PTS: 179. If the French government wants to decrease inflation in France, it willexchange foreign currency for euros.a. Trueb. FalseANS: F PTS: 180. The European Central Bank is located in:a. London.b. Denmark.c. Luxembourg.d. Frankfurt.ANS: D PTS: 181. Which of the following is not true regarding the eurozone?a. Members cannot set unique monetarypolicy individually.b. Members cannot apply their ownfiscal policies.c. Members have to agree on the idealmonetary policy.d. Its creation allowed for greaterpolitical union among its members.ANS: B PTS: 182. Assuming no credit risk, the interest rates among countries in theeurozone should be similar.a. Trueb. FalseANS: T PTS: 183. Which of the following is not a reason for devaluation of a currency?a. high inflation.b. to reduce balance-of-trade deficit.c. to decrease the amount of imports.d. high unemployment.ANS: A PTS: 184. Which of the following is the most likely reason for revaluation ofa currency?a. To reduce inflation.b. To stimulate the local economy.c. To increase the amount of exports.d. To increase balance-of-tradesurplus.ANS: A PTS: 185. To weaken the dollar using sterilized intervention, the Fed will ____U.S. dollars and simultaneously ____ Treasury securities.a. buy; sellb. sell; sellc. sell; buyd. buy; sellANS: B PTS: 186. The monetary policy implemented by the European Central Bank alwaysresults in favorable effects on all countries in the eurozone.a. Trueb. FalseANS: F PTS: 187. If the Fed desires to strengthen the dollar without affecting thedollar money supply, it should:a. exchange dollars for foreigncurrencies, and sell some of itsexisting Treasury security holdingsfor dollars.b. exchange foreign currencies fordollars, and sell some of itsexisting Treasury security holdingsfor dollars.c. exchange dollars for foreigncurrencies, and buy existingTreasury securities with dollars.d. exchange foreign currencies fordollars, and buy existing Treasurysecurities with dollars.ANS: D PTS: 188. Assume that the Fed intervenes by exchanging dollars for euros in theforeign exchange market. This will cause an ____ U.S. dollars and an ____ euros.a. inward shift in demand for; outwardshift in supply ofb. inward shift in demand for; inwardshift in supply ofc. outward shift in supply of; outwardshift in demand ford. outward shift in supply of; inwardshift in demand forANS: C PTS: 189. If the Fed ____ the interest rates when inflationary expectationsremain unchanged, the most likely result is that the value of dollar will ____ and the economy may ____.a. increases; appreciate; weakenb. decreases; appreciate; weakenc. increases; depreciate; strengthend. decreases; appreciate; strengthenANS: A PTS: 190. A central bank may attempt to stimulate a stagnant economy by weakeningthe value of the currency.a. Trueb. FalseANS: T PTS: 191. A common way to reduce inflation is to weaken the value of the domesticcurrency.a. Trueb. FalseANS: F PTS: 192. If a speculator expects that the Fed will intervene by exchangingdollars for Japanese yen, she would most likely ____ to capitalize on this intervention.a. purchase yen put optionsb. sell yen futures contractsc. purchase yen call optionsd. buy U.S. Treasury bondsANS: C PTS: 193. If a speculator expects that the Fed will intervene by exchanging eurosfor U.S. dollars, she would most likely ____ to capitalize on this intervention.a. purchase euro put optionsb. purchase euro futures contractsc. purchase yen call optionsd. sell U.S. Treasury bondsANS: A PTS: 194. If the Fed decides to weaken the dollar utilizing unsterilizedintervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation.a. Trueb. FalseANS: T PTS: 195. A strong dollar places ____ pressure on U.S. inflation, which in turnplaces ____ pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices.a. downward; upward; upwardb. downward; downward; upwardc. upward; upward; downwardd. upward; downward; upwardANS: B PTS: 196. The currency of Country X is pegged to the currency of Country Y. Assumethat Country Y's currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.a. more; moreb. more; lessc. less; lessd. less; moreANS: D PTS: 197. If the Bank of England announces that it will start to frequentlyintervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase.a. Trueb. FalseANS: F PTS: 198. One of the best-known pegged exchange rate arrangements that wasestablished by several European countries in April 1972 and wasdifficult to maintain is called the:a. European Monetary System (EMS).b. snake agreement.c. Maastricht Treaty.d. European Union.ANS: B PTS: 199. Direct intervention is usually more effective than indirectintervention.a. Trueb. FalseANS: F PTS: 1100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation.a. Trueb. FalseANS: T PTS: 1101. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.a. Trueb. FalseANS: T PTS: 1102. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.a. Trueb. FalseANS: F PTS: 1103. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreigncompetition.a. True。
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Chapter 8—Relationships among Inflation, Interest Rates, and Exchange Rates1. Assume a two-country world: Country A and Country B. Which of the following is correct aboutpurchasing power parity (PPP) as related to these two countries?a. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency willweaken.b. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency willweaken.c. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency willstrengthen.d. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency willweaken.ANS: A PTS: 12. Given a home country and a foreign country, purchasing power parity (PPP) suggests that:a. a home currency will depreciate if the current home inflation rate exceeds the currentforeign interest rate.b. a home currency will appreciate if the current home interest rate exceeds the currentforeign interest rate.c. a home currency will appreciate if the current home inflation rate exceeds the currentforeign inflation rate.d. a home currency will depreciate if the current home inflation rate exceeds the currentforeign inflation rate.ANS: D PTS: 13. The international Fisher effect (IFE) suggests that:a. a home currency will depreciate if the current home interest rate exceeds the currentforeign interest rate.b. a home currency will appreciate if the current home interest rate exceeds the currentforeign interest rate.c. a home currency will appreciate if the current home inflation rate exceeds the currentforeign inflation rate.d. a home currency will depreciate if the current home inflation rate exceeds the currentforeign inflation rate.ANS: A PTS: 14. Because there are a variety of factors in addition to inflation that affect exchange rates, this will:a. reduce the probability that PPP shall hold.b. increase the probability that PPP shall hold.c. increase the probability the IFE will hold.d. B and CANS: A PTS: 15. Because there are sometimes no substitutes for traded goods, this will:a. reduce the probability that PPP shall hold.b. increase the probability that PPP shall hold.c. increase the probability the IFE will hold.d. B and CANS: A PTS: 16. According to the IFE, if British interest rates exceed U.S. interest rates:a. the British pound's value will remain constant.b. the British pound will depreciate against the dollar.c. the British inflation rate will decrease.d. the forward rate of the British pound will contain a premium.e. today's forward rate of the British pound will equal today's spot rate.ANS: B PTS: 17. Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:a. the nominal interest rates of both countries are the same.b. the inflation rates of both countries are the same.c. the exchange rates of both countries will move in a similar direction against othercurrencies.d. none of the aboveANS: D PTS: 18. Given a home country and a foreign country, purchasing power parity suggests that:a. the inflation rates of both countries will be the same.b. the nominal interest rates of both countries will be the same.c. A and Bd. none of the aboveANS: D PTS: 19. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fishereffect (IFE) to hold:a. the value of the euro would often appreciate against the dollar.b. the value of the euro would often depreciate against the dollar.c. the value of the euro would remain constant most of the time.d. the value of the euro would appreciate in some periods and depreciate in other periods, buton average have a zero rate of appreciation.ANS: A PTS: 110. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:a. some corporations with excess cash can lock in a guaranteed higher return on futureforeign short-term investments.b. some corporations with excess cash could have generated profits on average from coveredinterest arbitrage.c. some corporations with excess cash could have generated higher profits on average fromforeign short-term investments than from domestic short-term investments.d. most corporations that consistently invest in foreign short-term investments would havegenerated the same profits (on average) as from domestic short-term investments.ANS: C PTS: 111. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate inequilibrium and:a. the income differential.b. the forward discount or premium.c. the inflation differential.d. none of the aboveANS: C PTS: 112. According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflationover one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:a. 2%.b. 3%.c. 2%.d. 5%.e. 8%.ANS: ESOLUTION: 5% + 3% = 8%PTS: 113. According to the international Fisher effect, if investors in all countries require the same real rate ofreturn, the differential in nominal interest rates between any two countries:a. follows their exchange rate movement.b. is due to their inflation differentials.c. is zero.d. is constant over time.e. C and DANS: B PTS: 114. Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate isexpected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.a. 2 percentage points above; depreciate by about 2%b. 3 percentage points above; depreciate by about 3%c. 3 percentage points below; appreciate by about 3%d. 3 percentage points below; depreciate by about 3%e. 2 percentage points below; appreciate by about 2%ANS: E PTS: 115. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S. interestrate is 6% and the nominal Swiss rate is 4%. According to the international Fisher effect, the franc will ____ by about ____.a. appreciate; 3%b. appreciate; 1%c. depreciate; 3%d. depreciate; 2%e. appreciate; 2%ANS: E PTS: 116. Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest ratedecreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.a. lower U.S. inflation; depreciateb. lower U.S. inflation; appreciatec. higher U.S. inflation; depreciated. higher U.S. inflation; appreciateANS: A PTS: 117. According to the international Fisher effect, if Venezuela has a much higher nominal rate than othercountries, its inflation rate will likely be ____ than other countries, and its currency will ____.a. lower; strengthenb. lower; weakenc. higher; weakend. higher; strengthenANS: C PTS: 118. If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predictedspot rate of the currency in one year according to the international Fisher effect.a. greater thanb. less thanc. equal tod. answer is dependent on whether the forward rate has a discount or premiumANS: C PTS: 119. The Fisher effect is used to determine the:a. real inflation rate.b. real interest rate.c. real spot rate.d. real forward rate.ANS: B PTS: 120. Latin American countries have historically experienced relatively high inflation, and their currencieshave weakened. This information is somewhat consistent with the concept of:a. interest rate parity.b. locational arbitrage.c. purchasing power parity.d. the exchange rate mechanism.ANS: C PTS: 121. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. Accordingto PPP, the Singapore dollar should ____ by ____%.a. appreciate; 4.85b. depreciate; 3,11c. appreciate; 3.11d. depreciate; 4.85ANS: ASOLUTION: (1.08/1.03) 1 = 4.85%.PTS: 122. The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange ratefor the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:a. $0.0076.b. $0.0073.c. $0.0070.d. $0.0066.ANS: CSOLUTION: (1.03/1.10) $.0075 = $.0070PTS: 123. Assume that the U.S. inflation rate rate is higher than the New Zealand inflation rate. This will causeU.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).a. reduce; increase; appreciationb. increase; reduce; appreciationc. reduce; increase; depreciationd. reduce; increase; appreciationANS: B PTS: 124. The following regression analysis was conducted for the inflation rate information and exchange rateof the British pound:Regression results indicate that a0 = 0 and a1 = 2. Therefore:a. purchasing power parity holds.b. purchasing power parity overestimated the exchange rate change during the period underexamination.c. purchasing power parity underestimated the exchange rate change during the period underexamination.d. purchasing power parity will overestimate the exchange rate change of the British poundin the future.ANS: C PTS: 125. Which of the following is indicated by research regarding purchasing power parity (PPP)?a. PPP clearly holds in the short run.b. Deviations from PPP are reduced in the long run.c. PPP clearly holds in the long run.d. There is no relationship between inflation differentials and exchange rate movements inthe short run or long run.ANS: B PTS: 126. The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for theBritish pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:a. $1.47.b. $1.53.c. $1.43.d. $1.57.ANS: ASOLUTION: (1.05/1.07) ⨯ (1.50) = $1.47.PTS: 127. If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound(£) is expected to ____ by about ____%, according to the international Fisher effect (IFE).a. depreciate; 2.9b. appreciate; 2.9c. depreciate; 1.0d. appreciate; 1.0e. none of the aboveANS: BSOLUTION: (1.06/1.03) - 1 = 2.9%.PTS: 128. There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S.interest rates are higher than Japanese interest rates. These investors most likely believe in theinternational Fisher effect.a. Trueb. FalseANS: F PTS: 129. Which of the following is not true regarding IRP, PPP, and the IFE?a. IRP suggests that a currency's spot rate will change according to interest rate differentials.b. PPP suggests that a currency's spot rate will change according to inflation differentials.c. The IFE suggests that a currency's spot rate will change according to interest ratedifferentials.d. All of the above are true.ANS: A PTS: 130. The relative form of purchasing power parity (PPP) accounts for the possibility of marketimperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.a. Trueb. FalseANS: T PTS: 131. According to the international Fisher effect (IFE), the exchange rate percentage change should beapproximately equal to the differential in income levels between two countries.a. Trueb. FalseANS: F PTS: 132. Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.a. Trueb. FalseANS: T PTS: 133. The IFE theory suggests that foreign currencies with relatively high interest rates will appreciatebecause the high nominal interest rates reflect expected inflation.a. Trueb. FalseANS: F PTS: 134. If the IFE theory holds, that means that covered interest arbitrage is not feasible.a. Trueb. FalseANS: F PTS: 135. If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies withrelatively high interest rates should have forward discounts and those currencies would be expected to depreciate.a. Trueb. FalseANS: T PTS: 136. Interest rate parity can only hold if purchasing power parity holds.a. Trueb. FalseANS: F PTS: 137. If interest rate parity holds, then the international Fisher effect must hold.a. Trueb. FalseANS: F PTS: 138. Which of the following theories suggests that the percentage change in spot exchange rate of acurrency should be equal to the inflation differential between two countries?a. purchasing power parity (PPP).b. triangular arbitrage.c. international Fisher effect (IFE).d. interest rate parity (IRP).ANS: A PTS: 139. Which of the following theories suggests that the percentage difference between the forward rate andthe spot rate depends on the interest rate differential between two countries?a. purchasing power parity (PPP).b. triangular arbitrage.c. international Fisher effect (IFE).d. interest rate parity (IRP).ANS: D PTS: 140. Which of the following theories can be assessed using data that exists at one specific point in time?a. purchasing power parity (PPP)b. international Fisher effect (IFE).c. A and Bd. interest rate parity (IRP).ANS: D PTS: 141. Which of the following theories suggests the percentage change in spot exchange rate of a currencyshould be equal to the interest rate differential between two countries?a. absolute form of PPP.b. relative form of PPP.c. international Fisher effect (IFE).d. interest rate parity (IRP).ANS: C PTS: 142. The following regression analysis was conducted for the inflation rate information and exchange rateof the British pound:Regression results indicate that a0 = 0 and a1 = 1. Therefore:a. purchasing power parity holds.b. purchasing power parity overestimated the exchange rate change during the period underexamination.c. purchasing power parity underestimated the exchange rate change during the period underexamination.d. purchasing power parity will overestimate the exchange rate change of the British poundin the future.ANS: A PTS: 143. The following regression analysis was conducted for the inflation rate information and exchange rateof the British pound:Regression results indicate that a0 = 0 and a1 = 0.4. Therefore:a. purchasing power parity holds.b. purchasing power parity overestimated the exchange rate change during the period underexamination.c. purchasing power parity underestimated the exchange rate change during the period underexamination.d. purchasing power parity will overestimate the exchange rate change of the British poundin the future.ANS: B PTS: 144. Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to theinternational Fisher effect, British pound's spot exchange rate should ____ by about ____ over the year.a. depreciate; 1.9%b. appreciate; 1.9%c. depreciate; 3.94%d. appreciate; 3.94%ANS: BSOLUTION: (1 + .07)/(1 + .05) - 1 = 1.9%PTS: 145. According to the international Fisher effect (IFE):a. the nominal rate of return on a foreign investment should be equal to the nominal rate ofreturn on the domestic investment.b. the exchange rate adjusted rate of return on a foreign investment should be equal to theinterest rate on a local money market investment.c. the percentage change in the foreign spot exchange rate will be positive if the foreigninterest rate is higher than the local interest rate.d. the percentage change in the foreign spot exchange rate will be negative if foreign interestrate is lower than the local interest rate.ANS: B PTS: 146. Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on euros is 8%. Youhave $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.40. What will be the yield on your investment if you invest in euros?a. 8%b. 5%c. 3%d. 2.78%ANS: B PTS: 147. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market?a. 6%b. 3%c. 4%d. 2%ANS: CSOLUTION: (1 + .05)/(1 + .07) ⨯ $0.689 = $0.676. ($100,000/A$0.689) ⨯ (1 + .06) =A$153,846 ⨯ $0.676 = $104,000. ($104,000 - $100,000)/$100,000 = 4% PTS: 148. Assume that the international Fisher effect (IFE) holds between the U.S. and the U.K. The U.S.inflation is expected to be 5%, while British inflation is expected to be 3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What does this say about real interest rates expected by British investors?a. real interest rates expected by British investors are equal to the interest rates expected byU.S. investors.b. real interest rates expected by British investors are 2 percentage points lower than the realinterest rates expected by U.S. investors.c. real interest rates expected by British investors are 2 percentage points above the realinterest rates expected by U.S. investors.d. 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.ANS: C PTS: 149. The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates willappreciate because those high rates will attract investment and increase the demand for that currency.a. Trueb. FalseANS: F PTS: 150. If purchasing power parity holds, then the Fisher effect must also hold.a. Trueb. FalseANS: F PTS: 151. If the international Fisher effect (IFE) holds, the local investors are expected to earn the same returnfrom investing internationally as they would from investing in their local markets.a. Trueb. FalseANS: T PTS: 152. Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is expected to be5% over the next year. Today you receive an offer to purchase a one-year put option for $.03 per unit on Australian dollars at a strike price of $0.72. Today the Australian dollar is quoted at $0.70. You believe that purchasing power parity holds. You should accept the offer.a. Trueb. FalseANS: FSOLUTION: Spot rate in a year = (1.09/1.05) ⨯ $0.70 = $0.73PTS: 153. Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%.For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.a. 3.43%b. 5.68%c. 6.5%d. 7.3%ANS: ASOLUTION: (1 + .05) ⨯ (1 + .015) - 1 = 3.43%PTS: 154. Purchasing power parity (PPP) focuses on the relationship between nominal interest rates andexchange rates between two countries.a. Trueb. FalseANS: F PTS: 155. According to the international fisher effect (IFE), the exchange rate percentage change should beapproximately equal to the differential in income levels between two countries.a. Trueb. FalseANS: F PTS: 156. According to purchasing power parity (PPP), if a foreign country's inflation rate is below the inflationrate at home, home country consumers will increase their imports from the foreign country and foreign consumers will lower their demand for home country products. These market forces cause the foreign currency to appreciate.a. Trueb. FalseANS: T PTS: 157. According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in theforeign country, the home currency should depreciate.a. Trueb. FalseANS: T PTS: 158. The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange ratefor the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen has adjustedaccording to purchasing power parity, the new exchange rate for the yen will bea. $0.0078.b. $0.0082.c. $0.0111.d. $0.00492.e. None of the aboveANS: B PTS: 159. Assume that the New Zealand inflation rate is higher than the U.S. inflation rate. This will cause U.S.consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).a. reduce; increase; appreciationb. increase; reduce; depreciationc. reduce; increase; depreciationd. reduce; increase; appreciationANS: C PTS: 160. The following regression was conducted for the exchange rate of the Cyprus pound (CYP):Regression results indicate that a0 = 0 and a1 = 2. Therefore,a. purchasing power parity holds.b. purchasing power parity overestimated the exchange rate change during the period underexamination.c. purchasing power parity underestimated the exchange rate change during the period underexamination.d. purchasing power parity will overestimate the exchange rate change of the Cyprus poundin the future.ANS: C PTS: 161. Among the reasons that purchasing power parity (PPP) does not consistently occur are:a. exchange rates are affected by interest rate differentials.b. exchange rates are affected by national income differentials and government controls.c. supply and demand may not adjust if no substitutable goods are available.d. all of the above are reasons that PPP does not consistently occur.ANS: D PTS: 162. Which of the following is not true regarding IRP, PPP, and the IFE?a. IRP suggests that a currency's spot rate will change according to interest rate differentials.b. PPP suggests that a currency's spot rate will change according to inflation differentials.c. The IFE suggests that a currency's spot rate will change according to interest ratedifferentials.d. All of the above are true.ANS: A PTS: 1。