Question 1

An indirect exchange rate can be converted to a direct exchange rate by:

Accepted Answer

A)   dividing the indirect rate by number of U.S. Dollars required to purchase one unit of the other currency.
B)   dividing the indirect rate by 100.
C)   multiplying the indirect rate by the spot rate.
D)   taking the inverse of the indirect rate.

Question 2

Discuss similarities and differences between futures contracts and forward contracts.

Accepted Answer

Both futures and forwards set an obligat...

Question 3

The difference in interest rates between countries is believed to be equal to the expected change in spot exchange rates.

Accepted Answer

A) True 
 B)False

Question 4

Assuming that the international Fisher effect is holding,what will be the effect of an increase in nominal interest rate on the currency?

Accepted Answer

A)   Currency will appreciate.
B)   Currency will depreciate.
C)   No significant change in exchange rate.
D)   Currency will sell at a forward premium.

Question 5

What is the basic difference between hedgers and speculators?

Accepted Answer

The difference between hedging and specu...

Question 6

If prices in the U.S.rise less rapidly than in Canada,which of the following would be expected according to purchasing power parity?

Accepted Answer

A)   The value of the Canadian Dollar will decline, relative to the U.S. Dollar
B)   The value of the U.S. Dollar will decline, relative to the Canadian Dollar
C)   Inflation will increase in Canada
D)   The price of gold will decline

Question 7

If the difference between forward and spot exchange rates is positive,interest rate parity would predict that:

Accepted Answer

A)   the difference in interest rates between countries will be negative.
B)   the difference in interest rates between countries will be positive.
C)   there will be no difference in interest rates between countries.
D)   the difference will be quickly eliminated.

Question 8

Explain the interest rate parity theory.

Accepted Answer

This states that the interest differenti...

Question 9

If interest rates are higher in Italy than in Canada,the market expects that the Euro will:

Accepted Answer

A)   appreciate against the Canadian Dollar.
B)   depreciate against the Canadian Dollar.
C)   offer a higher real rate of return than the Canadian Dollar.
D)   be selling at a forward discount.

Question 10

Consider the following spot exchange rates: $2.56/£,¥65.62/$,DM1.0/$,and L1,263/$.Which of the following seems to violate the law of one price if gold sells for $464 per ounce in the Canada? Dollars in the exchange rates are Canadian.

Accepted Answer

A)   1 troy oz. gold = £181,250
B)   1 troy oz. gold = ¥30,448
C)   1 troy oz. gold = DM464
D)   1 troy oz. gold = L550,500

Question 11

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

Accepted Answer

One advantage of holding futures is the ...

Question 12

The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

Accepted Answer

A)   1.3%
B)   2.9%
C)   4.1%
D)   7.0%

Question 13

Which of the following would you expect to be nearly equal across countries?

Accepted Answer

A)   Nominal interest rates
B)   Real interest rates
C)   Inflation rates
D)   Forward premium

Question 14

One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:

Accepted Answer

A)   transaction costs in the forward market are high.
B)   forward rates are always lower than spot rates.
C)   hedged currency could appreciate during the period.
D)   hedged currency could depreciate during the period.

Question 15

A firm intends to hedge against exchange loss,a large future payment that must be made in a foreign currency.Which of the following identifies the cost of such a hedge?

Accepted Answer

A)   Difference between expected and current spot rates
B)   Difference between expected and current forward rates
C)   Difference between the forward premium and the forward discount
D)   Difference between the forward rate and the expected future spot rate

Question 16

If the indirect exchange rate between French Francs and U.S.Dollars is 6.8/1,then the direct exchange rate between these currencies is:

Accepted Answer

A)   $.1471/FFr
B)   $/6.8FFr
C)   FFr/$6.8
D)   FFr/$.1471

Question 17

Explain the purchasing power parity.

Accepted Answer

In its strictest form,purchasing power p...

Question 18

During the 1980s,the Japanese Yen appreciated against the U.S.Dollar.As a result of this,the Japanese products became less price competitive in the U.S.This is an example of:

Accepted Answer

A)   contractual risk.
B)   non-contractual risk.
C)   exchange rate risk.
D)   forward premium.

Question 19

Which of the following is correct when foreign currency is contracted in the forward market?

Accepted Answer

A)   A fixed amount is paid when initiating the contract.
B)   A fixed amount is paid at the end of the contract.
C)   The amount to be paid is determined and paid at the end of the contract.
D)   The amount to be paid is determined periodically and paid in installments during the contract.

Question 20

You are importing TV sets worth ¥10,000,000 from a Japanese manufacturer,and this amount is payable after six months.You can hedge your exchange risk by doing one of the following.

Accepted Answer

A)   Buying Japanese Yen in the forward market.
B)   Selling Japanese Yen in the forward market.
C)   Borrowing Japanese Yen.
D)   Do nothing.

Exam 24: International Financial Management

If the difference between forward and spot exchange rates is positive,interest rate parity would predict that:

Correct AnswerverifiedShow Answer

Explain the interest rate parity theory.

Correct AnswerverifiedThis states that the interest differenti...View AnswerShow Answer

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

Correct AnswerverifiedOne advantage of holding futures is the ...View AnswerShow Answer

If prices in the U.S.rise less rapidly than in Canada,which of the following would be expected according to purchasing power parity?

Correct AnswerverifiedShow Answer

During the 1980s,the Japanese Yen appreciated against the U.S.Dollar.As a result of this,the Japanese products became less price competitive in the U.S.This is an example of:

Correct AnswerverifiedShow Answer

If the indirect exchange rate between French Francs and U.S.Dollars is 6.8/1,then the direct exchange rate between these currencies is:

Correct AnswerverifiedShow Answer

Discuss similarities and differences between futures contracts and forward contracts.

Correct AnswerverifiedBoth futures and forwards set an obligat...View AnswerShow Answer

An indirect exchange rate can be converted to a direct exchange rate by:

Correct AnswerverifiedShow Answer

What is the basic difference between hedgers and speculators?

Correct AnswerverifiedThe difference between hedging and specu...View AnswerShow Answer

If interest rates are higher in Italy than in Canada,the market expects that the Euro will:

Correct AnswerverifiedShow Answer

Which of the following would you expect to be nearly equal across countries?

Correct AnswerverifiedShow Answer

Which of the following is correct when foreign currency is contracted in the forward market?

Correct AnswerverifiedShow Answer

Explain the purchasing power parity.

Correct AnswerverifiedIn its strictest form,purchasing power p...View AnswerShow Answer

The difference in interest rates between countries is believed to be equal to the expected change in spot exchange rates.

Correct AnswerverifiedShow Answer

Assuming that the international Fisher effect is holding,what will be the effect of an increase in nominal interest rate on the currency?

Correct AnswerverifiedShow Answer

One of the drawbacks of using forward contracts to hedge foreign-exchange risk is that the:

Correct AnswerverifiedShow Answer

The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the U.S.is 5%.What is the approximate inflation rate in the United Kingdom?

Correct AnswerverifiedShow Answer

Consider the following spot exchange rates: $2.56/£,¥65.62/$,DM1.0/$,and L1,263/$.Which of the following seems to violate the law of one price if gold sells for $464 per ounce in the Canada? Dollars in the exchange rates are Canadian.

Correct AnswerverifiedShow Answer

You are importing TV sets worth ¥10,000,000 from a Japanese manufacturer,and this amount is payable after six months.You can hedge your exchange risk by doing one of the following.

Correct AnswerverifiedShow Answer

A firm intends to hedge against exchange loss,a large future payment that must be made in a foreign currency.Which of the following identifies the cost of such a hedge?

Correct AnswerverifiedShow Answer

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This states that the interest differenti...
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One advantage of holding futures is the ...
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Correct Answer
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Correct Answer
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Both futures and forwards set an obligat...
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The difference between hedging and specu...
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Correct Answer
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Correct Answer
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In its strictest form,purchasing power p...
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Correct Answer
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Correct Answer
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Correct Answer
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