CHAPTER 18

        1.     If a commodity costs the same regardless of what currency is used to purchase it or where it is selling, then _________________.

        A)        forward exchange rates are equal

        B)        interest rate parity holds

        C)        relative purchasing power parity holds

        D)        uncovered interest rate parity holds

        E)        absolute purchasing power parity holds

        2.        Suppose absolute purchasing power parity holds. The exchange rate between Indian rupees and U.S. dollars is Rs .2312 per $1.00. If an automobile costs $35,000 in the United States, how much should the same car cost in India?

        A)    Rs 3,624

        B)    Rs 4,426

        C)    Rs 8,092

        D)    Rs 8,225

        E)     Rs 151,384

        3.     The passage of the North American Free Trade Agreement (NAFTA) in 1994 sharply reduced trade barriers between the United States and Mexico. All else equal, the absolute PPP theory predicts that the exchange rate between the dollar and the peso will adjust to make the cost of goods in Mexico cheaper than the cost of identical goods in the U.S.

        A)    True

        B)    False

        4.     The current exchange rate between the U.S. and Mexico is Ps600 per $1.00. The nominal risk-free rate in the U.S. is 5%, while the Mexican rate is 28%. What is the only possible forward rate that could prevail that would eliminate any arbitrage opportunities?

        A)        Ps455.00 per $1.00

        B)        Ps558.72 per $1.00

        C)        Ps885.12 per $1.00

        D)        Ps731.43 per $1.00

        E)        Ps842.85 per $1.00

        5.     A currency is said to be selling at a discount relative to the dollar when ____________.

        A)    the foreign currency is less expensive in the future than it is today relative to the dollar

        B)    the foreign currency sells for less than 1 unit of foreign currency per U.S. dollar

        C)    the foreign currency currently sells for more than 1 unit of foreign currency per U.S. dollar

        D)    the foreign currency is overpriced in the spot market

        E)     the foreign currency is underpriced in the spot market

        6.     The foreign exchange market is an example of an organized exchange with a specific physical location for trading.

        A)    True

        B)    False

        7.     The current spot rate between Belgian francs and U.S. dollars is BF.03591 per $1.00. The rate on U.S. T-bills is 5% and the rate on the Belgian risk-free security is 8%. What is the approximate 2-year forward rate if interest rate parity holds?

        A)        BF.0321 BF per $1.00

        B)        BF.0328 BF per $1.00

        C)        BF.0345 BF per $1.00

        D)        BF.0381 BF per $1.00

        E)        BF.0556 BF per $1.00

        8.        According to today's Wall Street Journal, Deutsche Marks have gone from $0.6486 per Mark to $0.6496 per Mark. In other words, ___________.

        A)    the value of the U.S. dollar has fallen against the value of the Deutsche Mark

        B)    the value of the U.S. dollar has risen against the value of the Deutsche Mark

        C)    the value of the U.S. dollar has remained unchanged relative to the value of the Deutsche Mark

        D)    there is not enough information to make a statement about the relative values of the U.S. dollar and the Deutsche Mark

        9.        Suppose absolute purchasing power parity holds. The exchange rate between British pounds and U.S. dollars is £.4825 per dollar. If a computer costs $2,995 in the United States, how much should it cost in Britain?

        A)        £1,180

        B)        £1,445

        C)        £1,576

        D)        £2,373

        E)        £6,207

        10.   A(n) ___________ is a security issued in the U.S. to represent claims on shares of a foreign stock.

        A)        American Depository Receipt

        B)        Samurai bond

        C)        European Currency Unit

        D)        Swap

        E)     Gilt

        11.        Which of the following is/are required for absolute purchasing power parity to hold?

                I. There are barriers to trade

                II. The transactions cost of trading must be zero

                III. The commodity in question must have identical characteristics in all locations

        A)    I only

        B)    II only

        C)    III only

        D)    II and III only

        E)     I, II and III

        12.        ___________ will tell you the price of agreeing today to take delivery of a Canadian Dollar 60 days from now.

        A)    The cross-rate

        B)    The spot exchange rate

        C)    The forward exchange rate

        D)    The London Interbank Offer Rate

        E)     The swap rate

        13.        Suppose you are reviewing the exchange rates for the Irish Punt (P), the Swiss Franc (SF) and the U.S. Dollar ($). You see the following quotes: P 3 per $1; SF 9 per $1. What is the cross-rate for Punts per Swiss Franc?

        A)        P.133 per SF1

        B)        P.333 per SF1

        C)        P.667 per SF1

        D)        P3.000 per SF1

        E)        P9.000 per SF1

        14.   If the percentage difference between the forward exchange rate and the spot exchange rate is equal to the interest rate differential between two countries, then ___________ holds.

        A)    the unbiased interest parity theory

        B)    the interest rate parity theory

        C)    the relative purchasing power parity theory

        D)    the absolute purchasing power parity theory

        E)     the international Fisher effect

Use the following to answer question 15:

        U.S. $ Equivalent        Currency per $

Brazil (Real)        .9377        1.06644

France (Franc)        .1731        5.77701

Germany (Mark)        .5858        1.70707

        15.   A Mercedes costs DM153,636. How many U.S. dollars would you need to buy the car?

        A)        $90,000

        B)        $93,000

        C)        $98,600

        D)        $144,768

        E)        $262,267

        16.   On January 1st, you make plans to travel to France the following summer. The quote for French francs is $0.2000 per franc. Since it will be a short trip, you believe $1,000 in spending money will be sufficient. On June 1st, the quote for francs is $0.2500 per franc. As a result, your $1,000 will ___________.

        A)    buy 25 percent fewer francs than you had planned

        B)    buy 20 percent more francs than you had planned

        C)    buy 20 percent fewer francs than you had planned

        D)    buy 25 percent more francs than you had planned

        E)     buy exactly as many francs as you had planned

        17.        Which of the following describes the interest rate parity (IRP) condition?

        A)    Ft = S0 + [1 + (RFC - RUS)]t

        B)    Ft = S0 ´ [1 + (RFC - RUS)]t

        C)    Ft = S0/[1 + (RFC - RUS)]t

        D)    Ft = [1 + S0] ´ [1 + (RFC - RUS)]t

        E)     Ft = [1 + S0]/[1 + (RFC - RUS)]t

        18.        _____________ describes a transaction in which two parties exchange a floating-rate payment for a fixed-rate payment.

        A)    An American Depository Receipt

        B)    A currency swap

        C)    A European Currency Unit

        D)    A Gilt

        E)     An interest rate swap

        19.        According to this morning's Wall Street Journal, you can exchange $1.00 for $0.76 Canadian in three months. Thus, the ________ is $1.32 Canadian.

        A)        backward rate

        B)        forward rate

        C)        futures rate

        D)        triangle rate

        E)     spot rate

        20.   The current spot rate between Belgian francs and U.S. dollars is BF.03591 per $1.00. The rate on U.S. T-bills is 5% and the rate on the Belgian risk-free security is 8%. What is the 1-year forward rate if interest rate parity holds? DON'T use the approximation.

        A)        BF.0210 per $1.00

        B)        BF.0321 per $1.00

        C)        BF.0369 per $1.00

        D)        BF.0456 per $1.00

        E)        BF.0499 per $1.00

Answer Key

        1.     E     

        2.     C    

        3.     B     

        4.     D    

        5.     A    

        6.     B     

        7.     D    

        8.     A    

        9.     B     

        10.   A    

        11.   D    

        12.   C    

        13.   B     

        14.   B     

        15.   A    

        16.   C    

        17.   B     

        18.   E     

        19.   B