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Question 1

Assume that the U.S. oneyear interest rate is
5% and the oneyear interest rate on euros is 8%. You have $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?Answer
8%
5%
3%
2.78%
1 points
Question 2

Assume that the inflation rate in Singapore is
3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore
dollar should ____ by ____%.Answer
appreciate;
4.85depreciate;
3,11appreciate;
3.11depreciate;
4.85
1 points
Question 3

Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.Answer
2 percentage points above;
depreciate by about 2%3 percentage points above;
depreciate by about 3%3 percentage points below;
appreciate by about 3%3 percentage points below;
depreciate by about 3%2 percentage points below;
appreciate by about 2%
1 points
Question 4

The interest rate in the U.K. is 7%, while the
interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50.
According to the international Fisher effect (IFE), the British pound should
adjust to a new level of:Answer
$1.47.
$1.53.
$1.43.
$1.57.
1 points
Question 5

Latin American countries have historically
experienced relatively high inflation, and their currencies have weakened. This
information is somewhat consistent with the concept
of:Answer
interest rate
parity.locational
arbitrage.purchasing power
parity.the exchange rate
mechanism.
1 points
Question 6

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?Answer
real interest rates expected by
British investors are equal to the interest rates expected by U.S.
investors.real interest rates expected by
British investors are 2 percentage points lower than the real interest rates
expected by U.S. investors.real interest rates expected by
British investors are 2 percentage points above the real interest rates expected
by U.S. investors.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.
1 points
Question 7

Given a home country and a foreign country,
purchasing power parity (PPP) suggests that:Answer
a home currency will depreciate if
the current home inflation rate exceeds the current foreign interest
rate.a home currency will appreciate if
the current home interest rate exceeds the current foreign interest
rate.a home currency will appreciate if
the current home inflation rate exceeds the current foreign inflation
rate.a home currency will depreciate if
the current home inflation rate exceeds the current foreign inflation
rate.
1 points
Question 8

Assume that the U.S. inflation rate is higher
than the New Zealand 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$).Answer
reduce; increase;
appreciationincrease; reduce;
appreciationreduce; increase;
depreciationreduce; increase;
appreciation
1 points
Question 9

According to the international Fisher effect,
if investors in all countries require the same real rate of return, the
differential in nominal interest rates between any two
countries:Answer
follows their exchange rate
movement.is due to their inflation
differentials.is zero.
is constant over
time.
1 points
Question 10

If interest rate parity holds, then the
oneyear forward rate of a currency will be ____ the predicted spot rate of the
currency in one year according to the international Fisher
effect.Answer
greater
thanless than
equal to
answer is dependent on whether the
forward rate has a discount or
premium
1 points
Question 11

According to the IFE, if British interest
rates exceed U.S. interest rates:Answer
the British pound’s value will
remain constant.the British pound will depreciate
against the dollar.the British inflation rate will
decrease.the forward rate of the British
pound will contain a premium.today’s forward rate of the British
pound will equal today’s spot
rate.
1 points
Question 12

Which of the following theories suggests that
the percentage change in spot exchange rate of a currency should be equal to the
inflation differential between two countries?Answer
purchasing power parity
(PPP).triangular
arbitrage.international Fisher effect
(IFE).interest rate parity
(IRP).
1 points
Question 13

Which of the following theories suggests that
the percentage difference between the forward rate and the spot rate depends on
the interest rate differential between two countries?Answer
purchasing power parity
(PPP).triangular
arbitrage.international Fisher effect
(IFE).interest rate parity
(IRP).
1 points
Question 14

Which of the following theories suggests the
percentage change in spot exchange rate of a currency should be equal to the
interest rate differential between two countries?Answer
absolute form of
PPP.relative form of
PPP.international Fisher effect
(IFE).interest rate parity
(IRP).
1 points
Question 15

Assume that the oneyear interest rate in the
U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect,
British pound’s spot exchange rate should ____ by about ____ over the
year.Answer
depreciate;
1.9%appreciate;
1.9%depreciate;
3.94%appreciate;
3.94%
1 points
Question 16

A fundamental forecast that uses multiple
values of the influential factors is an example of:Answer
sensitivity
analysis.discriminant
analysis.technical
analysis.factor
analysis.
1 points
Question 17

Which of the following is not a limitation of
fundamental forecasting?Answer
uncertain timing of
impact.forecasts are needed for factors
that have a lagged impact.omission of other relevant factors
from the model.possible change in sensitivity of
the forecasted variable to each factor over
time.
1 points
Question 18

Which of the following forecasting techniques
would best represent sole use of today’s spot exchange rate of the euro to
forecast the euro’s future exchange rate?Answer
fundamental
forecasting.marketbased
forecasting.technical
forecasting.mixed
forecasting.
1 points
Question 19

If the forward rate was expected to be an
unbiased estimate of the future spot rate, and interest rate parity holds,
then:Answer
covered interest arbitrage is
feasible.the international Fisher effect
(IFE) is supported.the international Fisher effect
(IFE) is refuted.the average absolute error from
forecasting would equal zero.
1 points
Question 20

If speculators expect the spot rate of the
Canadian dollar in 30 days to be ____ than the 30day forward rate on Canadian
dollars, they will ____ Canadian dollars forward and put ____ pressure on the
Canadian dollar forward rate.Answer
lower; sell;
upwardlower; sell;
downwardhigher; sell;
upwardhigher; sell;
downward
1 points
Question 21

Sensitivity analysis allows for all of the
following except:Answer
accountability for
uncertainty.focus on a single point estimate
of future exchange rates.development of a range of possible
future values.consideration of alternative
scenarios.
1 points
Question 22

If speculators expect the spot rate of the
yen in 60 days to be ____ than the 60day forward rate on the yen, they will
____ the yen forward and put ____ pressure on the yen’s forward
rate.Answer
higher; buy;
upwardhigher; sell;
downwardhigher; sell;
upwardlower; buy;
upward
1 points
Question 23

Which of the following forecasting techniques
would best represent the use of today’s forward exchange rate to forecast the
future exchange rate?Answer
fundamental
forecasting.marketbased
forecasting.technical
forecasting.mixed
forecasting.
1 points
Question 24

Small Corporation would like to forecast the
value of the Cyprus pound (CYP) five years from now using forward rates.
Unfortunately, Small is unable to obtain quotes for fiveyear forward contracts.
However, Small observes that the fiveyear interest rate in the U.S. is 11%,
while the Cyprus fiveyear interest rate is 15%. Based on this information, the
Cyprus pound should ____ by ____% over the next five
years.Answer
appreciate;
16.22depreciate;
16.22appreciate;
6.66depreciate;
6.66
1 points
Question 25

Which of the following forecasting techniques
would best represent the use of relationships between economic factors and
exchange rate movements to forecast the future exchange
rate?Answer
fundamental
forecasting.marketbased
forecasting.technical
forecasting.mixed
forecasting.
1 points
Question 26

Assume that the forward rate is used to
forecast the spot rate. The forward rate of the Canadian dollar contains a 6%
discount. Today’s spot rate of the Canadian dollar is $.80. The spot rate
forecasted for one year ahead is:Answer
$.860.
$.848.
$.740.
$.752.
1 points
Question 27

If a particular currency is consistently
declining substantially over time, then a marketbased forecast will usually
have:Answer
underestimated the future exchange
rates over time.overestimated the future exchange
rates over time.forecasted future exchange rates
accurately.forecasted future exchange rates
inaccurately but without any bias toward consistent underestimating or
overestimating.
1 points
Question 28

Which of the following is not a method of
forecasting exchange rate volatility?Answer
using the absolute forecast error
as a percentage of the realized value.using the volatility of historical
exchange rate movements as a forecast for the future.using a time series of volatility
patterns in previous periods.deriving the exchange rate’s
implied standard deviation from the currency option pricing
model.
1 points
Question 29

Assume that interest rate parity holds. The
U.S. fiveyear interest rate is 5% annualized, and the Mexican fiveyear
interest rate is 8% annualized. Today’s spot rate of the Mexican peso is $.20.
What is the approximate fiveyear forecast of the peso’s spot rate if the
fiveyear forward rate is used as a forecast?Answer
$.131.
$.226.
$.262.
$.140.
$.174.
1 points
Question 30

Assume that the U.S. interest rate is 11
percent, while Australia’s oneyear interest rate is 12 percent. Assume interest
rate parity holds. If the oneyear forward rate of the Australian dollar was
used to forecast the future spot rate, the forecast would reflect an expectation
of:Answer
depreciation in the Australian
dollar’s value over the next year.appreciation in the Australian
dollar’s value over the next year.no change in the Australian
dollar’s value over the next year.information on future interest
rates is needed to answer this
question.
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