Question

1- An exporter who is to receive payment in foreign currency in three months and who wants to engage in “hedging” would __________ the foreign currency on the three-months forward market in order to protect himself/herself from __________ of the

foreign currency.

a. buy; an appreciation

b. buy; a depreciation

c. sell; an appreciation

d. sell; a depreciation

2- A given exchange rate will be more or less the same in all of the world’s financial

markets because of

a. hedging.

b. interest arbitrage.

c. speculation.

d. currency arbitrage.

3- If ef = the forward rate on three-months Swiss francs, e = the current spot rate on Swiss francs, and E(e) = the expected future rate of the Swiss franc in three months, then the Swiss franc is said to be at a forward discount if __________ is negative.

a. (ef - e)/ e

b. (e - ef)/ e

c. (E(e) - e)/ e

d. (E(e) - ef)/ ef

4- Suppose that, in Year 1, the price of the U.K. pound is $1.44 = £1. In year 2, the price is $1.48 = £1. An economist would validly conclude that, from Year 1 to Year 2 and in nominal terms, the U.K. pound __________ relative to the U.S. dollar and, simultaneously, the U.S. dollar __________ relative to the U.K. pound.

a. appreciated; appreciated

b. appreciated; depreciated

c. depreciated; appreciated

d. depreciated; depreciated

5- If a “Big Mac” costs $4.00 in the United States and 5 francs in Switzerland, then the implied “purchasing-power-parity” exchange rate using the “Big Mac Index” is __________. If the actual exchange rate in the market is 1 franc = $0.90, then an economist would say that the actual Swiss franc is __________ in comparison with its “purchasing-power-parity” rate.

a. 1 franc = $1.25; overvalued

b. 1 franc = $1.25; undervalued

c. 1 franc = $0.80; overvalued

d. 1 franc = $0.80; undervalued

6- If a French citizen places $100,000 in an Italian bank and an Italian citizen places $40,000 in a French bank, “net international bank lending” increased by __________.

a. $40,000

b. $60,000

c. $100,000

d. $140,000

7- A surge in international bank lending could be potentially economically destabilizing because

a. it creates the possibility of reduced control of a country’s money supply.

b. it directly contributes to destabilizing real investment flows.

c. it results in too much control of world investment by a few large industrial countries.

d. it results in inefficient use of financial capital, and hence reduces world growth rates. 3

8- The eurodollar deposit rate would theoretically be expected to lie __________ the domestic U.S. deposit rate, and the eurodollar lending rate would theoretically be expected to lie __________ the U.S. domestic lending rate.

a. below; below

b. below; above

c. above; below

d. above; above

9- The growth in the last 10-30 years in international bond markets

a. should result in exactly equal interest rates on two identical assets, even though the

assets are located in different countries.

b. should reduce exchange rate risk.

c. will likely slow down, and may even become negative.

d. will likely result in a more efficient allocation of financial capital.

10- Which one of the following is NOT a component of international bank lending?

a. domestic bank loans in domestic currency to nonresidents

b. domestic bank loans in foreign currency to domestic residents

c. domestic bank loans in domestic currency to a multinational corporation located in the

domestic country

d. domestic bank loans in foreign currency to nonresidents

Answer 1

1. d. sell; a depreciation
(To engage in hedging, foreign currency is sold to protect against the depreciation.)

2. b. interest arbitrage.
(Exchange rate are kept same in all of the world’s financial markets because of interest arbitrage.)

3. a. (ef - e)/ e
(Currency is said to be at a discount if (ef - e)/ e < 0 and at a premium if (ef - e)/ e > 0)

4. b. appreciated; depreciated
(As 1 pound can buy more dollars so pound appreciated and dollar depreciated)

5. c. 1 franc = $0.80; overvalued
(According to purchasing power parity, 5 francs = $4. So, 1 franc = $4/5 = $0.8
As actual exchange rate is higher so franc is overvalued.)

(Note: Post 4 MCQs at a time.)