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Question
Suppose that the covered interest parity holds. If real interest rates are equal in two countries, then:
a. the interest rate differential will equal to expected inflation rate differential.
b. the interest rate differential will equal to the forward premium or discount between two currencies.
c. the expected inflation rate differential will equal to the forward premium or discount between two currencies.
d. All of the above are correct.
Answer
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Related questions
Q:
Risk premium equals to:a. expected premium minus forward premium.b. expected premium plus forward premium.c. forward premium minus expected premium.d. exchange rate premium plus forward premium.
Q:
Risk premium equals to: a. expected premium minus forward premium. b. expected premium plus forward premium. c. forward premium minus expected premium. d. exchange rate premium plus forward premium.
Q:
If the inflation rates of two countries are both equal to the percentage change in the exchange rate, then absolute purchasing power parity holds.
Q:
If a bicycle costs $200 in the U.S. and 50 Swedish kronor in Sweden and the exchange rate is 0.25 Swedish krona per dollar, then the Swedish krona is:
a. Correctly valued according to PPP.
b. Undervalued relative to PPP.
c. Overvalued relative to PPP.
d. Not enough information to find answer.
Q:
If prices in the U.K. are rising slower than prices in the U.S. then
a. The pound depreciates.
b. The exchange rate stays the same.
c. The dollar depreciates.
d. The dollar appreciates.
Q:
The equivalence of the exchange rate to the ratio of price levels between two countries is referred to as the:
a. Absolute PPP
b. Relative PPP
c. Interest rate parity
d. None of the above
Q:
The exchange rate that is actually observed in the foreign exchange market is called the real exchange rate.
Q:
If a currency has appreciated more than the price differential between two countries as implied by PPP, then a currency is overvalued.
Q:
In the presence of purchasing-power parity, if five pesos exchange for one dollar and a new smartphone sells for $100 in Dallas, then the identical smartphone in Mexico City should cost:
a. 20 Pesos
b. 80 Pesos
c. 250 Pesos
d. 500 Pesos
Q:
Sterilized intervention is the policy that:
a. targets a domestic inflation rate within a certain range of values.
b. attempts to influence exchange rate movements with official statements on the governments preferred rate, without taking any direct action in the financial markets.
c. coordinates monetary and fiscal policies with ones trading partners so as to achieve particular international economic outcomes.
d. offsets private capital movements with changes in the asset portfolio of the central bank.
Q:
Starting from a position where a countrys money demand equals the money supply and its balance of payments is in equilibrium. According to the monetary approach, an expansionary monetary policy will lead to a(n) ______ of the home currency under flexible exchange rate regime; whereas it will cause trade _______ under fixed exchange rate.
a. depreciation; deficit
b. depreciation; surplus
c. appreciation; deficit
d. appreciation; surplus
Q:
Under the flexible exchange rate regime, which of the following variables in the monetary approach becomes zero and is dropped out of the equation?
a. Percentage change in domestic credit
b. Percentage change in spot exchange rate
c. Percentage change in foreign reserves
d. Percentage change in money demand
Q:
According to the monetary approach to the balance of payments, which of the following economic events would help a country to resolve its balance of trade deficit?
a. An increase in money supply
b. A decrease in money supply
c. A fall of foreign price level
d. A fall of domestic income
Q:
True or false: The balance of payment equilibrium implies that current account equals to zero.
Q:
True or false: The BP curve could be vertical, if capital is perfectly mobile.
Q:
Considering the internal balance in an economy, which of the following could lead to lower interest rate and higher income?
a. An increase in government spending
b. A depreciation of domestic currency
c. An increase in money supply
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Q:
With perfect substitutability and perfect capital mobility, the domestic interest rate is equal to the foreign interest rate.
Q:
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The goal of a multinational corporation (MNC) is
a. The minimization of taxes remitted from foreign subsidiaries.
b. The establishment of subsidiaries in any country where operations would provide a return above the cost of capital, even if better projects are available domestically.
c. The maximization of shareholder wealth.
d. The maximization of social benefits to the host country through knowledge spillover effects.
Q:
The variability of the firms foreign exchange risk arises from uncertainty about future exchange rates.
Q:
In foreign exchange forecasting, what is a good forecast?
a. When the forecast encourages the firm to buy.
b. When the forecast is close.
c. When the forecast is high.
d. When the forecast predicts the right hedging strategy.
Q:
Suppose for two currencies the forward premium is 8.5% and the expected premium is 5%. Then the risk premium is:
a. -13.5%
b. -3.5%
c. 3.5%
d. 13.5%
Q:
Suppose that the 1-year forward rate of dollar per pound is $1.32, the current spot rate ($/pound) is $1.20, and the expected future spot rate ($/pound) is $1.40. The expected premium on the pound is:
a. -6.7%
b. 5.7%
c. 10%
d. 16.7%
Q:
Which of the following best describes economic exposure?
a. The sensitivity of the domestic currency value of future operating income to unexpected changes in exchange rate.
b. The risk of operating in politically risky countries.
c. When a business leaves only one branch to operate in a foreign country.
d. Exposure from uncertainty about the currency value of a foreign-denominated transaction to be fulfilled in the future.
Q:
Which of the following best describes translation exposure?
a. Operating banks in a remote location with an uncommon language
b. Accounting exposure from translating interest rates from different regions
c. Translating financial statements from one currency to another
d. Creating more than one offshore branch
Q:
The ________ in the forward exchange market is equal to the effective return differential.
a. Strike price
b. Exposure risk
c. Future spot exchange rate
d. Risk premium
Q:
Information exposure is a type of foreign exchange risk.
Q:
Suppose for two currencies the forward premium is 4% and the expected premium is 8%. Then the risk premium is:
a. -4%
b. -2%
c. 2%
d. 4%
Q:
A U.S. firm has a 1 million payment due to a Dutch firm in 90 days. The current spot rate is $1.00 per euro, and the 90-day forward rate is $1.11. Ben forecasts that the spot rate in 90 days will be $0.99. Jerry forecasts that the spot rate will be $1.12 in 90 days. The actual spot rate in 90 days turns out to be $1.10. Whose advice, between Ben and Jerry, will save the companys money?
a. Ben
b. Jerry
c. Both Ben and Jerry
d. Neither Ben nor Jerry
Q:
Suppose that the 1-year forward rate of dollar per Swiss franc is $0.42, the current spot rate ($/SFr) is $0.40, and the expected future spot rate ($/SFr) is $0.45. The forward premium equals to:
a. 7.5%
b. 5%
c. 6.67%
d. 12.5%