Q&A Hero

Q: If the foreign exchange market is efficient, the forward exchange rate would differ from the expected future spot exchange rate only by a risk premium.

Q: Economic exposure is the sensitivity of the domestic currency value of future operating income to unexpected changes in exchange rate.

Q: The foreign exchange exposure premium is the difference between the forward exchange rate and the expected future spot exchange rate.

Q: The degree to which a firm is affected by exchange rate changes is known as currency risk.

Q: The variability of the firms foreign exchange risk arises from uncertainty about future exchange rates.

Q: Investors would be willing to hold foreign investments even if the foreign investments yield lower expected returns than the domestic investments, if: a. There is a negative risk premium on domestic currency. b. The foreign exchange market is efficient. c. The foreign currency carries no risk premium. d. There is a positive risk premium on domestic currency.

Q: If the foreign exchange market is efficient, the forward exchange rate would differ from the expected future spot exchange rate only by a(n) ________. a. Strike price b. Exposure risk c. Future spot exchange rate d. Risk premium

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: Which forecasting technique uses a fundamental-based model with information that is thought to be important to changes in exchange rates? a. Structural b. Hedging c. Atheoretical d. Flow

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 risk premium on the pound is: a. -6.7% b. 5.7% c. 10% d. 16.7%

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: 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 forward premium on the pound is: a. -6.7% b. 5.7% c. 10% d. 16.7%

Q: Which of the following describe ways that a business manages foreign exposure? I. Hedge in the futures market II. Hedge in the options market III. Slow payments of currencies expected to appreciate IV. Slow collections of currencies expected to depreciate a. I only b. I and II c. III and IV d. II, III, and IV

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: Which of the following is not a type of foreign exchange risk? a. Information exposure b. Translation exposure c. Transaction exposure d. Economic exposure

Q: In the uncovered interest rate parity, the forward rate is assumed to include a ________. a. Return differential b. Exposure risk c. Risk premium d. Future spot exchange rate

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: The foreign exchange _______ is the difference between the forward exchange rate and the expected future spot exchange rate. a. Risk premium b. Exposure c. Strike price d. Leverage point

Q: Investors would be willing to hold foreign investments even if the foreign investments yield lower expected returns than the domestic investments, if there is a negative risk premium on domestic currency.

Q: One way businesses reduce foreign exchange risks is to speed up the rate of payments of currencies expected to appreciate.

Q: Information exposure is a type of foreign exchange risk.

Q: The effective return differential in the forward exchange market is equal to the strike price.

Q: In the uncovered interest rate parity, the forward rate is assumed to be the unbiased predictor of the future spot exchange rate.

Q: Which forecasting technique uses the past movements in the exchange rate movements to predict the future level? a. Structural b. Hedging c. Atheoretical d. Flow

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: Suppose that the 1-year forward rate of dollar per peso is $11.25, the current spot rate ($/peso) is $10.00, and the expected future spot rate ($/peso) is $11.50. The risk premium on the peso is: a. -2.5% b. 12.5% c. 15% d. 22.75%

Q: Suppose that the 1-year forward rate of dollar per peso is $11.25, the current spot rate ($/peso) is $10.00, and the expected future spot rate ($/peso) is $11.50. The expected premium on the peso is: a. -2.5% b. 12.5% c. 15% d. 22.75%

Q: Suppose that the 1-year forward rate of dollar per peso is $11.25, the current spot rate ($/peso) is $10.00, and the expected future spot rate ($/peso) is $11.50. The forward premium on the peso is: a. -2.5% b. 12.5% c. 15% d. 22.75%

Q: Which of the following describe ways that a business manages foreign exposure? I. Hedge in the goods market II. Hedge in the forward market III. Rush payments of currencies expected to appreciate IV. Rush collections of currencies expected to depreciate a. I only b. I and II c. II, III, and IV d. I, II, III, and IV

Q: Exposure from the uncertain currency value of a foreign-denominated transaction to be completed at some future date describes: a. Information exposure b. Translation exposure c. Transaction exposure d. Economic exposure

Q: A U.S. importer has to pay SKr1 million to a Swedish firm in 60 days. The current spot rate is $0.5 per Swedish krona, and the 60-day forward rate is $0.65. Bob forecasts that the spot rate in 60 days will be $0.45. Jane forecasts that the spot rate will be $0.85 in 60 days. The actual spot rate in 60 days turns out to be $0.68. If the U.S. importer believes Janes forecast, it would: a. buy SKr in the forward market at $0.65. b. wait and buy SKr 60 days later at $0.68. c. buy SKr now at $0.68 and let it sit in the companys safe. d. wait and buy SKr in the forward market 60 days later at $0.65.

Q: A U.S. importer has to pay SKr1 million to a Swedish firm in 60 days. The current spot rate is $0.5 per Swedish krona, and the 60-day forward rate is $0.65. Bob forecasts that the spot rate in 60 days will be $0.45. Jane forecasts that the spot rate will be $0.85 in 60 days. The actual spot rate in 60 days turns out to be $0.68. Whose advice, between Bob and Jane, will save the companys money? a. Bob b. Jane c. Both Bob and Jane d. Neither Ben nor Jane

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: 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. If the U.S. firm follows Bens forecast, it would: a. buy euro in the forward market at$1.11. b. wait and buy euro 90 days later at $1.10. c. buy euro now at $1.12 and let it sit in the companys safe. d. wait and buy euro in the forward market 90 days later at $1.11.

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. If the U.S. firm follows Jerrys forecast, it would: a. buy euro in the forward market at$1.11. b. wait and buy euro 90 days later at $1.10. c. buy euro now at $1.12 and let it sit in the companys safe. d. wait and buy euro in the forward market 90 days later at $1.11.

Q: For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of uncovered international investment? a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency. b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars. c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate. d. Buy a dollar-denominated financial asset.

Q: Risk aversion implies that a. reckless drivers will pay higher insurance premium than safe drivers. b. for the same returns, investors prefer low risk investment to high risk investment. c. People with higher default risk must pay higher interest rates than people with good credit. d. All of the above are correct.

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 risk premium equals to: a. 7.5% b. 5% c. 6.67% d. 12.5%

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 expected premium equals to: a. 7.5% b. 5% c. 6.67% d. 12.5%

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%

Q: The six-month interest rate in the United States is 10 percent; in Mexico it is 16 percent. The current spot rate (dollars per peso) is $0.20. The annualized six-month forward rate equal to ______ and peso is selling at a forward _______. a. 0.188, discount b. 0.212, premium c. 0.194, discount d. 0.206, premium

Q: The uncovered interest rate parity (UIRP) indicates that the interest rate differential is (approximately) equal to___________. a. expected premium b. risk premium c. forward premium d. exchange rate premium

Q: The covered interest rate parity (CIRP) indicates that the interest rate differential is (approximately) equal to___________. a. expected premium b. risk premium c. forward premium d. exchange rate premium

Q: If the Hong Kong subsidiary of a U.S. firm has net exposed assets of HK$ 500,000 and the HK$ changes in value from US$0.50/HK$ toUS$0.30/HK$, the U.S. firm will have a translation ________. a. loss HK$100,000 b. loss US$100,000 c. gain US$100,000 d. gain US$ 50,000

Q: When the parent company consolidates financial statements from foreign subsidiaries, a. Exchange rate values can affect the translation gains or losses. b. The translation gains or losses always accurately represent the subsidiaries actual operating gains or losses. c. The translation gains or losses always exaggerate the actual operating gains or losses of the foreign subsidiaries. d. The translation gains or losses always understate the actual operating gains or losses of the foreign subsidiaries.

Q: ________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction. a. Transaction b. Translation c. Structural d. Conversion

Q: Boeing, Inc. sold an airplane to Singapore Airlines for SGD100 million (Singapore dollars) with terms of one-year payment. The current spot rate $0.25 per SGD. Boeing expects to exchange SGD100 million at next years spot rate when payment is received. If the spot rate for the SGD declines to $0.24 one year from today, what is Boeings potential transaction gain or loss? a. Transaction gain of $1 million b. Transaction gain of $2 million c. Transaction loss of $1 million d. Transaction loss of $2 million

Q: The potential effect of exchange rate fluctuations on future cash flows of the direct foreign investment is expressed as _____ exposure. a. translation b. transaction c. conversion d. economic

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: Government restrictions are used to keep the purchasing power parity from deviating over time.

Q: The law of one price states that identical goods will have the same price in different markets as long as trade barriers are in place.

Q: The purchasing power parity captures the connection between the goods market and foreign exchange market.

Q: High-inflation countries rarely see purchasing power parity hold over time because of relative price changes.

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: Which of the following prices indices can be used in determining purchasing-power parity? a. Producer price index b. Consumer price index c. GDP Deflator d. All of the above

Q: After adjusting for inflation differentials between two countries, the exchange rate is referred to as: a. Predicted exchange rate b. Real exchange rate c. Nominal exchange rate d. Inflation exchange rate

Q: If the absolute PPP suggest that the yen to U.S. dollar is 84.50 and the actual exchange rate in New York is 85.50 (Yen/$), then: a. The Japanese yen is overvalued. b. The U.S. dollar is overvalued c. The U.S. dollar is undervalued d. Exchange rates and absolute PPP are unrelated.

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 a watch costs $50 in the U.S. and 100 Swiss francs in Switzerland and the exchange rate is 2.25 Swiss franc per dollar, then the dollar 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: The Big Mac index is used as: a. A way to set exchange rates in different currencies b. A way to set interest rates in different regions c. A record of different ingredients in hamburgers in different regions d. A measure of different prices in different countries

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: If a currency has appreciated ________ the price differential between two countries as implied by PPP, then a currency is ________. a. The same as, undervalued b. The same as, overvalued c. More than, overvalued d. Less than, overvalued

Q: Absolute PPP can be seen as an extension of ________ by generalizing the price of a good to the countrywide level. a. Relative PPP b. Law of one price c. Exchange rate equilibrium d. Equilibrium currency

Q: According to the law of one price, identical goods will have the same price in different markets when the prices are expressed in the same currency if: a. Both currencies are fixed. b. Both currencies are floating. c. There are no transaction costs and trade barriers. d. Trade barriers protect arbitrary price changes.

Q: In the presence of purchasing-power parity, if one dollar exchanges for one Euro and a new laptop sells for $750 in New York, then the identical laptop in Paris should cost: a. 400 Euros b. 600 Euros c. 750 Euros d. 1000 Euros

Q: Which of the following are reasons by the absolute PPP would not hold? I. Consumer preferences II. Transaction costs III. Local taxes IV. Company discounts a. II only b. IV only c. I, II, and IV d. I, II, and III

Q: Assume that the U.S. has an 8 percent inflation rate while Mexico has a 4 percent inflation rate. According to relative PPP, the dollar would be expected to: a. Appreciate by 2 percent against the Mexican peso. b. Depreciate by 2 percent against the Mexican peso. c. Appreciate by 4 percent against the Mexican peso. d. Depreciate by 4 percent against the Mexican peso.

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 relationship between product price levels and exchange rates is explained by: a. Currency boards. b. Purchasing power parity. c. Per capita income levels. d. Interest rate parity.

Q: The real exchange rate is equal to one when absolute PPP holds.

Q: Purchasing power parity is used for short term analysis because it tends to fail in the long run.

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: Purchasing power parity (PPP) explains the relationship between interest rates and product price changes.

Q: If the absolute PPP suggest that the dollar to pound should be 1.88 and the actual exchange rate in London is 2.50 ($/pound), then: a. The British pound is overvalued. b. The U.S. dollar is overvalued c. The British pound is undervalued d. Exchange rates and absolute PPP are unrelated.

Q: If a pair of sunglasses costs $80 in the U.S. and 80 pounds in the U.K. and the exchange rate is 1.70 pound per dollar, then the pound is a. Correctly valued according to PPP. b. Undervalued relative to PPP. c. Overvalued relative to PPP. d. None of the above.

Q: If a currency has appreciated ________ the price differential between two countries as implied by PPP, then a currency is ________. a. The same as, undervalued b. The same as, overvalued c. Less than, overvalued d. Less than, undervalued