Q&A Hero

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: Assume that the U.S. has a 2 percent inflation rate while Sweden has a 7 percent inflation rate. According to relative PPP, the dollar would be expected to: a. Appreciate by 3.5 percent against the Swedish krona. b. Depreciate by 3.5 percent against the Swedish krona. c. Appreciate by 5 percent against the Swedish krona. d. Depreciate by 5 percent against the Swedish krona.

Q: ________ tends to hold better. a. Absolute PPP b. Relative PPP c. Covered Interest Rate Parity d. Big Mac Index

Q: The equivalence of the percentage change in the exchange rate to the inflation differential between countries is referred to as the: a. Absolute PPP b. Relative PPP c. Interest rate parity d. None of the above

Q: If the price of a pair of shoes in the U.S. is $80, the price of the same pair of shoes in Germany is 120 euro, and the exchange rate is 1.5 euro/$, the euro: a. is correctly valued according to PPP. b. is overvalued relative to PPP. c. is undervalued relative to PPP. d. None of the above is correct.

Q: Empirical evidence shows that in the short run, purchasing power parity _____, and in the long run, purchasing power parity _____. a. holds; does not hold b. holds; holds c. does not hold; holds d. does not hold; does not hold

Q: If the nominal exchange rate in dollars per pound rises by 5%, the U.S. inflation is 2%, and the U.K. inflation is 0%, what is the percent change in the real exchange rate? a. 7% b. 5% c. 3% d. 2%

Q: Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, a. the Russian ruble should depreciate against Swiss franc by 198 percent. b. the Russian ruble should appreciate against Swiss franc by 198 percent. c. the Russian ruble should depreciate against Swiss franc by 202 percent. d. the Russian ruble should depreciate against Swiss franc by 202 percent.

Q: Suppose the exchange rate between the U.S. dollar and the British pound is initially 2.00 dollars per pound. According to relative purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in the U.K, the exchange rate will become: a. 1.80 dollars per pound b. 1.98 dollars per pound c. 2.02 dollars per pound d. 2.20 dollars per pound

Q: Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen per dollar. According to relative purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, the exchange rate will become: a. 72 yen per dollar b. 81 yen per dollar c. 99 yen per dollar d. 108 yen per dollar

Q: In the presence of purchasing-power parity, if one dollar exchanges for 2 British pounds and if a flat-screen TV costs $400 in the United States, then in Great Britain the flat-screen TV should cost: a. 200 pounds b. 400 pounds c. 600 pounds d. 800 pounds

Q: Assume that the United States faces a 5 percent inflation rate while the U.K has a 7 percent inflation rate. According to the relative PPP, the dollar would be expected to: a. appreciate by 2 percent against the British pound b. depreciate by 2 percent against the British pound c. appreciate by 12 percent against the British pound d. depreciate by 12 percent against the British pound

Q: Assume that the United States faces a 5 percent inflation rate while no (zero) inflation exists in Japan. According to the relative PPP, the dollar would be expected to: a. appreciate by 5 percent against the yen b. depreciate by 5 percent against the yen c. remain at its existing exchange rate d. None of the above is correct.

Q: Which of the following statements is the most accurate? a. Absolute PPP does not imply relative PPP. b. Relative PPP implies absolute PPP. c. Absolute PPP implies relative PPP. d. There is no relationship between absolute and relative PPP.

Q: A year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time, the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately _________ per Canadian dollars. a. $0.96 b. $1 c. $1.04 d. $4

Q: Under Purchasing Power Parity, a. S$/ = PUS/PUK b. S$/ = PUK/PUS c. S$/ = PUS + PUK d. S$/ = PUS PUK

Q: Relative PPP indicates that a. The same goods are sold for the same price internationally. b. The exchange rate between two countries is equal to the ratio of their price indexes. c. The percentage change in the exchange rate is equal to the inflation differential between two countries. d. The inflation differential between two countries is equal to the forward premium.

Q: Suppose that the U.S. dollar price of a Big Mac is $3.57. The price of a Big Mac in Norway is 25 kroner. Suppose that the current exchange rate is 5.00 krone per dollar. If absolute PPP holds, the PPP-implied exchange rate is _______ and krone is ________. a. 5.00 krone per dollar; overvalued. b. 5.00 krone per dollar; undervalued. c. 7.00 krone per dollar; overvalued. d. 7.00 krone per dollar; undervalued.

Q: Suppose that the U.S. dollar price of a Big Mac is $3.57. The price of a Big Mac in China is 12.5 yuan. Suppose that the current exchange rate is 6.83 yuan per dollar. If absolute PPP holds, the PPP-implied exchange rate is _______ and yuan is ________. a. 3.50 yuan per dollar; overvalued. b. 3.50 yuan per dollar; undervalued. c. 1.83 yuan per dollar; overvalued. d. 1.83 yuan per dollar; undervalued.

Q: We can expect deviations from absolute PPP because of: a. different bundles of goods across countries b. quotas and tariffs c. transactions costs. d. All of the above are correct

Q: If absolute PPP holds, then the real exchange rate must be equal to: a. a constant b. a positive number c. one d. All of the above

Q: The structure of interest rates existing on investment opportunities over time is known as the flat structure of interest rates.

Q: The real interest rate is equal to the nominal interest rate minus the expected rate of inflation.

Q: Suppose that the one-year U.S. interest rate is 3% and the equivalent one-year Swiss interest rate is 3%. According to the covered interest rate parity, there is a forward flat on the Swiss franc.

Q: If expected inflation in Canada is higher than expected inflation in the U.K., and the real interest rates are equal, we would expect the Canadian dollar to appreciate.

Q: The equivalence of the interest differential between two currencies to the forward premium or discount is known as interest rate parity.

Q: Suppose interest parity holds. There is a change in U.S. policy that leads to expectations of a higher U.S. inflation rate. The increase in expected inflation will cause dollar interest rates to _______. a. Stay the same. b. Fall. c. Rise. d. None of the above.

Q: Which of the following reasons explain why interest rate parity may not hold perfectly? I. Transaction costs II. Business loan risks III. Offshore risk accounting rules IV. Political risk a. I only b. II and III c. I and IV d. I, III, and IV

Q: Which of the following reasons explain why interest rate parity may not hold perfectly? I. Banking practices II. Government controls III. Business loan risk IV. Varying expectations a. I only b. II only c. II and IV d. I, III, and IV

Q: The liquidity premium theory of term structure of interest rates suggests that long-term bonds should________ short-term bonds due to investor risk aversion. a. Hold a premium over b. Have a discount over c. Offer the same return as d. Be entirely separate of

Q: The structure of interest rates existing on investment opportunities over time is known as the ______ structure of interest rates. a. Investment b. Opportunity c. Fixed d. Term

Q: Suppose that the one-year U.S. interest rate is 4% and the equivalent one-year U.K. interest rate is 6%. According to the covered interest rate parity, there is a ________ on the British pound. a. 2% forward discount b. 2% forward premium c. 10% forward discount d. 10% forward premium

Q: The exact and approximate CIRP are close in value when a. Interest rates are larger b. Interest rates are smaller c. Spot rates are larger d. Spot rates are smaller

Q: A forward flat occurs when: a. The forward rate is greater than the spot rate. b. The spot rate is greater than the forward rate. c. The forward and spot rates are equal. d. None of the above.

Q: A forward premium occurs when: a. The forward rate is greater than the spot rate. b. The spot rate is greater than the forward rate. c. The forward and spot rates are equal. d. None of the above.

Q: Suppose that the one-year U.S. interest rate is 7% and the one-year Swedish interest rate is 10%. If the current spot rate is 6.80 Swedish krona per dollar, what must the one-year forward rate (SKr/$) be according to the approximate covered interest parity? a. 6.596 b. 6.720 c. 7.004 d. 7.276

Q: Suppose that the one-year U.S. interest rate is 9% and the one-year U.K. interest rate is 6%. If the current spot rate is $1.80 per pound, what must the one-year forward rate ($/pound) be according to the approximate covered interest parity? a. 1.746 b. 1.854 c. 1.908 d. 1.962

Q: A currency is at a ________ when its interest rate is ________ than the interest rate in the other country. a. Forward flat, lower b. Forward discount, lower c. Forward flat, higher d. Forward premium, lower

Q: Deviations from interest rate parity could come from: a. Transaction costs b. Government controls c. Political risk d. All of the above.

Q: Profit-seeking arbitrage activity ensures: a. Covered interest rate parity. b. Decreased competition. c. Higher interest rates on loans. d. Increased banking regulation.

Q: In international finance, covered interest rate parity refers to: a. The forward rate being in excess of the spot rate. b. The advantage of one currency over another. c. The equivalence of the interest differential between two currencies to the forward premium or discount. d. The difference of the two comparable investments in two different countries.

Q: Suppose interest parity holds and there is a sudden change in U.S. policy that leads to expectations of a higher U.S. inflation rate. The increase in expected inflation will cause dollar interest rates to rise.

Q: The expected exchange rate changes will be reflected in the differences between the term structure of interest rates in two countries.

Q: Pegging exchange rates at fixed levels by buying and selling to maintain the fixed rate by the central bank means that domestic and foreign currency interest rates will have to adjust to parity levels.

Q: The real interest rate is equal to the nominal interest rate plus the expected rate of inflation.

Q: Suppose that the one-year U.S. interest rate is 5% and the equivalent one-year Swiss interest rate is 4%. According to the covered interest rate parity, there is a forward discount on the Swiss franc.

Q: Suppose interest parity holds. There is a change in U.S. policy that leads to expectations of a lower U.S. inflation rate. The decrease in expected inflation will cause dollar interest rates to _______. a. Stay the same. b. Fall. c. Rise. d. None of the above.

Q: Which of the following reasons explain why interest rate parity may not hold perfectly? I. Controls on financial capital flows II. Offshore risk accounting rules III. Different tax rates for interest and foreign exchange rate earnings IV. Time zone fluctuations a. I only b. I and III c. I, II, and III d. I, III, and IV

Q: The preferred habit theory of term structure of interest rates suggests that long-term bonds should________ short-term bonds due to investor risk aversion. a. Hold a premium over b. Have a discount over c. Offer the same return as d. Be entirely separate of

Q: Suppose that the one-year U.S. interest rate is 5% and the equivalent one-year Swiss interest rate is 4%. According to the covered interest rate parity, there is a ________ on the Swiss franc. a. 1% forward discount b. 1% forward premium c. 9% forward discount d. Forward flat

Q: Suppose that the one-year U.S. interest rate is 8% and the equivalent one-year U.K. interest rate is 10%. According to the covered interest rate parity, there is a ________ on the U.S dollar. a. 2% forward discount b. 2% forward premium c. 18% forward discount d. 18% forward premium

Q: The ________ interest rate is equal to the ________ interest rate minus the expected rate of inflation. a. Real, nominal b. Predicted, nominal c. Standard, nominal d. Nominal, standard

Q: A forward discount occurs when: a. The forward rate is greater than the spot rate. b. The spot rate is greater than the forward rate. c. The forward and spot rates are equal. d. None of the above.

Q: Suppose that the one-year Swiss interest rate is 1% and the one-year U.K. interest rate is 11%. If the current spot rate is 0.75 Swiss franc per pound, what must the one-year forward rate (SFr/pound) be according to the approximate covered interest parity? a. 0.675 b. 0.730 c. 0.770 d. 0.825

Q: Suppose that the one-year U.S. interest rate is 13% and the one-year Swiss interest rate is 2%. If the current spot rate is $1.40 per Swiss franc, what must the one-year forward rate ($/SFr) be according to the approximate covered interest parity? a. 1.246 b. 1.330 c. 1.470 d. 2.100

Q: Suppose that the one-year U.S. interest rate is 4% and the one-year U.K. interest rate is 6%. If the current spot rate is $1.80 per pound, what must the one-year forward rate ($/pound) be according to the approximate covered interest parity? a. 1.360 b. 1.764 c. 1.836 d. 1.980

Q: When investors hedge themselves from risk using forward contracts, the international investment is considered: a. Flat b. Discounted c. A bargain d. Covered

Q: A currency is at a ________ when its interest rate is ________ than the interest rate in the other country. a. Forward flat, lower b. Forward discount, lower c. Forward discount, higher d. Forward premium, higher

Q: 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.

Q: Deviations from interest rate parity could be the result of: a. different tax treatment of income and foreign exchange earnings b. political risk c. transaction costs d. All of the above are correct.

Q: Assume a nominal interest rate on one-year U.S. Treasury Bills of 5.30% and a real rate of interest of 1.50%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year? a. 3.80% b. 3.53% c. 3.80% d. 6.80%

Q: Use the following graph to answer questions 23-24. Figure 6.1: Yield Curves Refer to Figure 6.1. The forward _________ on the U.S. dollar becomes ______ at higher maturities. a. discount, larger b. discount, smaller c. premium, larger d. premium, smaller

Q: If the expected inflation in Brazil in higher than the expected inflation in the U.S., and the real interest rates are equal across countries, then: a. there is a forward premium on the dollar. b. there is a forward flat on the dollar. c. there is a forward discount on the dollar. d. there is a spot discount on the dollar.

Q: If the expected inflation in Brazil in higher than the expected inflation in the U.S., and the real interest rates are equal across countries, then we would expect the Brazilian real (Brazils currency) to: a. appreciate b. depreciate c. remain the same d. depreciate and then appreciate later.

Q: Assume two countries, A and B have the following Fisher equations, where i is nominal interest rate, r is real interest rate, and π is the expected rate of inflation: Spot and forward rates are expressed as currency A per currency B. When the covered interest parity holds and , then a. b. c. d.

Q: Assume the following: the current spot rate S/$ = 100.0 and the annual interest rates: iJAPAN = 2% and iUS = 10%. According to covered interest parity, if an intern at Citibank sets the one-year forward rate: F360/$ = 91, then: a. the intern has correctly set the forward rate. b. both U.S. and Japans investment returns are equal. c. the Japans investment return exceeds the U.S. investment return d. the U.S. investment return exceed the Japans investment return

Q: Assume the following: the current spot rate S$/ = 2.00 and the annual interest rates: iUS = 4% and iUK = 8%. According to covered interest parity, if an intern at a bank in U.K. sets the 90-day forward: F90$/ = 1.80, then: a. the intern has correctly set the forward rate. b. both U.S. and U.K. investment returns are equal. c. the British investment return exceeds the U.S. investment return d. the U.S. investment return exceed the British investment return

Q: Assume the following: You have $10,000 to invest. The current spot rate: S$/ = 2.00, the 90-day forward: F90$/ = 1.80, annual interest rates: iUS = 4% and iUK = 8%. If you invest $10,000 in the U.S. for 90 days, you will get $____________. If you invest in the U.K. and cover in the forward market for 90 days, you will get $__________. a. $10,100: $10,098 b. $10,400: $9,720 c. $10,100: $10,133 d. $10,400: $10,692

Q: If the U.S. and the U.K. have identical term structures of interest rates, we would expect: a. the pound to appreciate against the dollar. b. the pound to depreciate against the dollar. c. no change in the exchange rate between two currencies. d. there is not enough information to forecast the direction of the exchange rate.

Q: Assume that the 6-month iUS = 10% and the 6-month iSwiss = 20%, and the spot rate is $1.20 per Swiss franc. Using the approximate covered interest rate parity condition, the 6-month forward rate ($/Swiss franc) is: a. 1.08 b. 1.14 c. 1.26 d. 1.32

Q: Assume that the 3-month iUS = 8% and the 3-month iUK = 4%, and the spot rate is $1.50 per pound. Using the approximate covered interest rate parity condition, the 3-month forward rate ($/pound) is: a. 1.440 b. 1.515 c. 1.527 d. 1.560

Q: Use the following information to answer questions 10-12. Table 6.2: Spot and Forward Exchange Rates on May 5, 2012. U.S. dollar per pound May 5 1-month forward 3-month forward U.K. (pound) 1.68 1.52 1.46 Refer to Table 6.2. Comparing the yens forward rates against the yens spot rate, over the period of a forward contract, we would expect the yens spot rate to: a. remain constant against the dollar b. appreciate against the dollar c. depreciate against the dollar d. depreciate against the dollar in the first 30 days and then appreciate afterward.

Q: Use the following information to answer questions 6-9. Table 6.1: Spot and Forward Exchange Rates on May 5, 2012. Currency per U.S. dollar May 5 1-month forward 3-month forward 1-year forward Japanese yen 80.100 78.750 78.150 77.250 Refer to Table 6.1. Comparing the yens forward rates against the yens spot rate, over the period of a forward contract, we would expect the yens spot rate to: a. remain constant against the dollar b. appreciate against the dollar c. depreciate against the dollar d. depreciate against the dollar in the first 30 days and then appreciate afterward.

Q: Suppose that the one-year U.S. interest rate is 8% and the equivalent one-year India interest rate is 12%. According to covered interest parity, there is: a. Forward discount on dollar. b. Forward premium on dollar. c. Forward premium for Indian rupee. d. Forward flat on dollar

Q: Suppose that the one-year U.S. interest rate is 8% and the equivalent one-year India interest rate is 12%. Using the exact covered interest parity, the dollar is expected to: a. depreciate by 3.6%. b. depreciate by 50%. c. appreciate by 3.6% d. appreciate by 50%.

Q: Suppose that the one-year U.S. interest rate is 10%. If the one-year forward rate against the pound is $1.52 per pound and the spot exchange rate is $1.50 per pound, what must the equivalent British interest rate be according to the approximate covered interest parity? a. 8.67% b. 9.95% c. 10% d. 11.33%

Q: Suppose that the one-year U.S. interest rate is 8% and the one-year Swiss interest rate is 10%. If the current spot rate is $1.50 per Swiss franc, what must the one-year forward rate ($/SFr) be according to the approximate covered interest parity? a. $1.47 b. $1.50 c. $1.53 d. $4.50

Q: Suppose that the one-year U.S. interest rate is 9% and the one-year U.K. interest rate is 8%. If the current spot rate is $1.70 per pound, what must the one-year forward rate ($/pound) be according to the approximate covered interest parity? a. $1.683 b. $1.717 c. $1.723 d. $3.400

Q: What is LIBOR? a. The average of London interest rate spreads. b. The interest rate that only Eurobanks use. c. The average of a sample of interest rates that large banks face to borrow from each other. d. The interest rate that London banks use for deposits.

Q: Interest rates on ________ are lower at Eurobanks than domestic banks. a. Loans b. Deposits c. Currency exchanges d. None of the above