Term
| Foreign exchange markets are electronic communication systems connecting the major financial centers of the world. |
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Definition
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Term
| The direct quotation method expresses the number of foreign currency units needed to buy one U.S. dollar. |
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Definition
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Term
| The direct quotation method indicates the amount of a foreign currency necessary to purchase one unit of the home country’s currency. |
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Definition
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Term
| A nation with a relatively lower inflation rate than other countries will have a relatively stronger currency holding other factors constant. |
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Definition
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Term
| A nation with relatively lower interest rate levels than other countries will have a relatively stronger currency. |
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Definition
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Term
| Arbitrage is the simultaneous buying of securities in one market and selling them in another to make a profit from price differences in the two markets. |
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Definition
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Term
| The Board of Governors of the Federal Reserve System authorizes member banks to accept drafts that arise in the course of certain types of international transactions. |
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Definition
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Term
| The Export-Import Bank is a corporation owned by the Federal Reserve Banks. |
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Definition
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Term
| The balance of payments is a summary of all economic transactions between one country and the rest of the world. |
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Definition
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Term
| Slow economic growth in investments in another country would be an example of political risk. |
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Definition
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Term
| The capital account balance includes all foreign private and government investment in the United States netted against U.S. investments in foreign countries. |
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Definition
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Term
| The current account balance shows the flow of income into and out of the United States during a specified time period. |
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Definition
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Term
| Interest rate parity states that a country with a relatively higher expected inflation rate will have its currency depreciate relative to a country with a relatively lower inflation rate. |
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Definition
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Term
| The ultimate effect of large-scale arbitrage activities on exchange rates is the elimination of the variation between the two markets. |
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Definition
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Term
| An expected decline in a country’s currency may lead to an attempt to accelerate collection of accounts receivable from that country for transfer to another country with a more stable currency. |
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Definition
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Term
| The 1991 Maastricht Treaty formally committed the countries of the European Union to economic and monetary union. |
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Definition
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Term
| A contract for the purchase or sale of a currency where delivery will take place at a future date is called a forward contract. |
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Definition
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Term
| Under a floating exchange rate system, the value of one currency relative to another is determined by the forces of supply and demand. |
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Definition
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Term
| In foreign exchange, variations in quotations among countries at any time are quickly brought into alignment through arbitrage activities. |
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Definition
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Term
| Under the system of flexible (floating) exchange rates, exchange rates are determined by the actual process of supply and demand in the foreign exchange market. |
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Definition
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Term
| Economic Risk is the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners. |
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Definition
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Term
| The international monetary system consists of institutions and mechanisms that foster international trade, manage the flow of financial capital, and determine currency exchange rates. |
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Definition
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Term
| The International Monetary Fund (IMF) was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payment problems. |
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Definition
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Term
| The European Economic Organization (EEO) is an organization of twelve European countries that agreed to have a common overall monetary policy and the euro as their common currency. |
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Definition
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Term
| An indirect exchange rate quotation is simply the reciprocal of a direct exchange rate quotation. |
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Definition
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Term
| Holding the demand for euros (€) constant, an increase in the supply of euros will cause the euro to appreciate relative to the dollar. |
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Definition
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Term
| Holding the demand for euros (€) constant, an increase in the supply of euros will cause the euro to depreciate relative to the dollar. |
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Definition
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Term
| Holding the supply of euros (€) constant, an increase in the demand for euros will cause the euro to appreciate relative to the dollar. |
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Definition
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Term
| Holding the supply of euros (€) constant, an increase in the demand for euros will cause the euro to depreciate relative to the dollar. |
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Definition
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Term
| Holding the supply of euros (€) constant, a decrease in the demand for euros will cause the dollar to appreciate relative to the euro. |
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Definition
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Term
| Holding the supply of euros (€) constant, a decrease in the demand for euros will cause the dollar to depreciate relative to the euro. |
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Definition
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Term
| Purchasing power parity (PPP) states that the currency of a country with relatively higher inflation will depreciate relative to the currency of a country with a relatively lower inflation rate. |
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Definition
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Term
| Interest rate parity (IRP) states that the currency of a country with relatively higher interest rate will appreciate relative to the currency of a country with a relatively lower interest rate. |
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Definition
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Term
| Political risk is the risk associated with possible actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investors. |
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Definition
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Term
| Political risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability. |
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Definition
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Term
| Economic risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability. |
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Definition
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Term
1. If the exchange rate in New York for British pounds sterling is quoted at 1 pound = $1.60, and in London the rate is quoted at 1 pound = $1.62, financial arbitragers might:
a. buy pounds in New York
b. sell dollars in London
c. simultaneously sell pounds in New York and buy pounds in London
d. simultaneously buy pounds in New York and sell pounds in London |
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Definition
| d. simultaneously buy pounds in New York and sell pounds in London |
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Term
| 2. The direct exchange rate is the rate at which one unit of foreign currency is quoted in terms of: a. commodity prices b. the domestic currency c. the foreign currency d. gold |
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Definition
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Term
3. The effect of arbitrage activities in foreign exchange markets is to:
a. create disparity among the rates of various currencies
b. eliminate or reduce exchange rate quotation differentials
c. hinder the otherwise smooth functioning of the exchange markets
d. create wide swings in quotations from period to period |
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Definition
| b. eliminate or reduce exchange rate quotation differentials |
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Term
4. Foreign exchange hedging by a multinational corporation is:
a. a normal responsibility of foreign exchange specialists
b. not ordinarily considered to be prudent business
c. usually described in speculative terms
d. permitted only for defensive purposes |
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Definition
| a. a normal responsibility of foreign exchange specialists |
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Term
5. The manager of the foreign exchange office of a multinational corporation could, in anticipation of a decline in the value of currency of one of its foreign accounts:
a. borrow in that country and add to its account with that branch
b. accelerate the timing of remitting on the payables of that foreign branch
c. enter into a futures contract for delivery of that currency at today’s rate
d. shift funds from branches in other countries to that foreign branch |
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Definition
| c. enter into a futures contract for delivery of that currency at today’s rate |
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Term
6. Large multinational corporations enjoy special opportunities for risk reduction or speculative gains from currency activities:
a. because of their influence on currency developments in the various countries
b. since they can move balances from one country to another as monetary conditions seem to warrant
c. because of their generally stronger credit ratings
d. because they always deal in currencies denominated in U.S. dollars |
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Definition
| b. since they can move balances from one country to another as monetary conditions seem to warrant |
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Term
7. Which of the following statements is false?
a. A direct quote is in terms of units of the home country’s currency per one unit of the foreign country’s currency.
b. An indirect quote is in terms of units of the foreign country’s currency per one unit of the home country’s currency.
c. Economic risk reflects the uncertainty associated with national government action that might affect asset values.
d. All the above statements are true. |
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Definition
| c. Economic risk reflects the uncertainty associated with national government action that might affect asset values. |
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Term
8. Under conditions of purchasing power parity (PPP), a country with a relatively _______ expected inflation rate will have its currency _______ relative to a country with a relatively _______ inflation rate.
a. higher, depreciate, lower
b. lower, depreciate, higher
c. higher, appreciate, lower
d. lower, appreciate, higher. |
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Definition
| a. higher, depreciate, lower |
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Term
9. Under conditions of interest rate parity (IRP), a country with a relatively _______ hnominal interest rate will have its currency _______ relative to a country with a relatively _______ nominal interest rate.
a. higher, depreciate, lower
b. lower, depreciate, higher
c. higher, appreciate, lower
d. lower, appreciate, higher. |
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Definition
| a. higher, depreciate, lower |
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Term
10. The _______ includes ALL international transactions.
a. balance of trade
b. balance of payments
c. current account balance
d. capital account balance |
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Definition
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Term
11. A stronger U.S. dollar generally
a. results in more imports of foreign merchandise
b. leads to concern about worsening trade deficits
c. results in lower domestic inflation
d. all of the above |
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Definition
a. results in more imports of foreign merchandise
b. leads to concern about worsening trade deficits
c. results in lower domestic inflation
answer:d. all of the above |
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Term
12. A weaker U.S. dollar generally
a. helps U.S. exporting firms
b. reduces an existing U.S. trade deficit
c. leads to higher inflation in the U.S.
d. all of the above
e. none of the above |
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Definition
a. helps U.S. exporting firms
b. reduces an existing U.S. trade deficit
c. leads to higher inflation in the U.S.
answer:d. all of the above |
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Term
13. Foreign exchange markets may be described as:
a. specific locations in major industrial cities
b. major financial centers connected by good communications systems
c. money markets outside of the United States
d. facilities of central banks for foreign exchange |
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Definition
| b. major financial centers connected by good communications systems |
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Term
14. Quotations of foreign exchange rates in the many cities of the world are identical or nearly so because of:
a. central bank control
b. price fixing
c. clearinghouse activities
d. arbitrage activities |
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Definition
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Term
15. To protect against loss as a result of adverse currency fluctuations, an export firm may:
a. demand immediate cash settlement
b. use a futures contract as a hedge
c. require the customer to make payment in the exporter’s currency
d. all of the above are possible protections. |
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Definition
a. demand immediate cash settlement
b. use a futures contract as a hedge
c. require the customer to make payment in the exporter’s currency
answer:d. all of the above are possible protections. |
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Term
16. _________________________ was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payments problems.
a. The World Bank
b. The International Monetary Fund
c. The International Bank for Reconstruction and Development
d. none of the above |
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Definition
| b. The International Monetary Fund |
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Term
17. _________________________ was created to help economic growth in developing countries.
a. The World Bank
b. The International Monetary Fund
c. The Export-Import Bank
d. The Agency for International Development. |
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Definition
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Term
18. _________________________ was an international monetary system in which the U.S. dollar was valued in gold and other exchange rates were pegged to the dollar.
a. The gold standard
b. The flexible exchange rate system
c. The Bretton Woods System
d. none of the above |
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Definition
| c. The Bretton Woods System |
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Term
19. The currency quotation method that indicates the amount of a home country’s currency needed to purchase one unit of a foreign currency is called the
a. direct quotation method
b. indirect quotation method
c. floating exchange rate method
d. none of the above |
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Definition
| a. direct quotation method |
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Term
20. Key factors that influence currency exchange rates include all of the following EXCEPT:
a. supply and demand relationships
b. inflation rates
c. interest rates
d. all of the above influence exchange rates |
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Definition
a. supply and demand relationships
b. inflation rates
c. interest rates
answer:d. all of the above influence exchange rates |
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Term
21. Key factors that influence currency exchange rates include all of the following EXCEPT:
a. supply and demand relationships
b. legal constraints
c. interest rates
d. inflation rates |
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Definition
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Term
22. If the U.S. inflation rate is expected to be 3 percent next year, the European inflation rate is expected to be 4% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.)
a. appreciate, $1.2875
b. appreciate, $1.3126
c. depreciate, $1.2875
d. depreciate, $1.3126 |
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Definition
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Term
| 23. If the U.S. inflation rate is expected to be 3 percent next year, the European inflation rate is expected to be 4% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.) |
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Definition
c. depreciate, $1.2875/€
$ |
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Term
| 24. If the U.S. inflation rate is expected to be 4 percent next year, the European inflation rate is expected to be 3% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.) |
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Definition
d. depreciate, $1.3126/€
$ |
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Term
25. If the U.S. inflation rate is expected to be 4 percent next year, the European inflation rate is expected to be 3% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.)
a. appreciate, $1.2875/€
b. appreciate, $1.3126/€
c. depreciate, $1.2875/€
d. depreciate, $1.3126/€ |
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Definition
b. appreciate, $1.3126/€
$ |
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Term
26. If U.S. interest rates are expected to be 6 percent next year, European interest rates are expected to be 4 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.)
a. appreciate, $1.275
b. appreciate, $1.325
c. depreciate, $1.275
d. depreciate, $1.325 |
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Definition
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Term
27. If U.S. interest rates are expected to be 6 percent next year, European interest rates are expected to be 4 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.)
a. appreciate, $1.275/€
b. appreciate, $1.325/€
c. depreciate, $1.275/€
d. depreciate, $1.325/€ |
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Definition
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Term
28. If U.S. interest rates are expected to be 4 percent next year, European interest rates are expected to be 6 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $1.30/€ to __________: (Pick the closest answer.)
a. appreciate, $1.275/€
b. appreciate, $1.325/€
c. depreciate, $1.275/€
d. depreciate, $1.325/€ |
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Definition
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Term
29. If U.S. interest rates are expected to be 4 percent next year, European interest rates are expected to be 6 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $1.30/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $1.30/€ to __________: (Pick the closest answer.)
a. appreciate, $1.275/€
b. appreciate, $1.325/€
c. depreciate, $1.275/€
d. depreciate, $1.325/€ |
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Definition
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Term
30. If U.S. interest rates are expected to be 2 percent next year, European interest rates are expected to be 5 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $0.92/€ to __________: (Pick the closest answer.)
a. appreciate, $0.894/€
b. appreciate, $0.947/€
c. depreciate, $0.894/€
d. depreciate, $0.947/€ |
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Definition
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Term
31. If U.S. interest rates are expected to be 2 percent next year, European interest rates are expected to be 5 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $0.92/€ to __________: (Pick the closest answer.)
a. appreciate, $0.894/€
b. appreciate, $0.947/€
c. depreciate, $0.894/€
d. depreciate, $0.947/€ |
|
Definition
|
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Term
32. If U.S. interest rates are expected to be 5 percent next year, European interest rates are expected to be 2 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the dollar to _________ against the euro from $0.92/€ to __________: (Pick the closest answer.)
a. appreciate, $0.894/€
b. appreciate, $0.947/€
c. depreciate, $0.894/€
d. depreciate, $0.947/€ |
|
Definition
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Term
33. If U.S. interest rates are expected to be 5 percent next year, European interest rates are expected to be 2 percent next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.92/€, then according to interest rate parity, we would expect the euro to _________ against the dollar from $0.92/€ to __________: (Pick the closest answer.)
a. appreciate, $0.894/€
b. appreciate, $0.947/€
c. depreciate, $0.894/€
d. depreciate, $0.947/€ |
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Definition
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Term
34. Purchasing commodities, securities, or currencies in one market and immediately selling them in another to make a profit from price differences in the two markets is called:
a. profiteering
b. skimming
c. arbitrage
d. all of the above |
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Definition
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Term
35. Which of the following statements is most correct?
a. A weaker dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase.
b. A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase.
c. A stronger dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase.
d. A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase.
e. none of the above |
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Definition
| c. A stronger dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase. |
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Term
36. Which of the following statements is most correct?
a. A weaker dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase.
b. A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase.
c. A stronger dollar results in more imports of foreign merchandise since it requires more dollars for purchase.
d. A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase.
e. none of the above |
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Definition
a. A weaker dollar results in more imports of foreign merchandise since it requires fewer dollars for purchase.
b. A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase.
c. A stronger dollar results in more imports of foreign merchandise since it requires more dollars for purchase.
d. A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase.
answer:e. none of the above |
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Term
37. Which factor does not impact international trade balances?
a. The exchange value of the U.S. dollar relative to other currencies
b. How often the government sells treasury bills
c. Relative inflation rates
d. Economic growth
e. The prices of goods in the U.S. |
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Definition
| b. How often the government sells treasury bills |
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Term
38. The ___________________ shows the flow of income into and out of the United States during a specified period.
a. Balance of payments
b. Capital Account balance
c. Current Account balance
d. Merchandise Trade balance
e. Balance of trade |
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Definition
| c. Current Account balance |
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Term
39. If the U.S. inflation rate is expected to be 7 percent next year, the European inflation rate is expected to be 5% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $0.93/€ to __________: (Pick the closest answer.)
a. appreciate, $0.9477/€
b. appreciate, $0.9126/€
c. depreciate, $0.9477/€
d. depreciate, $0.9126/€ |
|
Definition
a. appreciate, $0.9477/€
$ |
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Term
40. If the U.S. inflation rate is expected to be 7 percent next year, the European inflation rate is expected to be 5% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $0.93/€ to __________: (Pick the closest answer.)
a. appreciate, $0.9477/€
b. appreciate, $0.9126/€
c. depreciate, $0.9477/€
d. depreciate, $0.9126/€ |
|
Definition
c. depreciate, $0.9477/€
$ |
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Term
41. If the U.S. inflation rate is expected to be 5 percent next year, the European inflation rate is expected to be 7% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the dollar to _________ against the euro from $0.93/€ to __________: (Pick the closest answer.)
a. appreciate, $0.9477/€
b. appreciate, $0.9126/€
c. depreciate, $0.9477/€
d. depreciate, $0.9126/€ |
|
Definition
b. appreciate, $0.9126/€
$ |
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Term
42. If the U.S. inflation rate is expected to be 5 percent next year, the European inflation rate is expected to be 7% next year, the U.S. is the home country, and the spot rate between the euro and dollar is $0.93/€, then according to purchasing power parity, we would expect the euro to _________ against the dollar from $0.93/€ to __________: (Pick the closest answer.)
a. appreciate, $0.9477/€
b. appreciate, $0.9126/€
c. depreciate, $0.9477/€
d. depreciate, $0.9126/€ |
|
Definition
d. depreciate, $0.9126/€
$ |
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Term
43. The current U.S. one month interest rate is 4% compared to 6% in Europe. Today’s spot rate between the euro and dollar is $1.15/€ and today’s one month forward rate is $1.13/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today’s forward rate of $1.19/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.)
a. sell, €869.57, $982.61, -1.74%
b. sell, €921.74, $1,041.55, 4.16%
c. buy, €869.57, $982.61, -1.74%
d. buy, €921.74, $1,041.55, 4.16% |
|
Definition
b. sell, €921.74, $1,041.55, 4.16%
$1,000/$1.15/€ = €869.57 → €869.57(1.06) = €921.74
€921.74($1.13/€) = $1,041.57
41.57/$1,000 = 4.16% |
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Term
44. The current U.S. one month interest rate is 6% compared to 4% in Europe. Today’s spot rate between the euro and dollar is $1.15/€ and today’s one month forward rate is $1.19/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today’s forward rate of $1.19/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.)
a. buy, €869.57, $1,034.78, 3.48%
b. buy, €904.35, $1,076.18, 7.62%
c. sell, €869.57, $1,034.78, 3.48%
c. sell, €869.57, $1,034.78, 3.48% |
|
Definition
d. sell, €904.35, $1,076.18, 7.62%
1,000$/1.15/€ = €869.57 → €869.57(1.04) = €904.35
€904.35($1.19/€) = $1,076.18
$76.18/$1,000 = 7.62% |
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Term
45. The current U.S. one month interest rate is 7% compared to 5% in Europe. Today’s spot rate between the euro and dollar is $1.25/€ and today’s one month forward rate is $1.18/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today’s forward rate of $1.18/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.)
a. sell, €847.46, $1,059.33, 5.93%
b. sell, €840.00, $991.20, - 0.88%
c. sell, €800.00, $944.00, - 5.60%
d. sell, €856, $1,010.08, 1.01% |
|
Definition
b. sell, €840.00, $991.20, - 0.88%
$1,000/$1.25/€= €800.00 → €800(1.05) = €840
€840($1.18/€) = $991.20
- $8.80/$1,000 = - 0.88% |
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Term
46. The current U.S. one month interest rate is 5% compared to 7% in Europe. Today’s spot rate between the euro and dollar is $1.18/€ and today’s one month forward rate is $1.25/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today’s forward rate of $1.25/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.)
a. sell, €800, $944.00, - 5.6%
b. sell, €847.46, $906.78, -9.32%
c. sell, €906.78, $1,133.48, 13.35%
d. sell, €889.83, $1,112.29, 11.23%
e. none of the above is correct because you want to buy €’s with the forward contract |
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Definition
c. sell, €906.78, $1,133.48, 13.35%
$1,000/$1.18/€= €847.46 → €847.46(1.07) = €906.78
€906.78($1.25/€) = $1,133.48
$133.48/$1,000 = 13.35% |
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Term
47. The current U.S. one month interest rate is 5% compared to 7% in Europe. Today’s spot rate between the euro and dollar is $1.18/€ and today’s one month forward rate is $1.25/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. Today you should convert your $1,000 to euros, deposit the euros in a European bank for one month, and enter into a forward contract to € one month forward at today’s forward rate of $1.25/€. One month from today you will take your euros out of the European bank and use the forward contract to convert them to $ giving you a % rate of return. (Pick the closest answer.)
a. buy, €800, $944.00, - 5.6%%
b. buy, €847.46, $906.78, -9.32%
c. buy, €906.78, $1,133.48, 13.35%
d. buy, €889.83, $1,112.29, 11.23%
e. none of the above is correct because you want to sell €’s with the forward contract |
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Definition
e. none of the above is correct because you want to sell €’s with the forward contract
$1,000/$1.18/€= €847.46 → €847.46(1.07) = €906.78
€906.78($1.25/€) = $1,133.48
$133.48/$1,000 = 13.35% |
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Term
48. The current U.S. one month interest rate is 4% compared to 6% in Europe. Today’s spot rate between the euro and dollar is $1.15/€ and today’s one month forward rate is $1.13/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. The rate of return on your covered investment in Europe is % compared to a rate of return of % if you invested your $1,000 in the U.S. (Pick the closest answer.)
a. 6.00%, 4%
b. 7.88%, 4.16%
c. 4.16%, 4%
d. 2.19%, 4.16% |
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Definition
c. 4.16%, 4%
1,000/$1.15/€= €869.57 → €869.57(1.06) = €921.74
€921.74($1.13/€) = $1,041.56
$41.56/$1,000 = 4.16% |
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Term
49. The current U.S. one month interest rate is 6% compared to 4% in Europe. Today’s spot rate between the euro and dollar is $1.15/€ and today’s one month forward rate is $1.13/€. The U.S. is the home country. You have $1,000 to invest and you want to take advantage of covered interest arbitrage. The rate of return on your covered investment in Europe is % compared to a rate of return of % if you invested your $1,000 in the U.S. (Pick the closest answer.)
a. 4%, 6%
b. 6%, 4%
c. 4.83%, 6%
d. 2.19%, 6% |
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Definition
d. 2.19%, 6%
1,000/$1.15/€= €869.57 → €869.57(1.04) = €904.35
€904.35($1.13/€) = $1,021.92
$21.92/$1,000 = 2.19% |
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Term
50. The current U.S. one month forward rate is $1.25/€. You are an American speculator with $40,000. You are sure the spot rate will be $1.32/€ one month from today. What steps should you take today and one month from today to make a profit buying and selling euros using your $40,000 and a forward contract? Today you should enter into a one month forward contract to € at today’s forward rate of $1.25/€. One month from today your dollar profit is . (Pick the closest answer.)
a. buy, €32,000, $2,240
b. buy, €30,303, $2,121
c. sell, €30,303, $2,121
d. sell, €32,000, $2,240 |
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Definition
a. buy, €32,000, $2,240
Today: Enter into a forward contract to buy €32,000 one month from today at $1.25.
$40,000/€$1.25/€ = €32,000
One Month from Today:
Step 1: With the forward contract buy €32,000 for $40,000
Step 2: Sell the €32,000 in the spot market for $1.32 and receive (€32,000)($1.32) = $42,240
Dollar Profit: $42,240 - $40,000 = $2,240 |
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Term
51. The current U.S. one month forward rate is $1.34/€. You are an American speculator with $40,000. You are sure the spot rate will be $1.28/€ one month from today. What steps should you take today and one month from today to make a profit buying and selling euros using your $40,000 and a forward contract? Today you should enter into a one month forward contract to € at today’s forward rate of $1.34/€. One month from today your dollar profit is . (Pick the closest answer.)
a. buy, €31,250, $1,875
b. buy, €29,851, $1,791
c. sell, €29,851, $1,791
d. sell, €31,250, $1,875 |
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Definition
d. sell, €31,250, $1,875
Today: Enter into a forward contract to sell €31,250 one month from today at $1.34.
$40,000/€$1.28/€ = €31,250
One Month from Today:
Step 1: Buy €31,250 in the spot market at the spot rate of $1.28 for a cost of $40,000
Step 2: With the forward contract, sell the €31,250 for $1.34 and receive (€31,250)($1.34) = $41,875
Dollar Profit: $41,875 - $40,000 = $1,875 |
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Term
52. A U.S. based multinational corporation (MNC) bought some equipment from a British firm today and must pay them £1,000,000 one month from today. The MNC thinks the spot rate will be $1.10/£ one month from today. The current forward rate is $1.05/£. How can the MNC use a forward contract to its benefit in this situation?
a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£.
b. Enter into a forward contract to buy £1,000,000 one month from today at $1.05/£.
c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£.
d. Enter into a forward contract to sell £1,000,000 one month from today at $1.05/£.
e. Wait one month and buy to pounds in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract. |
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Definition
| b. Enter into a forward contract to buy £1,000,000 one month from today at $1.05/£. |
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Term
53. A U.S. based multinational corporation (MNC) bought some equipment from a British firm today and must pay them £1,000,000 one month from today. The MNC thinks the spot rate will be $1.10/£ one month from today. The current forward rate is $1.15/£. How can the MNC use a forward contract to its benefit in this situation?
a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£.
b. Enter into a forward contract to buy £1,000,000 one month from today at $1.15/£.
c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£.
d. Enter into a forward contract to sell £1,000,000 one month from today at $1.15/£.
e. Wait one month and buy to pounds in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract. |
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Definition
| e. Wait one month and buy to pounds in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract. |
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Term
54. A U.S. based multinational corporation (MNC) sold some equipment to a British firm today and will receive £1,000,000 from the British firm one month from today. The MNC thinks the spot rate will be $1.10/£ one month from today. The current forward rate is $1.15/£. How can the MNC use a forward contract to its benefit in this situation?
a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£.
b. Enter into a forward contract to buy £1,000,000 one month from today at $1.15/£.
c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£.
d. Enter into a forward contract to sell £1,000,000 one month from today at $1.15/£.
e. Wait one month and buy to pounds in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract. |
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Definition
| d. Enter into a forward contract to sell £1,000,000 one month from today at $1.15/£. |
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Term
55. A U.S. based multinational corporation (MNC) sold some equipment to a British firm today and will receive £1,000,000 from the British firm one month from today. The MNC thinks the spot rate will be $1.10/£ one month from today. The current forward rate is $1.05/£. How can the MNC use a forward contract to its benefit in this situation?
a. Enter into a forward contract to buy £1,000,000 one month from today at $1.10/£.
b. Enter into a forward contract to buy £1,000,000 one month from today at $1.05/£.
c. Enter into a forward contract to sell £1,000,000 one month from today at $1.10/£.
d. Enter into a forward contract to sell £1,000,000 one month from today at $1.05/£.
e. Wait one month and buy to pounds in the spot market at the forecasted rate of $1.10/£ rather than use a forward contract. |
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Definition
| d. Enter into a forward contract to sell £1,000,000 one month from today at $1.05/£. |
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Term
56. Holding the demand for euros (€) constant, an increase in the supply of euros will cause the euro to relative to the dollar.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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Term
57. Holding the demand for euros (€) constant, an increase in the supply of euros will cause the dollar to relative to the euro.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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Term
58. Holding the demand for euros (€) constant, a decrease in the supply of euros will cause the euro to relative to the dollar.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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Term
59. Holding the demand for euros (€) constant, a decrease in the supply of euros will cause the dollar to relative to the euro.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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Term
60. Holding the supply of euros (€) constant, an increase in the demand for euros will cause the euro to a relative to the dollar.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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Term
61. Holding the supply of euros (€) constant, an increase in the demand for euros will cause the dollar to a relative to the euro.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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Term
62. Holding the supply of euros (€) constant, a decrease in the demand for euros will cause the euro to a relative to the dollar.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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Term
63. Holding the supply of euros (€) constant, a decrease in the demand for euros will cause the dollar to a relative to the euro.
a. appreciate
b. depreciate
c. remain stable
d. cannot be determined without additional information |
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Definition
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