Exam
Name___________________________________
Chapter 04 International Parity Conditions
Chapter 06 The Foreign Exchange Market
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which of the following is not a function of the foreign exchange market?
A) transferring purchasing power
B) facilitating long-term financing
C) providing international trade credit
D) allowing participant to hedge their foreign exchange exposure
2) For a US trader, an interbank quotation of $1.4631/£ is in
A) European terms
B) non-conventional terms
C) indirect terms
D) direct terms
3) A direct quote of €0.1346/Dkr is equivalent to an indirect quote of
A) Dkr0.8654/€
B) Dkr1.1346/€
C) Dkr7.4294/€
D) Dkr7.8654/€
4) On a point basis, 3-month forward quote of $1.4631/£ + 15 is equivalent to an outright $/£ quotation of
A) $1.4631/£
B) $1.4646/£
C) $1.4650/£
D) $1.4641/£
5) On May 1, 2002, the Russian ruble was trading at Ruble31.2400/$ and the exchange rate for the Hungarian
Forint was Forint 268.225/$. What was the implied Ruble/Forint cross rate?
A) Ruble0.1165/Forint
B) Ruble8.5859/Forint
C) Ruble236.985/Forint
D) Ruble8,379.35/Forint
6) A forward contract to deliver U.S. dollars for British pounds could be described either as ___________ or
_________.
A) selling pounds forward; selling dollars forward
B) buying dollars forward; buying pounds forward
C) selling dollars forward; buying pounds forward
D) selling pounds forward; buying dollars forward
7) The following is an example of a European term foreign exchange quote:
A) ¥100/€.
B) $1.50/£.
C) €1.05/$.
D) None of the choices are correct.
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8) The price of one country's currency in units of another currency or commodity is the
A) par value.
B) international rate.
C) foreign interest rate.
D) foreign currency exchange rate.
9) In June 2002, the Euro changed in value from €1.111/$ to €1.053/$, thus, the euro ___________ against the U.S.
dollar.
A) weakened
B) strengthened
C) remained neutral
D) all of the choices are correct
10) The Economist publishes annually the "hamburger standard" by which they compare the prices of the
McDonalds Corporation Big Mac hamburger around the world. The index estimates the exchange rates for
currencies based on the assumption that the burgers in question are the same across the world and therefore, the
price should be the same. If a Big Mac costs $2.54 in the United States and £1.99 in Britain, what is the estimated
exchange rate of pounds per dollar as hypothesized by the Hamburger index?
A) £0.78/$
B) $1.28/£
C) £1.45/$
D) £1.55/$
11) If the current exchange rate is $1.43/£, the price of a Big Mac hamburger in the United States is $2.54, and the
price of a Big Mac hamburger in Britain is £1.99, then other things equal, the Big Mac hamburger in Britain is
________.
A) under priced
B) correctly priced
C) over priced
D) not enough information to determine if the price is appropriate or not.
12) One year ago the spot rate of U.S. dollars for euros was $1/€1. Since that time the rate of inflation in the U.S. has
been 4% less than that in the European Union. Based on the theory of Relative PPP, the current spot exchange
rate of U.S. dollars for Euros should be approximately ____________.
A) $1.04/€
B) $0.96/€
C) relative PPP provides no guide for this type of question
D) $1/€
13) Assume that the inflation rate in Barbados is 3.20%, while the inflation rate in the U.S. is 3.00%. According to
PPP, the Barbados dollar (BBD) should ___________ by _________%.
A) appreciate; 0.20%
B) depreciate; 0.20%
C) appreciate; 1.20%
D) depreciate; 1.20%
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14) In its exact form the Fisher effect may be written as ____________. Where: i = the nominal rate of interest, r = the
real rate of return and = the expected rate of inflation.
A) i = (r)( )
B) i = r +
C) i = r + + (r)( )
D) i = r + 2
15) Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.60% and a real rate of interest of 2.00%.
Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next
year?
A) 5.60%
B) 2.00%
C) 1.60%
D) 1.05%
16) From the viewpoint of a U.S. investor or trader, the direct quote for a currency exchange rate would be quoted
in _____________.
A) terms of dollars per unit of foreign currency (e.g., $/£)
B) terms of foreign currency units per dollar (e.g., £/$)
C) 1/8ths
D) cents
17) A _____________ is an exchange rate quoted today for settlement today.
A) currency rate
B) forward rate
C) yield curve
D) spot rate
18) The current U.S. dollar-yen spot rate is ¥120/$. If the 180-day forward exchange rate is ¥125/$ then the yen is
selling at a per annum _________ of ___________.
A) discount; 8.00%
B) discount; 1.57%
C) premium; 8.00%
D) premium; 6.30%
19) If the current €/$ spot rate is €1.180/$ and the dollar interest rate is 8% and the euro interest rate is 14.9%, what is
the 90-day forward rate?
A) €1.2554/$
B) €1.2000/$
C) €1.1800/$
D) €1.1546/$
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