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Assume the current spot rate is C$1.2568 and the one-year forward rate is C$1.2455. Also assume the nominal risk-free rate in Canada is 3.7 percent compared to 4.1 percent in the U.S. Using covered interest arbitrage, how much additional profit can you earn over that which you would earn if you invested $1 in the U.S for one year?


A) $.0054
B) $.0042
C) $.0008
D) $.0015
E) $.0061

F) B) and C)
G) B) and E)

Correct Answer

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U.S. dollars deposited in a bank in Switzerland are called:


A) foreign depository receipts.
B) international exchange certificates.
C) francs.
D) Eurocurrency.
E) Eurodollars.

F) B) and C)
G) None of the above

Correct Answer

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Suppose the spot and three-month forward rates for the yen are ¥102.32 and ¥102.27, respectively. What is the approximate annual percent difference between the inflation rate in Japan and in the U.S.?


A) 1.93 percent
B) −1.21 percent
C) 1.67 percent
D) −.20 percent
E) 2.28 percent

F) A) and E)
G) A) and B)

Correct Answer

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Spot trades must be settled:


A) at the time of the trade.
B) on the day following the trade date.
C) within two business days.
D) within three business days.
E) within one week of the trade date.

F) C) and D)
G) All of the above

Correct Answer

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The home currency approach:


A) discounts all of a project's foreign cash flows using the current spot rate.
B) employs the uncovered interest parity relationship to project future exchange rates.
C) computes the net present value (NPV) of a project in the foreign currency and then converts that NPV into U.S. dollars.
D) utilizes the international Fisher effect to compute the NPV of foreign cash flows in the foreign currency.
E) utilizes the international Fisher effect to compute the required future exchange rates.

F) A) and D)
G) C) and D)

Correct Answer

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The forward rate market is dependent upon:


A) current forward rates exceeding current spot rates.
B) current spot rates exceeding current forward rates over time.
C) current spot rates equaling current forward rates, on average, over time.
D) forward rates equaling the actual future spot rates on average over time.
E) current spot rates equaling the actual future spot rates on average over time.

F) All of the above
G) C) and D)

Correct Answer

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Assume that on Friday, one South African rand was worth $.0953 and on the following Monday the value was $.0962. Also assume one Kuwaiti dinar was worth $3.56 on Friday and $3.54 on the following Monday. Given these rates, which one of the following statements must be correct?


A) On Thursday, one U.S. dollar was equal to .0944 South African rand.
B) On Friday, one U.S. dollar was worth 10.388 rands.
C) Both the South African rand and the Kuwaiti dinar appreciated against the U.S. dollar from Friday to Monday.
D) The South African rand appreciated from Friday to Monday against the U.S. dollar.
E) The U.S. dollar depreciated from Friday to Monday against the Kuwaiti dinar.

F) A) and E)
G) All of the above

Correct Answer

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You are analyzing a project with an initial cost of £50,000. The project is expected to return £12,000 the first year, £36,000 the second year, and £40,000 the third and final year. There is no salvage value. Assume the current spot rate is £.6346. The nominal return relevant to the project is 12 percent in the U.S. The nominal risk-free rate in the U.S. is 3.4 percent while it is 4.1 percent in the U.K. Assume that uncovered interest rate parity exists. What is the net present value of this project in U.S. dollars?


A) $23,611
B) $26,509
C) $26,930
D) $29,639
E) $30,796

F) A) and D)
G) B) and C)

Correct Answer

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International bonds issued in multiple countries but denominated in a single currency are called:


A) Treasury bonds.
B) Bulldog bonds.
C) Eurobonds.
D) Yankee bonds.
E) Samurai bonds.

F) A) and E)
G) B) and C)

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Which one of the following securities is used as a means of investing in a foreign stock that otherwise could not be traded in the United States?


A) American Depository Receipt
B) Yankee bond
C) Yankee stock
D) LxIBOR
E) Gilt

F) A) and E)
G) B) and D)

Correct Answer

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Which one of the following conditions is not required for absolute purchasing power parity to exist?


A) No trade barriers can exist.
B) Goods must be identical.
C) Transaction costs must be zero.
D) There can be no spoilage.
E) Spot and forward rates must be equal.

F) B) and C)
G) A) and D)

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Suppose the current spot rate for the Norwegian krone is NKr5.9433 while the expected inflation rate in Norway is 3.1 percent and 1.7 percent in the U.S. A risk-free asset in the U.S. is yielding 3.2 percent. What risk-free rate of return should you expect on a Norwegian security?


A) 5.1 percent
B) 4.0 percent
C) 4.4 percent
D) 5.9 percent
E) 4.6 percent

F) A) and D)
G) None of the above

Correct Answer

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Which one of the following formulas expresses the absolute purchasing power parity relationship between the U.S. dollar and the British pound?


A) S₀ = PUK(PUS)
B) PUS = Ft(PUK)
C) PUK = S₀(PUS)
D) Ft = PUS(PUK)
E) S₀(Ft) = PUK(PUS)

F) A) and E)
G) B) and E)

Correct Answer

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Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?


A) Unbiased forward rates condition
B) Uncovered interest parity
C) International Fisher effect
D) Purchasing power parity
E) Interest rate parity

F) C) and E)
G) C) and D)

Correct Answer

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Which one of the following supports the idea that real interest rates are equal across countries?


A) Unbiased forward rates condition
B) Uncovered interest rate parity
C) International Fisher effect
D) Purchasing power parity
E) Interest rate parity

F) A) and D)
G) B) and E)

Correct Answer

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Assume the euro is selling in the spot market for $1.15. Simultaneously, in the three-month forward market the euro is selling for $1.17. Which one of the following statements correctly describes this situation?


A) The spot market is out of equilibrium.
B) The forward market is out of equilibrium.
C) The dollar is selling at a premium relative to the euro.
D) The euro is selling at a premium relative to the dollar.
E) The euro is expected to depreciate in value.

F) All of the above
G) C) and D)

Correct Answer

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On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. Which one of the following is most likely the interest rate that will be charged on this loan?


A) Eurodollar yield to maturity
B) London Interbank Offer Rate
C) Paris Opening Interest Rate
D) United States Treasury bill rate
E) International prime rate

F) A) and C)
G) D) and E)

Correct Answer

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International bonds and domestic bonds issued by the same domestic issuer are usually:


A) identical in all respects.
B) issued jointly in unlimited quantities.
C) treated as identical bonds for taxation purposes.
D) issued in different currencies.
E) subject to different regulations.

F) All of the above
G) C) and D)

Correct Answer

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The price of one euro expressed in U.S. dollars is referred to as a(n) :


A) ADR rate.
B) cross inflation rate.
C) depository rate.
D) exchange rate.
E) foreign interest rate.

F) B) and E)
G) None of the above

Correct Answer

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The unbiased forward rate condition supports the idea that the current forward rate is a:


A) condition where a future spot rate is equal to the current spot rate.
B) guarantee of a future spot rate at one point in time.
C) condition where the spot rate is expected to remain constant over a period of time.
D) relationship between the future spot rates of two currencies at an equivalent point in time.
E) predictor of the future spot rate at the equivalent point in time.

F) A) and B)
G) C) and D)

Correct Answer

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