Shapiro6thTESTBANK
Chapter 1
CHAPTER 1
Introduction
EASY
1.1
Historically, the primary motive for U.S. multinationals to produce abroad has
been to
a.
lower costs
b.
respond more quickly to the marketplace
c.
avoid trade barriers
d.
gain tax benefits
ANSWER: b: evolution of multinational
1.2
The primary objective of the multinational corporation is to
a.
maximize shareholder wealth
b.
maximize world production
c.
minimize debt
d.
minimize the cost of doing business globally
ANSWER: a: Multinational Financial Management: Theory and Practice
1.3
____________ is defined as the purchase of assets or commodities on one
market for immediate resale on another in order to profit form a price
discrepancy.
a.
internationalization
b.
arbitrage
c.
financing
d.
total risk
ANSWER: b: evolution of multinational
1.4
The value of good financial management is ___________ in the global markets
because of the much greater probability of market imperfections and multiple tax
rates.
a.
minimized
b.
neutralized
c.
enhanced
d.
arbitraged away
ANSWER: c: role of the financial executive
1.5
When a firm operates globally it offers advantages such as
a.
greater political power at home
b.
less taxes on its profits
c.
greater negotiating power with foreign minority groups
d.
greater negotiating power with labor unions
ANSWER: d: rise of the multinational
Shapiro6thTESTBANK
Chapter 1
1.6
The prime transmitter of global competitive forces is the
a.
public utility firm
b.
financial management experience of the U.S. markets
c.
the multinational corporation
d.
the Federal Reserve System of the U.S.
ANSWER: c: rise of the multinational
1.7
___________ were the earliest multinationals.
a.
raw-material seekers
b.
market seekers
c.
cost minimizers
d.
oil companies.
ANSWER: a: raw material seekers
1.8
The ___________ are the archetype of the modern multinational firm that goes
overseas to produce and sell in foreign markets.
a.
cost minimizers
b.
market seekers
c.
raw-material seekers
d.
whaling companies
ANSWER: b: market seekers
1.9
___________ are a recent category of multinationals that seek out and invest in
lower cost production sites overseas.
a.
Cost minimizers
b.
Market seekers
c.
Raw-material seekers
d.
High tech firms
ANSWER: a: cost minimizers
1.10
Which one of the following is a consequence of increased global competition?
a.
the creation of new steel plants in the old industrial countries
b.
the end of free-trade agreements between governments of the world
c.
increased comfort level of trade unions with the consequences
d.
increased anxiety among workers in the old industrial countries
ANSWER: d: Consequences of Global Competition
1.11
The defenders of multinationals believe that __________ are the appropriate
reward for efficiently providing the global economy with products and services.
a.
profits
b.
subsidies
c.
tax holidays
d.
low-interest, government-subsidized loans
ANSWER: a: Criticisms of the Multinational Corporation
Shapiro6thTESTBANK
Chapter 1
1.12
International ________ can reduce the volatility of an investment portfolio
because national financial markets tend to move independently of each other.
a.
arbitrage
b.
centralization of the MNC’s cash
c.
diversification
d.
investment
ANSWER: c: The Importance of Total Risk
MODERATE
1.13
Into which category of multinational is IBM most likely to fall?
a.
raw materials seeker
b.
market seeker
c.
cost minimizer
d.
all of the above
ANSWER: b: market seeker
1.14
Which one of the following did NOT accelerate the growth of the global economy
in the past decade?
a.
the U.S.-Canada-Mexico free-trade pact
b.
the creation of the European Union
c.
China’s entrance into the WTO
d.
The Southeast Asia Currency Crisis
ANSWER: d: Consequences of Global Competition
1.15
The multinational financial system enables companies to
a.
avoid currency controls
b.
reduce taxes
c.
access lower cost financing sources
d.
all of the above
ANSWER: d: rise of the multinational
1.16
An alternative to the set up of an production facility overseas is to license a local
firm to manufacture the company’s products. One disadvantage of this method is
a.
the establishment of a competitor with loss of future revenues to the
licensing firm
b.
the time to market entry
c.
the degree of financial and legal risks
d.
the amount of the investment required
ANSWER: a: The Process of Overseas Expansion
Shapiro6thTESTBANK
Chapter 1
1.17
Which of the following is an example of reverse foreign investment for the U.S.?
a.
Honda builds a factory in Ohio
b.
Apple builds a plant in Ireland that exports to the United States
c.
British Telecom issues new stock in the United States
d.
American investors buy shares in Sony
ANSWER: a: market seeker
1.18
Which of the following is NOT a failing of the theory of comparative advantage?
a.
it ignores the role of uncertainty and economies of scale
b.
it assumes that factors of production are relatively immobile
c.
it assumes that there are no differentiated products
d.
it deals with trade only differentiate rather than undifferentiated products
ANSWER: d: rise of the multinational
DIFFICULT
1.19
Which of the following theories identifies specialization as the main reason for
international business activity?
a.
product life cycle theory of international trade
b.
theory of diversification
c.
doctrine of comparative advantage
d.
theory of globalization
ANSWER: c: rise of the multinational
1.20
Critics of the multinational corporation would NOT fault its tendency to
a.
shift production from one location to another in search of lower costs
b.
avoid taxes
c.
cause balance of payments difficulties
d.
engage in environmental protection measures
ANSWER: d: criticisms of the MNC
1.21
Multinational firms would most likely be
a.
riskier than purely domestic firms because of the exposures of operating
abroad
b.
less risky than purely domestic firms because of international
diversification
c.
less risky than domestic firms if the added risks of operating overseas are
more than offset by the ability to operate in nations whose economic
cycles are not perfectly in phase
d.
invested in developed countries only and avoid developing economies
ANSWER: c: the importance of total risk
1.22
According to the capital asset pricing model
Shapiro6thTESTBANK
Chapter 1
a.
b.
c.
d.
ANSWER:
only the systematic component of risk affects the required return
foreign investments whose returns are uncorrelated with the market's
return should have a higher required return than comparable domestic
investments
total risk of the investment is most relevant for small to medium-sized
firms
diversification is secondary to risk levels of the investment
a: capital asset pricing
1.23
The internationalization process most likely tends to
a.
proceed in a preprogrammed series of steps
b.
begin by licensing foreign producers
c.
inevitably involve foreign production
d.
begin by exporting
ANSWER: d: capital asset pricing
1.24
According to the efficient market hypothesis, which one of the following is NOT
correct?
a.
markets place a premium on the future
b.
today’s stock price is the best predictor of tomorrow’s stock price
c.
stock prices reflect all available information
d.
today’s stock price incorporates the past history of prices
ANSWER: a: market efficiency
1.25
Which one of the following provides strong evidence that internationalization
continues to grow in the world economy?
a.
import restrictions by the Bush Administration on foreign steel
b.
efforts suggested by politicians to restrict the sourcing of foreign products
by locally headquartered multinationals
c.
the growing volume of foreign direct investment by U.S. as well as other
multinational companies
d.
pressure on governments to embargo unfriendly nations
ANSWER: c: Evolution of the Multinational Corporation
1.26
For the multinational corporation, which one of the following complements to
the integration of world wide operations is MOST critical?
a.
flexibility
b.
adaptability
c.
speed
d.
economies of scale of distribution
ANSWER: c: A Behavioral Definition of the Multinational Corporation
Shapiro6thTESTBANK
Chapter 1
1.27
According to Shapiro, if you were the CEO of a multinational corporation, which
of the following would be MOST important to you in hiring a manager? One
that
a.
Avoids risk at any price
b.
Manages effectively the political environment of the subsidiary country
c.
Anticipates every future disturbance related to the supply chain
d.
Makes decisions that anticipates problems and provides solutions that
enhances the firm’s prospects for growth
ANSWER: d: The Global Manager
CHAPTER 2
THE DETERMINATION OF EXCHANGE RATES
EASY
2.1
The explanation for the rise of the U.S. dollar during the early 1980s is that
a.
the U.S. budget deficit lowered U.S. interest rates
b.
the U.S. trade deficit caused more U.S. inflation
c.
the U.S. budget deficit raised U.S. interest rates
d.
the U.S. economy deteriorated dramatically
ANSWER: c: Expectations and the Asset Market Model of Exchange Rates
2.2
The U.S. dollar weakened during the 1970s because
a.
control of Congress changed political parties
b.
the U.S. economy grew
c.
foreigners wanted to hold more dollars than before
d.
U.S. inflation accelerated
ANSWER: d: Expectations and the Asset Market Model of Exchange Rates
2.3
Exchange rates depend on
a.
relative inflation rates
b.
relative interest rates
c.
relative trade deficits
d.
a and b
ANSWER: d: The Nature of Money and Currency Values
2.4
Beginning in 1997, the ruble came under attack by speculators and resulted in
accelerating
a.
stock market prices
b.
capital flight
c.
efforts by the Russian government to address the root causes of the crisis
d.
decontrol by the government on the foreign exchange market
ANSWER: b: Illustration The Ruble is Rubble
2.5
During the second half of 1997, currencies and stock market prices plunged in
value across Southeast Asia, beginning in
a.
Thailand
b.
Malaysia
c.
Indonesia
d.
South Korea
ANSWER: a: Asian Currencies Sink in 1997
2.6
The asset market view of exchange rate determination says that the spot rate
a.
b.
c.
d.
ANSWER:
should follow a random walk
is affected primarily by a nation's long-run economic prospects
both a and b
should be strongly affected by a nation's balance of trade
c: Expectations and the Asset Market Model of Exchange Rates
2.7
When monetary authorities have not insulated their domestic money supplies
from the foreign exchange transactions, it is known as ________ intervention.
a.
unsterilized
b.
sterilized
c.
foreign market
d.
subsidized
ANSWER: a: Sterilized versus Unsterilized Intervention
2.8
When the U.S. Federal Reserve sells or purchases Treasury securities in order to
sterilize the impact of their foreign exchange market interventions, it is referred to
as a(n) ________ operation.
a.
floating currency
b.
spot rate
c.
revaluation
d.
open market
ANSWER: d: Sterilized versus Unsterilized Intervention
2.9
Under which one of the following systems is there no central bank?
a.
Floating exchange rates
b.
Currency board
c.
Pegged exchange rates
d.
Sterilized intervention
ANSWER: b: Central Bank Reputations
MODERATE
2.10
On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the
weekend the lira devalued against the DM to DM 0.0012. By how much had the
lira devalued against the DM?
a.
7.69%
b.
8.33%
c.
5.21%
d.
9.27%
ANSWER: a: Setting the Equilibrium Spot Exchange Rate
2.11
Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how
much will the dollar appreciate against the real?
a.
67%
b
40%
c.
32%
d.
28%
ANSWER: a: Setting the Equilibrium Spot Exchange Rate
2.12
If the French euro devalued by 17% against the U.S. dollar, this is equivalent to a
revaluation of the dollar against the euro by
a.
17%
b.
16.31%
c.
20.48%
d.
17.54%
ANSWER: c: Setting the Equilibrium Spot Exchange Rate
2.13
If the Australian dollar devalues against the Japanese yen by 10%, the yen will
appreciate by
a.
33.32%
b.
25.55%
c.
10.11%
d.
11.11%
ANSWER: d: Setting the Equilibrium Spot Exchange Rate
2.14
If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates
against the euro by
a.
55%
b.
100%
c.
200%
d.
1,000%
ANSWER: b: Setting the Equilibrium Spot Exchange Rate
2.15
If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira
depreciates against the dollar by
a.
60%
b.
75%
c.
125%
d.
300%
ANSWER: a: Setting the Equilibrium Spot Exchange Rate
2.16
If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will
appreciate against the dinar by
a.
45%
b.
82%
c.
55%
d.
32%
ANSWER: b: Setting the Equilibrium Spot Exchange Rate
2.17
If the peso depreciates against the U.S dollar by 80%, the US dollar will
appreciate against the peso by
a.
300%
b.
200%
c.
250%
d.
400%
ANSWER: d: Setting the Equilibrium Spot Exchange Rate
2.18
If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate
against the U.S. dollar
a.
25%
b.
20%
c.
30%
d.
10%
ANSWER: b: Setting the Equilibrium Spot Exchange Rate
2.19
If a foreigner purchases a U.S. government security
a.
the supply of dollars rises
b.
the federal government deficit declines
c.
the demand for dollars rises
d.
the U.S. money supply rises
ANSWER: c: Setting the Equilibrium Spot Exchange Rate
2.20
The price of foreign goods in terms of domestic goods is called
a.
the real exchange rate
b.
the balance of trade
c.
the trade-weighted exchange rate
d.
purchasing parity
ANSWER: a: The Fundamentals of Central Bank Intervention
2.21
An increase in the real exchange rate will
a.
raise national income
b.
lower national income
c.
make a country less competitive in international trade
d.
ANSWER:
raise the cost of foreign goods
c: The Fundamentals of Central Bank Intervention
2.22
A slowdown in U.S. economic growth will
a.
boost the value of the dollar because inflation fears will be calmed
b.
boost the value of the dollar because the Federal Reserve will expand the
money supply
c.
lower the value of the dollar because the U.S. will be a less attractive
place to invest in
d.
lower the value of the dollar because interest rates will rise
ANSWER: c: The Fundamentals of Central Bank Intervention
2.23
The willingness of people to hold money
a.
increases with the interest rate
b.
rises with price stability
c.
rises with national income
d.
b and c only
ANSWER: d: The Fundamentals of Central Bank Intervention
2.24
Sound economic policies will
a.
raise the value of a nation's currency by boosting the economy
b.
lower the value of a nation's currency by increasing the precautionary
demand for money
c.
lower the value of a nation's currency by leading to lower interest rates
d.
both b and c
ANSWER: a: The Fundamentals of Central Bank Intervention
2.25
Large government budget deficits will
a.
raise the value of a nation's currency by raising domestic interest rates
b.
raise the value of a nation's currency by stimulating the domestic
economy
c.
lower the value of a nation's currency by leading to higher inflation
d.
lower the value of a nation's currency by leading to added political risk
e.
historical experience shows no correlation between government budget
deficits and the value of the nation's currency
ANSWER: e: The Nature of Money and Currency Values
DIFFICULT
2.26
Which type of money is MOST likely to see its value fluctuate in the foreign
exchange market?
a.
fiat money
b.
c.
d.
ANSWER:
commodity money
price-indexed money
pegged-exchange rate
a: Central Bank Reputations and Currency Values
2.27
An increase in the supply of U.S. dollars by the Federal Reserve will
a.
raise the value of the dollar because it will stimulate U.S. economic
growth
b.
raise the value of the dollar because it will lead to higher U.S. interest
rates
c.
reduce the value of the dollar because of inflation fears in the United
States
d.
decrease the value of the dollar because it will force other countries to
raise their interest rates
ANSWER: c: The Fundamentals of Central Bank Intervention
2.28
Which one of the following is probably the best advice for governments when it
comes to exchange rate arrangements?
a.
The complete replacement of the local currency with the U.S. dollar.
b.
Currency boards are the next best arrangement after fixed exchange rates.
c.
There is no substitute for good macroeconomic policy.
d.
Fixed exchange rates are the most completely sound and credible.
ANSWER: c: Central Bank Reputations
2.29
Which of the following is an example of foreign exchange market intervention?
a.
the U.S. government pays Social Security checks to pensioners living in
Poland
b.
IBM sells euros it received in international trade
c.
the Canadian government pays interest to Saudi Arabian investors
d.
the Japanese central bank sells yen in the foreign exchange market to
prop up the value of the yen
ANSWER: d: The Fundamentals of Central Bank Intervention
2.30
During 1995, the yen went from $0.0125 to $0.0095238. By how much did the
dollar appreciate against the yen?
a.
23.81%
b.
31.25%
c.
15.67%
d.
40.78%
ANSWER: b: Setting the Equilibrium Spot Exchange Rate
2.31
Which one of the following effects would MOST likely be caused by a
government artificially holding its currency value down?
a.
a massive rise in foreign exchange reserves.
b.
the value of the nation’s exports rises dramatically
c.
d.
ANSWER:
the outsourcing a the nation’s manufacturing jobs to offshore markets
a growing trade deficit with foreign economies
a: Central Bank reputation
CHAPTER 3
The International Monetary System
EASY
3.1
The ________ is an exchange rate system that is relatively free from central bank
and other government interventions.
a.
managed float
b.
clean float
c.
dirty float
d.
target-zone arrangement
ANSWER: b: Free Float
3.2
When government intervention attempts to reduce for exporters and importers
the uncertainty caused by disruptive exchange rate changes for the short and
medium term, it is referred to as _________.
a.
smoothing out daily fluctuations
b.
leaning against the wind
c.
unofficial pegging
d.
a dirty float
ANSWER: b: Managed Float
3.3
Under a _________, countries adjust their national economic policies to maintain
their exchange rates within a specific margin around agreed-upon, fixed central
exchange rates.
a.
managed float
b.
‘beggar-thy-neighbor” devaluation
c.
dirty float
d.
target-zone agreement
ANSWER: d: Target-Zone Agreement
3.4
________ is nonconvertible paper money backed only by faith that the monetary
authorities will not issue more money.
a.
Specie
b.
Fiat money
c.
Seignorage
d.
Par value
ANSWER: b: the classical gold standard
3.5
Under the classic gold standard, if prices began rising in the U.S.
a.
the dollar value of the pound would rise
b.
the dollar value of the pound would fall
c.
the U.S. would begin running a balance of trade surplus
d.
gold would flow out of the U.S. and the U.S. money supply would drop
ANSWER: d: the classical gold standard
3.6
The Bretton Woods system
a.
ended in 1971
b.
ended in 1939 when World War II began
c.
is currently the basis for the international monetary system
d.
is currently in use only by the major industrial nations
ANSWER: a: introduction
3.7
The current exchange rate system can best be characterized as a
a.
free float
b.
managed float
c.
target-zone arrangement
d.
fixed-rate system
e.
hybrid system
ANSWER: e: the current system of exchange rate determination
3.8
Managed floats would NOT fall into which of the following categories of central
bank intervention?
a.
smoothing out daily fluctuations
b.
leaning against the wind
c.
unofficial pegging
d.
target-zone arrangements
ANSWER: d: managed float
3.9
The European Monetary System is best described as a
a.
clean float
b.
target-zone arrangement
c.
dirty float
d.
managed float
ANSWER: b: the European monetary system
3.9
A weak peso is most likely to cause
a.
added employment and inflation in Mexico
b.
less unemployment but more inflation in Mexico
c.
more unemployment but less inflation in Mexico
d.
less unemployment and less inflation in Mexico
ANSWER: b: emerging market currency crises
3.10
The Bretton Woods system fell apart because
a.
of the oil crisis
b.
U.S. monetary policy was too expansionary
c.
the United States ran a large trade deficit
d.
the United States no longer supported a pegged gold standard
ANSWER: b: the Bretton Woods System
3.11
The gold standard was dissolved in 1973 because
a.
the U.S. printed too many dollars to maintain gold at $35/oz
b.
some countries preferred to hold gold instead of dollars
c.
high interest rates raised the cost of holding gold
d.
a and b only
ANSWER: d: the post-Bretton Woods System
3.12
The rising dollar in the early 1980s can be attributed to
a.
high real interest rates in the United States
b.
improved investment prospects in the United States
c.
the growing U.S. budget deficit
d.
a and b only
ANSWER: d: the rising dollar: 1980-1985
3.13
The fall of the dollar beginning in 1985 can be attributed to
a.
the growing U.S. budget deficit
b.
the large U.S. trade deficit
c.
rapid U.S. economic growth
d.
the slowdown in U.S. economic growth relative to growth overseas
ANSWER: d: the sinking dollar: 1985-1987
MODERATE
3.14
The characteristic of gold that is most important to the success of a gold standard
is that it is
a.
portable
b.
storable
c.
easily standardized
d.
expensive to produce
ANSWER: d: the classical gold standard
3.15
A gold standard ensures a long-run tendency toward price stability because
a.
gold is desirable
b.
gold is durable and storable
c.
the cost of producing an ounce of gold stays relatively constant overtime
d.
gold supply is directly related to consumer satisfaction
ANSWER: c: the classical gold standard
3.16
Calls for a new gold standard reflect
a.
fundamental distrust of government's willingness to maintain the integrity
of fiat money
b.
a general willingness to accept fiat money
c.
a short memory of what actually transpired under the gold standard
d.
the durability and desirability of gold
ANSWER: a: the classical gold standard
3.17
Under the gold standard
a.
price levels rose dramatically
b.
price levels stayed constant over time
c.
the long-run stability of the price level includes alternating periods of
inflation and deflation
d.
fiat money is more valuable
ANSWER: c: the classical gold standard
3.18
Under a fixed-rate system, a country that followed policies that would lead to a
higher rate of inflation than that experienced by its trading partners would
a.
experience a balance-of-payments deficit as its goods became more
expensive
b.
see a decrease in the supply of its currency on the foreign exchange
markets
c.
find its currency exchange rate subject to upward pressure
d.
experience a balance-of-payments surplus.
ANSWER: a: fixed-rate system
3.19
Under a fixed-rate system, a country that followed policies leading to a lower
inflation rate than that experienced by its trading partners would
a.
come under pressure to expand its money supply
b.
restrict the growth of its money supply
c.
experience a balance-of-payments deficit
d.
be forced to buy its currency in the foreign exchange market
ANSWER: a: fixed-rate system
3.20
Underlying the emerging markets currency crises is a fundamental conflict
among policy objectives that the target nations have failed to resolve. Which one
of the following is NOT?
a.
IMF bailouts
b.
fixed exchange rates
c.
independent domestic monetary policy
d.
free capital movement
ANSWER: a: emerging market currency crises
DIFFICULT
3.21
In a fixed-rate system, central banks maintain currency values by
a.
reducing the money supplies of nations with overvalued currencies
b.
boosting the money supplies of nations with undervalued currencies
c.
buying up overvalued currencies in the foreign exchange market
d.
buying undervalued currencies in the foreign exchange market
ANSWER: d: fixed-rate system
3.22
Governments intervene in the foreign exchange markets for all of the following
except to
a.
b.
c.
d.
ANSWER:
earn foreign exchange
reduce economic uncertainty
improve the nation's export competitiveness
reduce inflation
a: managed float
3.23
Under a fixed-rate system, which of the following four alternatives to
devaluation is MOST likely to succeed?
a.
foreign borrowing
b.
austerity
c.
wage and price controls
d.
exchange controls
ANSWER: b: fixed-rate system
3.24
In order to boost the value of the euro relative to the dollar
a.
the Fed should sell dollars for euros and the European central bank
should buy DM with dollars
b.
the Fed should sell dollars for euros and the European central bank
should buy dollars with euros
c.
the Fed should sell euros for dollars and the European central bank
should sell dollars for DM
d.
the Fed should sell DM for dollars and the European central bank should
buy euros with dollars
ANSWER: a: managed float
CHAPTER 4
Parity Conditions in International Finance and Currency Forecasting
EASY
4.1
A currency is said to be at a forward _________ if the forward rate is below the
spot rate.
a.
discount
b.
premium
c.
position
d.
forward
ANSWER: a: arbitrage and the law of one price
4.2
The theory of relative purchasing power parity states that, between two nations,
the
a.
inflation rates are unrelated
b.
exchange rate difference reflects the inflation rate difference
c.
inflation rate is greater in weaker currencies
d.
the interest rate is greater than the inflation rate during depreciations
ANSWER: b: purchasing power parity
4.3
The Fisher effect states that the _________ rate is made up of a real required rate
of return and an inflation premium.
a.
nominal exchange
b.
real exchange
c.
nominal interest rate
d.
adjusted dividend
ANSWER: c: The Fisher Effect
4.4
A rise in the inflation rate in one nation relative to others will be associated with
a fall in the first nation’s exchange rate and with a rise of its interest rate relative
to foreign interest rates. The two conditions combined result in the _________
Effect.
a.
Fisher
b.
Herstatt
c.
Unbiased forward rate
d.
International Fisher
ANSWER: d: The Fisher effect
4.5
The purchase of currency on one market for immediate resale in another market
in order to profit from the rate discrepancy is known as _________.
a.
arbitrage
b.
financial innovation
c.
a line of credit
d.
countertrade
4.6
In its absolute version, _______ states that price levels should be equal worldwide when expressed in a common currency.
a.
interest rate parity
b.
purchasing power parity
c.
the international Fisher effect
d.
covered interest arbitrage
4.7
When there is a relative shortage of capital and high political risk in most
developing countries, it is likely to drive real interest rates in these countries to
a.
decline below real interest rates in developed countries
b.
exceed nominal interest rates in developed countries
c.
exceed rate interest rates in developed countries
d.
parity conditions in all developing countries
MODERATE
4.8
Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and
80%, respectively, over the next several years. If the current spot rate for the
Mexican peso is $.005, then the best estimate of the peso's spot value in 3 years
is
a.
$.00276
b.
$.01190
c.
$.00321
d.
$.00102
ANSWER: d: purchasing power parity
4.9
If the expected inflation rate is 5% and the real required return is 6%, then the
Fisher effect says that the nominal interest rate should be
a.
1%
b.
11.3%
c.
11%
d.
6%
ANSWER: b: The Fisher Effect
4.10
The inflation rates in the U.S. and France are expected to be 4% per annum and
7% per annum, respectively. If the current spot rate is $.1050, then the expected
spot rate in three years is
a.
$.1150
b.
$.1112
c.
$.0964
d.
$.0992
ANSWER: c: purchasing power parity
4.11
If inflation in the U.S. is projected at 5% annually for the next 5 years and at
12% annually in Italy for the same time period, and the lira/$ spot rate is
currently at L2400 = $1, then the PPP estimate of the spot rate five years from
now is
a.
1738
b.
3314
c.
2560
d.
2250
ANSWER: b: purchasing power parity
4.12
If expected inflation is 20% and the real required return is 10%, then the Fisher
effect says that the nominal interest rate should be exactly
a.
30%
b.
32%
c.
22%
d.
12%
ANSWER: b: The Fisher effect
4.13
Annual inflation rates in the U.S. and Greece are expected to be 3% and 8%,
respectively. If the current spot rate for the drachma is $.007, then the expected
spot rate in three years is
a.
$.00607
b.
$.00823
c.
$.00751
d.
$.00694
ANSWER: a: purchasing power parity
4.14
If a country's freely floating currency is undervalued in terms of purchasing
power parity, its capital account is likely to be
a.
in deficit or tending toward a deficit
b.
in surplus or tending toward a surplus
c.
Subsidized by the International Monetary Fund
d.
a candidate for loans from the World Bank
ANSWER: a: purchasing power parity
4.15
If the average rate of inflation in the world rises from 5% to 7%, this will tend to
make forward exchange rates move toward
a.
smaller premiums or larger discounts in relation to the dollar
b.
larger premiums or smaller discounts in relation to the dollar
c.
no change on average
d.
can't tell what will happen
ANSWER: c: purchasing power parity
4.16
A 150% real return in Brazil is higher than a 15% dollar return in the U.S.
a.
because arbitrage opportunities exist
b.
when the inflation controls are suspended in Brazil
c.
it depends on whether these are nominal or real returns
d.
regardless of nominal or real returns
ANSWER:
c: purchasing power parity
4.17
Annual inflation rates in the U.S. and Italy are expected to be 4% and 7%,
respectively. If the current spot rate is $1 = L2,000, then the expected spot rate
for the lira in three years is
a.
$.0004591
b.
$.0011590
c.
$.0009892
d.
$.0005471
ANSWER: a: purchasing power parity
4.18
Annual inflation rates in the U.S. and France are expected to be 4% and 6%,
respectively. If the current spot rate is $.1250/FF, then the expected spot rate in
two years is
a.
$.1299
b.
$.1150
c.
$.1203
d.
$.1335
ANSWER: c: purchasing power parity
4.19
Suppose five-year deposit rates on Eurodollars and Euromarks are 12% and 8%,
respectively. If the current spot rate for the mark is $0.50, then the spot rate for
the mark five years from now implied by these interest rates is
a.
.5997
b.
.4169
c.
.5185
d.
.4821
ANSWER: a: the international Fisher effect
4.20
The direct spot quote for the Canadian dollar is $.76 and the 180-day forward
rate is $.74. The difference between the two rates is likely to mean that
a.
inflation in the U.S. during the past year was lower than in Canada
b.
interest rates are rising faster in Canada than in the U.S.
c.
prices in Canada are expected to rise more rapidly than in the U.S.
d.
the Canadian dollar's spot rate is expected to rise in terms of the U.S.
dollar
ANSWER: c: interest rate parity theory
4.21
The spot rate on the Dutch guilder is $0.39 and the 180-day forward rate is
$0.40. The difference between the spot and forward rates means that
a.
interest rates are higher in the U.S. than in the Netherlands
b.
the guilder has risen in relation to the dollar
c.
the inflation rate in the Netherlands is declining
d.
the guilder is expected to fall in value relative to the dollar
there is a high inflation rate in the U.S.
ANSWER:
a: interest rate parity theory
4.22
Suppose the price indexes in Mexico and the U.S., which both began the year at
100, are at 160 and 103, respectively, by the end of the year. If the exchange rate
began the year at Mex$4.5 = $1 and ended the year at Mex$5.9 = $1, then the
change in the real value of the peso (a "-" indicates a real devaluation) during the
year is
a.
0%
b.
-5.0%
c.
18.5%
d.
-8.2%
ANSWER: c: purchasing power parity
4.23
Suppose the spot rates for the pound, mark, and Swiss franc are $1.20, $.32, and
$.40, respectively. The associated 90-day interest rates (annualized) are 16%,
8%, and 4%, while the U.S. 90-day interest rate is 12%. What is the 90-day
forward rate (to the nearest cent) on a TCU (TCU 1 = £1 + DM1 + SFr1) if
interest parity holds?
a
$1.92
b
$1.98
c
$1.94
d
$1.87
ANSWER: a: interest rate parity theory
4.24
The current five-year Euroyen rate is 6% per annum (compounded annually).
The five-year Eurodollar rate is 8.5%. What is the implied forward premium or
discount of the yen (over the current spot rate) for a five-year forward contract?
a.
4.17% premium
b.
18.46% discount
c.
11.00% discount
d.
12.36% premium
ANSWER: d: interest rate parity theory
4.25
Suppose the spot rates for the pound, mark, and Swiss franc are $1.50, $.42, and
$.48, respectively. The associated 90-day interest rates (annualized) are 12%,
6%, and 4%, while the U.S. 90-day interest rate (annualized) is 8%. What is the
90-day forward rate on a DCU (DCU 1 = £1 + DM1 + SFr1) if interest parity
holds?
a.
$2.4027
b.
$2.3923
c.
$2.4196
d.
$2.3738
ANSWER:
b: interest rate parity theory
4.26
Suppose that spot pounds are selling at $1.7342, while 90-day forward pounds
are selling at $1.7156. At the same time, DM spot and 90-day forward rates are
$0.6138 and $0.6014, respectively. According to these quotes the
a.
pound is selling at a 3.87% forward discount relative to the DM
b.
pound is selling at a 2.37% forward premium relative to the DM
c.
DM is selling at a 0.97% forward discount relative to the pound
d.
DM is selling at a 1.54% forward premium relative to the pound
ANSWER: a: interest rate parity theory
4.27
If annualized interest rates in the U.S. and France are 9% and 13%, respectively,
and the spot value of the franc is $.1109, then at what 180-day forward rate will
interest rate parity hold?
a.
$.1070
b.
$.1150
c.
$.1088
d.
$.1130
ANSWER: c: interest rate parity theory
4.28
If annualized interest rates in the U.S. and Switzerland are 10% and 4%,
respectively, and the 90-day forward rate for the Swiss franc is $.3864, at what
current spot rate will interest rate parity hold?
a.
$.3902
b.
$.3874
c.
$.3807
d.
$.3792
ANSWER: c: interest rate parity theory
4.29
The spot rate on the euro is $1.40 and the 180-day forward rate is $1.50. The
difference between the two rates means
a.
interest rates are higher in the U.S. than in the European Union
b.
the mark has risen in relation to the dollar
c.
the inflation rate in Germany is declining
d.
the euro is expected to fall in value relative to the dollar
ANSWER: a: interest rate parity theory
4.30
Suppose the spot rates for the pound, mark, and Swiss franc are $1.30, $.35, and
$.40, respectively. The associated 90-day interest rates (annualized) are 16%,
8%, and 4%, while the U.S. 90-day interest rate (annualized) is 12%. What is the
90-day forward rate on an ACU (ACU 1 = £1 + DM1 + SFr1) if interest parity
holds?
a.
$2.0512
b.
c.
d.
ANSWER:
$2.1134
$2.0397
$2.0489
d: interest rate parity theory
4.31
The current five-year Euroyen and Eurodollar rates are 8% and 12.5% per
annum, respectively. What is the implied forward premium or discount of the
yen (over the current spot rate for a five-year forward contract)?
a.
4.17% premium
b.
18.46% discount
c.
17.74% discount
d.
22.64% premium
ANSWER: d: interest rate parity theory
4.32
The 90-day interest rates (annualized) in the U.S. and Japan are, respectively,
10% and 7%, while the direct spot quote for the yen in New York is $.004300.
At what 90-day forward rate would interest rate parity hold?
a.
.004430
b.
.004271
c.
.004332
d.
.004176
ANSWER: c: interest rate parity theory
4.33
If annualized interest rates in the U.S. and France are 9% and 13%, respectively,
and the spot value of the franc is $.1109, then at what 180-day forward rate will
interest rate parity hold?
a.
$.1070
b.
$.1150
c.
$.1088
d.
$.1130
ANSWER: c: interest rate parity theory
DIFFICULT
4.34
Suppose the pound devalues from $1.25 at the start of the year to $1.00 at the
end of the year. Inflation during the year is 15% in England and 5% in the U.S.
What is the real devaluation (-) or real revaluation (+) of the pound during the
year?
a.
- 12.38%
b.
- 20.71%
c.
+ 2.39%
d.
ANSWER:
+ 1.46%
a: purchasing power parity
4.35
Suppose the price indexes in Spain and the U.S., which both began the year at
100, are at 117 and 105, respectively, by the end of the year. If the beginning and
ending exchange rates, respectively, for the peseta are $.1320 and $.1125, then
the change in the real value of the peseta (a "-" indicates a real devaluation)
during the year is
a.
0%
b.
-5.0%
c.
2.4%
d.
-8.2%
ANSWER: b: purchasing power parity
4.36
Suppose the Swiss franc revalues from $0.40 at the beginning of the year to
$0.44 at the end of the year. U.S. inflation is 5% and Swiss inflation is 3% during
the year. What is the real devaluation (-) or real revaluation (+) of the Swiss
franc during the year?
a.
+ 7.9%
b.
- 5.3%
c.
+ 8.1%
d.
- 1.6%
ANSWER: a: purchasing power parity
4.37
Suppose the value of the Polish zloty moves from Z 1000 = $1 at the start of the
year to Z 1,800 at the end of the year. At the same time, the Polish price level
changes from an index of 100 on January 1 to 134 on December 31. U.S.
inflation during the year was 4.5%. If the one-year interest rate on the zloty is
44%, what was the real dollar cost of borrowing the zloty during the year?
a.
17.53%
b.
27.81%
c.
-23.44%
d.
-8.76%
ANSWER: c: purchasing power parity
4.38
Suppose inflation rates in the U.S. and France are expected to be 4% and 9%,
respectively, next year and 6% and 7%, respectively, in the following year. If the
current spot rate is $.1050, then the expected spot value of the franc in two years
is
a.
$.1111
b.
$.1024
c.
d.
ANSWER:
$.0992
$.1074
c: purchasing power parity
4.39
Suppose the Deutsche mark revalues from $.30 at the beginning of the year to
$.33 at the end of the year. Inflation during the year is 5% in the U.S. and 3% in
Germany. What is the real devaluation (-) or real revaluation (+) of the Deutsche
mark during the year?
a.
+ 7.9%
b.
- 5.3%
c.
+ 8.1%
d.
- 1.6%
ANSWER: a: purchasing power parity
4.40
If the U.S. trade balance with Japan is expected to go from a deficit this year to a
surplus next year, the forward rate on yen would
a.
be less than the spot rate
b.
be higher than the spot rate
c.
equal the spot rate
d.
could be either above or below the spot rate
ANSWER:
d: the relationship between the forward rate and the future spot rate
4.41
The following exchange and interest rate quotations were recently observed:
Eurocurrency rates
Exchange rate per $
90-days (% annum)
(Discretely-compounded)
90-day
forward
Spot
$
DM
£
DM
£
DM
£
Bid:
15 5/8
7 7/8
12 1/4
1.881
.4961
1.801
.4937
Ask:
16
8 1/4
13
1.843
.4902
1.773
.4889
An arbitrage profit can be obtained by
a.
borrowing pounds and lending dollars
b.
borrowing dollars and lending DM
c.
borrowing DM and lending pounds
d.
there are no arbitrage opportunities
ANSWER: a: interest rate and parity theory
CHAPTER 5
The Balance of Payments and International Economic Linkages
EASY
5.1
A balance of trade deficit results in a current account
a.
deficit
b.
surplus
c.
IMF intervention
d.
World Bank loan
ANSWER: c: current account
5.2
The change in private domestic borrowing or lending required to keep payments
in balance without adjusting official reserves is called
a.
the net liquidity balance
b.
the balance of payments
c.
the balance on current account
d.
the balance on capital account
ANSWER: a: balance-of-payment measures
5.3
Tourism shows up on the
a.
merchandise account
b.
current account
c.
capital account
d.
a and c above
ANSWER: b: current account
5.4
The accounting statement that summarizes all the economic transactions between
residents of the home country and residents of all other countries is called the
a.
balance of trade
b.
current account balance
c.
balance of payments
d.
capital account balance
ANSWER: c: balance-of-payment categories
5.5
The balance on current account includes the net flow of good, services, income
and
a.
portfolio investments
b.
changes in reserve assets
c.
direct investment
d.
unilateral transfers
ANSWER: d: balance of payment categories
5.6
The sale of American computers to the Spanish government shows up as
a.
a debit on the official reserves account
b.
a credit on the official reserves account
c.
a credit on the trade account
d.
ANSWER:
a debit on the current account
c: current account
5.7
An overvalued currency acts as a(n) ____ on exports and a(n) _____ to imports.
a.
subsidy, tax
b.
increase, reduction
c.
increase, increase
d.
tax, subsidy
ANSWER: d: coping with the current-account deficit
5.8
The US savings deficit can be attributed, in part, to
a.
the growing US budget deficit
b.
high real interest rates abroad
c.
low American investment in plant and equipment
d.
rising US taxes on capital accumulation
ANSWER: a: the international flow of goods
MODERATE
5.9
In a freely floating exchange rate system, if the capital account surplus for the
U.S. rises, what will most likely happen to the real value of the dollar?
a.
it will decline
b.
it will rise
c.
there is no impact on the dollar
d.
the IMF will step in to adjust rising exchange rates
ANSWER: b: the link between the current and the capital accounts
5.10
If a real value of a nation's freely floating currency increases, and the nation's
current account is initially zero, its capital account will most likely be
a.
in deficit
b.
in surplus
c.
adjusted for the rate of inflation
d.
decreased by the amount of increase in the current account
ANSWER: b: the link between the current and the capital accounts
5.11
In a freely floating exchange rate system, if the capital account is running a
deficit
a.
the balance of payments must run a deficit
b.
the balance of payments must be zero
c.
the current account must run a surplus
d.
b and c above
ANSWER: d: the link between the current and the capital accounts
5.12
As the real value of the dollar rises, the balance on current account is likely to
a.
increase
b.
decrease
c.
stay the same
d.
move with the capital account adjustments factor
ANSWER: b: the link between the current and the capital goods
5.13
In a freely floating exchange rate system, if the current account is running a
deficit
a.
the balance of payments must run a deficit
b.
the balance of payments must be zero
c.
the capital account must run a surplus
d.
b and c above
ANSWER: d: the link between the current and the capital goods
5.14
In a freely-floating exchange rate system, the sale of Japanese cars to the United
States will be offset by which item on the US balance of payments?
a.
a credit on the current account
b.
a credit on the capital account
c.
a debit on the trade account
d.
a or b
ANSWER: d: the link between the current and the capital goods
5.15
The Japanese current account surplus can best be attributed to
a.
the high rate of Japanese domestic investment
b.
Japanese protectionism
c.
the high rate of Japanese savings
d.
government budget deficits
ANSWER: c: the link between the current and the capital goods
According to the J-curve theory, a country’s trade deficit
a.
decreases just after its currency depreciates
b.
increases just after its currency appreciates
c.
increases just after its currency is pegged to the dollar
d.
worsens just after its currency depreciatees
ANSWER: d: coping with the current-account deficit
5.16
DIFFICULT
5.17
Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991, financed by a
five-year loan from the US Export-Import Bank There is a one year grace period
on principal and interest payments The net impact of this sale in 1991 is
a.
a $150 million reduction in the U.S. trade deficit
b.
a $150 million increase in the U.S. capital account surplus
c.
d.
ANSWER:
positive change in the U.S. balance of payments in 1991
a $500 million reduction in the U.S. trade deficit
a: the link between the current and the capital goods
5.18
If a nation's income exceeds its spending, then
a.
savings will be less than domestic investment
b.
the nation must run a current-account deficit
c.
the balance of payments will have deficits for the next two years
d.
the nation must run a capital-account deficit
ANSWER: d: the link between the current and the capital goods
5.19
A nation that is running a savings deficit
a.
must spend more than it produces
b.
will invest domestically more than it saves
c.
must have a net capital outflow
d.
a and b only
ANSWER: d: the link between the current and the capital goods
5.20
In order to reduce its current-account deficit, the United States must do which of
the following?
a.
reduce the federal budget deficit
b.
lower national product relative to national spending
c.
reduce savings relative to domestic investment
d.
reduce the federal budget surplus
ANSWER: a: the link between the current and the capital goods
CHAPTER 6
THE FOREIGN EXCHANGE MARKET
EASY
6.1
Exports of goods and services by the United States now total more than
_________ of gross domestic product.
a.
10%
d.
20%
d.
50%
d.
75%
ANSWER: a: introduction
6.2
What is the name of the international bank communications network for foreign
exchange transactions that connects more than 7,000 banks and broker-dealers?
a.
FedWire
b.
CHIPS
c.
SWIFT
d.
UBS
ANSWER: c: organization of the foreign exchange market
6.3
The overwhelming majority of foreign exchange transactions involve
a.
multinational corporations buying and selling foreign exchange
b.
importers and exporters buying and selling foreign exchange
c.
banks buying and selling foreign exchange
d.
governments buying and selling foreign exchange
ANSWER: c: the participants
6.4
The world's largest currency trading market is located in the city of
a.
New York
b.
Frankfurt
c.
Tokyo
d.
London
ANSWER: d: size
6.5
American terms refers to the
a.
number of U.S. dollars per unit of foreign currency
b.
number of foreign-currency units per U.S. dollar
c.
quotation system found in the United States
d.
bid-ask spread on the U.S. dollar
ANSWER: d: spot quotations
6.6
Trading on the foreign exchange market is
a.
located in a physical headquarters in London
b.
takes place within an organized exchange
c.
conducted by licensed brokers from the London stock exchange
d.
an electronically linked network of banks, brokers, and dealers
ANSWER: d: organization
6.7
Traders on the foreign exchange market use ___________ to eliminate or cover
the risk of loss on export or import orders denominated in foreign currencies.
a.
currency options
b.
forward contracts
c.
money-market hedges
d.
currency futures contracts
ANSWER: b: the participants
6.8
Hedgers, mostly _____________, engage in forward contracts on the foreign
exchange markets to protect the home currency value of various foreign currencydenominated assets and liabilities on their balance sheets.
a.
commercial banks
b.
public utilities
c.
multinational corporations
d.
speculators
ANSWER: c: the participants
6.9
A ___________ between a bank and a customer calls for a fixed delivery date, at
a fixed exchange rate for a specified amount of one currency against another
currency payment.
a.
spot quotation
b.
currency option
c.
currency swap
d.
forward contract
ANSWER: d: the forward market
6.10
Risk that a central bank will not make the necessary transfer of foreign currency
to complete a currency settlement is known as ________ risk.
a.
exchange rate
b.
Herstatt
c.
Interest-rate
d.
settlement
ANSWER: b: the mechanics of spot transactions
MODERATE
6.11
The spot and 30-day forward rates for the Dutch guilder are $.3075 and $.3120,
respectively. The guilder is said to be selling at a forward
a.
premium of 16.83%
b.
premium of 17.56%
c.
discount of 6.39%
d.
discount of 15.10%
ANSWER: b: forward quotations
6.12
Suppose the spot direct quotes for the pound sterling and French franc are
$1.3981-89 and $.1130-33, respectively. What is the direct quote for the pound
in Paris?
a.
12.3398-3796
b.
12.3469-3726
c.
.0808-12
d.
.0976-87
ANSWER: a: spot quotations
6.13
Suppose the following direct quotes are received for spot and one- month French
francs in New York: .1160-684-6. Then the outright 30- day forward quote for
the French franc is:
a.
.1156-62
b.
.1164-74
c.
.1166-72
d.
.1154-64
ANSWER: b: forward quotations
6.14
Suppose the spot direct quotes for the Swedish krona and French franc are
$.1395-99 and $.1130-33, respectively. What is the direct quote for the krona in
Paris?
a.
1.2312-81
b.
1.2435-37
c.
.0806-11
d.
.0973-81
ANSWER: a: spot quotations
6.15
Suppose sterling is quoted at $1.4419-36, and the Swiss franc is quoted at
$0.6250-67. What is the direct quote for the pound in Zurich?
a.
2.3035-70
b.
2.3018- 88
c.
2.3008-98
d.
2.3020-50
ANSWER: c: spot quotations
6.16
Suppose the Brazilian Real is quoted at $0.9455-9510, and the Thai baht is
quoted at $25.2513-3986. What is the direct quote for the Real in Bangkok?
a.
27.1267-5673
b.
26.7801-9801
c.
25.2597-2700
d.
26.5524-8626
ANSWER: d: spot quotations
6.17
If the direct price of the dollar is 2.5 in Frankfurt and transaction costs are .4% of
the amount transacted, then the minimum- maximum direct quotes for the DM in
New York are:
a.
.3968-4032
b.
2.4800-2.5200
c.
.3984-.4016
d.
2.4900-2.5100
ANSWER: a: spot quotations
6.18
Suppose the 90-day forward quotes on the DM and the French franc are
$.4002-10 and $.1180-90, respectively. What is the direct 90-day forward quote
for the franc in Frankfurt?
a.
3.3625-54
b.
3.3631-92
c.
.2943-74
d.
.2949-68
ANSWER: c: forward quotations
6.19
The spot and 180-day forward rates for the DM are $.3310 and $.3402,
respectively. The DM is said to be selling at a forward
a.
discount of 2.8%
b.
premium of 2.8%
c.
discount of 5.6%
d.
premium of 5.6%
ANSWER: d: forward quotations
6.20
Suppose the spot direct quotes for the Italian lira and Swedish krone are
$.00050-51 and $.1201-10, respectively. What is the direct quote for the Swedish
krone in Milan?
a.
.00413-25
b.
.00422-31
c.
235.49-242.00
d.
237.81-245.03
ANSWER: c: forward quotations
6.21
Suppose the direct quote for sterling in New York is 1.3110-5. Then the direct
quote for dollars in London is:
a.
.7110-5
b.
2.6220-30
c.
.7625-8
d.
1.3110-5
ANSWER: c: spot quotations
6.22
An American company that imports leather goods from England is most likely to
be
a.
long pounds
b.
short pounds
c.
can't tell
ANSWER: b: spot quotations
DIFFICULT
6.23
On December 3,2001, spot Japanese yen were sold at $0.008058. Suppose the
180-day forward Japanese yen was selling at a 1.91% annualized premium, what
is the 180-day forward rate of the yen?
a.
0.008245
b.
0.008135
c.
0.008457
d.
can’t tell
ANSWER: b: forward quotations
6.24
Suppose the spot rate and forward rate for the British pound are 1.4248 and
1.4179 respectively. Assume the forward pound is selling at a 1.94% annualized
discount, what is the number of days of the forward contract?
a.
180 days
b.
120 days
c.
90 days
d.
60 days
ANSWER: c: forward quotations
6.25
Suppose one observed the following direct spot quotations in New York and
London, respectively: 1.2500-60 and .8000-50. Arbitrage profits per $1 million
equal
a.
$637
b.
$0
c.
$1,268
d.
$4,492
ANSWER: b: currency arbitrage
6.26
The $/DM exchange rate is DM1 = $.35 and the DM/FF exchange rate is FF1 =
DM.31. What is the FF/$ exchange rate?
a.
3.226 French francs per dollar
b.
1.129 French francs per dollar
c.
.886 French francs per dollar
d.
9.217 French francs per dollar
ANSWER: d: cross rates
6.27
Suppose the following direct quotes are received for spot and one-month French
francs in New York: .1260-684-6. Then the outright 30-day forward quote for the
French is:
a.
.1256-62
b.
.1264-74
c.
.1266-72
d.
.1254-64
ANSWER: b: forward quotations
6.28
If the direct price of the dollar is 5 in Copenhagen and transaction costs are .5%,
then the minimum-maximum direct quotes for the Danish krone in New York are
a.
4.9750-5.0250
b.
4.9500-5.0500
c.
.1980-.2020
d.
.1990-.2010
ANSWER: c: the spot quotations
6.29
Suppose the pound sterling is selling for $1.62 and the buying rate for the Swiss
franc is $0.71. Then the £/SFr cross rate is
a.
£1 = SFr 0.4383
b.
SFr 1 = £2.2817
c.
£1 = SFr 2.2817
d.
a or b
ANSWER: c: cross rates
6.30
Suppose the quote for DM is DM 2.9865-92. Then the percent spread is
a.
2.31%
b.
0.97%
c.
0.62%
d.
0.09%
ANSWER: d: transaction costs
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