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**Question description**

### Question 1

AnswerAssume that the U.S. one-year interest rate is

5% and the one-year interest rate on euros is 8%. You have $100,000 to invest

and you believe that the international Fisher effect (IFE) holds. The euro's

spot exchange rate is $1.40. What will be the yield on your investment if you

invest in euros?8%

5%

3%

2.78%

1 points

### Question 2

AnswerAssume that the inflation rate in Singapore is

3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore

dollar should ____ by ____%.appreciate;

4.85depreciate;

3,11appreciate;

3.11depreciate;

4.85

1 points

### Question 3

AnswerAssume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.2 percentage points above;

depreciate by about 2%3 percentage points above;

depreciate by about 3%3 percentage points below;

appreciate by about 3%3 percentage points below;

depreciate by about 3%2 percentage points below;

appreciate by about 2%

1 points

### Question 4

AnswerThe interest rate in the U.K. is 7%, while the

interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50.

According to the international Fisher effect (IFE), the British pound should

adjust to a new level of:$1.47.

$1.53.

$1.43.

$1.57.

1 points

### Question 5

AnswerLatin American countries have historically

experienced relatively high inflation, and their currencies have weakened. This

information is somewhat consistent with the concept

of:interest rate

parity.locational

arbitrage.purchasing power

parity.the exchange rate

mechanism.

1 points

### Question 6

AnswerAssume that the international Fisher effect

(IFE) holds between the U.S. and the U.K. The U.S. inflation is expected to be

5%, while British inflation is expected to be 3%. The interest rates offered on

pounds are 7% and U.S. interest rates are 7%. What does this say about real

interest rates expected by British investors?real interest rates expected by

British investors are equal to the interest rates expected by U.S.

investors.real interest rates expected by

British investors are 2 percentage points lower than the real interest rates

expected by U.S. investors.real interest rates expected by

British investors are 2 percentage points above the real interest rates expected

by U.S. investors.IFE doesn't hold in this case

because the U.S. inflation is higher than the British inflation, but the

interest rates offered in both countries are

equal.

1 points

### Question 7

AnswerGiven a home country and a foreign country,

purchasing power parity (PPP) suggests that:a home currency will depreciate if

the current home inflation rate exceeds the current foreign interest

rate.a home currency will appreciate if

the current home interest rate exceeds the current foreign interest

rate.a home currency will appreciate if

the current home inflation rate exceeds the current foreign inflation

rate.a home currency will depreciate if

the current home inflation rate exceeds the current foreign inflation

rate.

1 points

### Question 8

AnswerAssume that the U.S. inflation rate is higher

than the New Zealand inflation rate. This will cause U.S. consumers to ____

their imports from New Zealand and New Zealand consumers to ____ their imports

from the U.S. According to purchasing power parity (PPP), this will result in

a(n) ____ of the New Zealand dollar (NZ$).reduce; increase;

appreciationincrease; reduce;

appreciationreduce; increase;

depreciationreduce; increase;

appreciation

1 points

### Question 9

AnswerAccording to the international Fisher effect,

if investors in all countries require the same real rate of return, the

differential in nominal interest rates between any two

countries:follows their exchange rate

movement.is due to their inflation

differentials.is zero.

is constant over

time.

1 points

### Question 10

AnswerIf interest rate parity holds, then the

one-year forward rate of a currency will be ____ the predicted spot rate of the

currency in one year according to the international Fisher

effect.greater

thanless than

equal to

answer is dependent on whether the

forward rate has a discount or

premium

1 points

### Question 11

AnswerAccording to the IFE, if British interest

rates exceed U.S. interest rates:the British pound's value will

remain constant.the British pound will depreciate

against the dollar.the British inflation rate will

decrease.the forward rate of the British

pound will contain a premium.today's forward rate of the British

pound will equal today's spot

rate.

1 points

### Question 12

AnswerWhich of the following theories suggests that

the percentage change in spot exchange rate of a currency should be equal to the

inflation differential between two countries?purchasing power parity

(PPP).triangular

arbitrage.international Fisher effect

(IFE).interest rate parity

(IRP).

1 points

### Question 13

AnswerWhich of the following theories suggests that

the percentage difference between the forward rate and the spot rate depends on

the interest rate differential between two countries?purchasing power parity

(PPP).triangular

arbitrage.international Fisher effect

(IFE).interest rate parity

(IRP).

1 points

### Question 14

AnswerWhich of the following theories suggests the

percentage change in spot exchange rate of a currency should be equal to the

interest rate differential between two countries?absolute form of

PPP.relative form of

PPP.international Fisher effect

(IFE).interest rate parity

(IRP).

1 points

### Question 15

AnswerAssume that the one-year interest rate in the

U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect,

British pound's spot exchange rate should ____ by about ____ over the

year.depreciate;

1.9%appreciate;

1.9%depreciate;

3.94%appreciate;

3.94%

1 points

### Question 16

AnswerA fundamental forecast that uses multiple

values of the influential factors is an example of:sensitivity

analysis.discriminant

analysis.technical

analysis.factor

analysis.

1 points

### Question 17

AnswerWhich of the following is not a limitation of

fundamental forecasting?uncertain timing of

impact.forecasts are needed for factors

that have a lagged impact.omission of other relevant factors

from the model.possible change in sensitivity of

the forecasted variable to each factor over

time.

1 points

### Question 18

AnswerWhich of the following forecasting techniques

would best represent sole use of today's spot exchange rate of the euro to

forecast the euro's future exchange rate?fundamental

forecasting.market-based

forecasting.technical

forecasting.mixed

forecasting.

1 points

### Question 19

AnswerIf the forward rate was expected to be an

unbiased estimate of the future spot rate, and interest rate parity holds,

then:covered interest arbitrage is

feasible.the international Fisher effect

(IFE) is supported.the international Fisher effect

(IFE) is refuted.the average absolute error from

forecasting would equal zero.

1 points

### Question 20

AnswerIf speculators expect the spot rate of the

Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian

dollars, they will ____ Canadian dollars forward and put ____ pressure on the

Canadian dollar forward rate.lower; sell;

upwardlower; sell;

downwardhigher; sell;

upwardhigher; sell;

downward

1 points

### Question 21

AnswerSensitivity analysis allows for all of the

following except:accountability for

uncertainty.focus on a single point estimate

of future exchange rates.development of a range of possible

future values.consideration of alternative

scenarios.

1 points

### Question 22

AnswerIf speculators expect the spot rate of the

yen in 60 days to be ____ than the 60-day forward rate on the yen, they will

____ the yen forward and put ____ pressure on the yen's forward

rate.higher; buy;

upwardhigher; sell;

downwardhigher; sell;

upwardlower; buy;

upward

1 points

### Question 23

AnswerWhich of the following forecasting techniques

would best represent the use of today's forward exchange rate to forecast the

future exchange rate?fundamental

forecasting.market-based

forecasting.technical

forecasting.mixed

forecasting.

1 points

### Question 24

AnswerSmall Corporation would like to forecast the

value of the Cyprus pound (CYP) five years from now using forward rates.

Unfortunately, Small is unable to obtain quotes for five-year forward contracts.

However, Small observes that the five-year interest rate in the U.S. is 11%,

while the Cyprus five-year interest rate is 15%. Based on this information, the

Cyprus pound should ____ by ____% over the next five

years.appreciate;

16.22depreciate;

16.22appreciate;

6.66depreciate;

6.66

1 points

### Question 25

AnswerWhich of the following forecasting techniques

would best represent the use of relationships between economic factors and

exchange rate movements to forecast the future exchange

rate?fundamental

forecasting.market-based

forecasting.technical

forecasting.mixed

forecasting.

1 points

### Question 26

AnswerAssume that the forward rate is used to

forecast the spot rate. The forward rate of the Canadian dollar contains a 6%

discount. Today's spot rate of the Canadian dollar is $.80. The spot rate

forecasted for one year ahead is:$.860.

$.848.

$.740.

$.752.

1 points

### Question 27

AnswerIf a particular currency is consistently

declining substantially over time, then a market-based forecast will usually

have:underestimated the future exchange

rates over time.overestimated the future exchange

rates over time.forecasted future exchange rates

accurately.forecasted future exchange rates

inaccurately but without any bias toward consistent underestimating or

overestimating.

1 points

### Question 28

AnswerWhich of the following is not a method of

forecasting exchange rate volatility?using the absolute forecast error

as a percentage of the realized value.using the volatility of historical

exchange rate movements as a forecast for the future.using a time series of volatility

patterns in previous periods.deriving the exchange rate's

implied standard deviation from the currency option pricing

model.

1 points

### Question 29

AnswerAssume that interest rate parity holds. The

U.S. five-year interest rate is 5% annualized, and the Mexican five-year

interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20.

What is the approximate five-year forecast of the peso's spot rate if the

five-year forward rate is used as a forecast?$.131.

$.226.

$.262.

$.140.

$.174.

1 points

### Question 30

AnswerAssume that the U.S. interest rate is 11

percent, while Australia's one-year interest rate is 12 percent. Assume interest

rate parity holds. If the one-year forward rate of the Australian dollar was

used to forecast the future spot rate, the forecast would reflect an expectation

of:depreciation in the Australian

dollar's value over the next year.appreciation in the Australian

dollar's value over the next year.no change in the Australian

dollar's value over the next year.information on future interest

rates is needed to answer this

question.

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