FIN 4604 SAMPLE PROBLEMS I

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1. Suppose that the Brazilian real depreciates by 40% against the U.S. dollar. By how much will the dollar appreciate against the real?

a. 67%

2. If the dollar appreciates by 300% against the Turkish Lira, obtain the Lira's depreciation against the dollar.

e. -75%

3. The asset market view of exchange rate determination says that the spot rate:

a. Should follow a random walk.
b. Is affected primarily by a nation's long-run economic prospects.

The current international flow model of exchange rate determination says
that the spot rate should:

c. Be strongly affected by a nation's balance of trade.
d. Be strongly affected by current relative incomes, relative prices, and relative interest rates.

Governments intervene in the foreign exchange markets for all of the
following reasons except to:

a. Earn foreign exchange.

6. In order to boost the value of the euro relative to the dollar the FED should:

a. Sell dollars for euros and the European CB should buy euros with dollars.

. In order to boost the value of the dollar relative to the euro the FED should:

e. Sell euros for dollars and the European CB should buy dollars with euros.

Given that the DM price of the ECU was 2.0583 and the DG price of the ECU
was 2.3194. Then the DG price of the DM by cross rates is given by:

c. DM = about 1.13 DG.

The spot and 30-day forward rates for the Swiss franc are $.3075 and $.3120,
respectively. The franc is said to be selling at a forward:

b. Premium of 17.56%.

10. Given that C$/U$ = 1.5938 and Y/U$ = 133.30, then the yen price of one
Canadian dollar is given by:

a. 83.64

A commercial bank quotes a bid rate of $.784 for the Swiss France, and an ask
rate of $.80. What is the bid/ask percentage spread that reflects the "markup
established" [compare with b/a based on "discount obtained"] by the dealer.

a. 0.2%

12. Which of the following theories points to international business engagement as
a natural stage in the evolution of new products from introduction to growth,
maturity, and possible decline?

c. Product cycle theory.

Which of the following theories identifies the propensity of firms to seek
protection of their proprietary technologies and their desire to engage in global
exploitation of such technologies as a motivation for international business?

Internalization theory

Which of the following theories identifies the non-transferability of resources
as an explanation for international business?

b. Imperfect markets theory.

Which of the following theories identifies risk diversification as a motivation
for international business?

Portfolio theory

Which of the following theories identifies specialization as a motivation for
international business?

a. Theory of comparative advantage.
b. Imperfect markets theory.

Which of the following forecasting techniques would best represent use of
today's forward exchange rate to forecast the future exchange rate?

b. Market-based forecasting

18. Under a fixed exchange rate system:

c. Central bank intervention in the foreign exchange market is very necessary.

A Eurocurrency is:

c. Any currency deposited outside its country of origin

A relative high domestic inflation, other things being equal, would tend to
cause the home currency to:

b. Depreciation.

21. A relative low home inflation, other things being equal, would tend to cause
the home currency to:

a. Appreciate.

When the Fed intervenes in the foreign exchange markets while taking action
to maintain the dollar money supply, it is said to use:

b. Sterilized intervention.

When the Fed intervenes in the foreign exchange markets without taking action to maintain the dollar money supply, it is said to use:

a. Non-sterilized intervention.

24. The following statement is true concerning a strong domestic currency except:

d. May induce lower unemployment.

Which of the following statement is true concerning a weak domestic
currency?

d. May induce lower unemployment.

A weak home currency may result in the following except:

c. Lower domestic inflation.

27. Which of the following is (are) consistent with a strong domestic currency

Lower domestic inflation.

The following statement is not true concerning technical forecasting of exchange rates:

c. The exchange rate must follow a random walk

29. The statement, the forward rate is an unbiased predictor of the future spot rate, means:

d. The forward rate is equally likely to overstate or understate the future spot.
e. The forward premium (discount) is an unbiased predictor of the expected change in exchange rates

The law of one price is enforced primarily by:

a. Arbitragers.

A German investment in the U.S. represents a foreign factor of production located
in the U.S. and the income from such investment adds to:

c. GNP of Germany.

A U.S. investment in Germany represents a foreign factor of production located
in Germany and the income from such investment adds to:

a. GNP of the U.S.
b. GDP of Germany.

33. If the Central Bank sets a fixed exchange rate that overvalues domestic
currency, then:

c. The country will run a BOP deficit.

If the Central Bank sets a fixed exchange rate that undervalues domestic
currency, then:

d. The country will run a BOP surplus.

Which of the following is not true concerning freely floating exchange rates?

d. MNC do not need to measure and manage their exposure to exchange rates.

If the values of major currencies were fixed to the dollar and the dollar were tied to
gold (Bretton Woods System) then the following would not be true:

d. The US and major countries would have a constant inflation or deflation over time

The following statements are true concerning fixed exchange rates except:

b. Governments can implement domestic economic policies without concerns on keeping exchange rates within limits.

The world's largest foreign exchange trading center is:

London

A nation's international transactions can best be grouped into the following three main
categories:

. Current account, capital account, and official reserve account

. A bond sold in countries other than the one in whose currency it is denominated is a:

. Eurobond

Which of the following best describes what an ideal international monetary system
should provide?

b. Reliability, elasticity, and sensitivity

42. If a Japanese purchases a US government security:

The demand for dollars increases

43. The following is an example of a direct intervention in the foreign exchange
market by the FED or a monetary authority:

. Buying or selling foreign currencies

The purchase of US Treasury bonds by a Turkish investor shows up as a:

Credit on the capital account

45. Tourism shows up on which of the following account balance?

. Current

The "J-curve effect" describes:

The initial deterioration and eventual improvement in the trade balance
following a currency devaluation.

. A bond sold outside the borrower's country but denominated in the currency
of the country of issue is a:

b. Yankee bond, Bulldog bond, Samurai bond, or Matador bond.
c. Foreign bond

A "global bond" issue is a:

Large international bond offering by a single borrower that is simultaneously
issued in domestic and several national bond markets and denominated in
domestic currency.

. If the U.S. ran a deficit of $150m on the current account in a year when the
country was a net recipient of $250m in long-term capital, then the basic
balance would be:

c. $100m

A measure of the total value of production that occurs within a country's
borders without regard to whether such production is undertaken by domestic
or foreign factors of production is commonly referred to as:

. Gross Domestic Product

51. Which of the following would likely have the least direct influence on a country's current account?

e. A tax on income earned on foreign stocks.

______________ is (are) income received by investors on investments in foreign financial assets (securities).

d. Factor income

3. Also known as the "central banks' central bank," the ___________ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.

e. Bank For International Settlements (BIS)

___________ is not a factor that causes currency supply and demand schedules to change.

b. Change in exchange rates.

A large increase in the income level in Mexico along with no growth in the U.S. income level, ceteris paribus, is expected to cause a/an _________ in Mexican demand for U.S. goods, and the Mexican peso should ____________

b. Increase; depreciate

56. An increase in U.S. interest (real) rates relative to German interest rates would likely ___________ the U.S. demand for euros and ____________ the supply of euros for sale.

a. Reduce; increase

. If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

d. An increased U.S. demand for euros and a decreased supply of euros for sale.

Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:

c. An increase in the supply of British pounds for sale.

Assume that the U.S. places a strict quota on goods imported from China and that China does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chinese Yuan to _____and the value of the Yuan to_____

c. Decrease; depreciate

Any event that increases the U.S. demand for euros should result in a (an) _________ in the value of the euro with respect to ___________, other things being equal.

a. Increase; U.S. dollar

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(an) ___________ in the value of the Swiss franc with respect to ________, other things being equal.

a. Increase; U.S. dollar

A weak dollar is normally expected to cause:

d. Low unemployment and high inflation in the U.S.

A strong dollar is normally expected to cause:

b. High unemployment and low inflation in the U.S.

. The interest rate of a country with a currency board:

c. Will move in tandem with the interest rate of the currency to which it is tied.

Assume a central bank sells its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

c. Non-sterilized intervention.

If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:

a. Sell dollars for foreign currencies, and sell equivalent value of its existing Treasury security holdings for dollars.

Which of the following is an example of direct intervention in foreign exchange markets?

c. Exchanging dollars for foreign currency.

68. A strong dollar places__________ pressure on inflation, which in turn places __________ pressure on the dollar.

b. Downward; upward

A weaker dollar places ______ pressure on U.S. inflation, which in turn places _____ pressure on U.S. interest rates, which places ______ pressure on U.S. bond prices.

c. Upward; upward; downward

To strengthen the dollar using sterilized intervention, the Fed would ____________ dollars and simultaneously _______________ Treasury securities.

c. Buy; buy

71. The term "target zone arrangement" refers to a:

a. Situation where countries adjust their national economic policies to maintain exchange rates within some pre-determined limits.

72. Which of the following are examples of currency control measures?

a. Import restrictions.
b. Prohibition of remittance of funds.
c. Ceilings on granting credit to foreign firms.
d. Dual/ multiple exchange rates

If it was determined that current movement of exchange rates was not related to
previous exchange rate values, this implies that a ________ will not be valuable for
speculating on expected exchange rate movements.

a. Technical forecasting

74. An increase in the current account deficit will place ________ pressure on the home currency value, other things equal.

b. Downward

75. If the home currency begins to appreciate against other currencies, this should ___________ the current account balance, other things equal.

c. Reduce

76. The World Bank was established to:

b. Enhance economic development through market interest loans.

77. The components of the current account are:

d. Balance on goods, services, factors, and transfer payments.

78. The demand for U.S. exports tends to increase when:

b. The currencies of foreign countries strengthen against the dollar.

79. The demand curve for a currency is __________, while the supply curve for a currency is ___________.

d. Downward sloping; upward sloping

80. The following agencies help to facilitate international flow of funds except:

h. No exception

81. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 Euros in 90 days, it could:

b. Sell Euros forward for 90-days.

82. The international money market primarily concentrates on:

a. Short-term lending (one year or less).

83. The international credit market primarily concentrates on:

b. Medium-term lending (2 to 5 years)

84. The LIBOR is the:

a. Interest rate commonly charged for loans between banks.

85. A syndicated Euro credit loan:

d. Represents a loan by a group of banks to borrower.

86. The foreign exchange market is the world's largest financial market. The size of daily global transaction is about________ in 2010.

d. $4.00 trillion.

87. The real interest rate adjusts the nominal interest rate for:

c. Inflation.

88. If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ___________ pressure on the value of the Australian dollar with respect to the U.S. dollar.

b. Downward

89. Any event that reduces the U.S. demand for Japanese yen should result in a (an) __________ in the value of the Japanese yen with respect to _______, other things being equal.

d. Decrease; U.S. dollar

90. Any event that increase the supply of British pounds to be exchanged for U.S. dollars should result in a(an) __________ in the value of the British pound with respect to ________, other things begin equal.

d. Decrease; U.S. dollar

91. News of a potential surge in U.S. inflation and zero Chilean inflation places ______ pressure on the value of the Chilean peso. The pressure will occur _______

c. Upward; immediately

92. Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to __________ and the value of the Canadian dollar to ___________.

d. Decrease; increase

93. Which of the following is not a factor affecting exchange rates?

e. A country's stock of gold.

94. If a country experiences high inflation relative to the U.S., its exports to the U.S. should __________, its imports should ___________, and there is ____________ pressure on its currency value.

d. Decrease; increase; downward

95. To strengthen the dollar using sterilized intervention, the Fed would __________ dollars and simultaneously ____________ Treasury Securities.

c. Buy; buy

96. The following are factors contributing to a strong domestic currency except:

. No exception

97. The following are factors contributing to a weak domestic currency

No exception

. A MNC's short-term financing needs are most likely to be satisfied in the _____
market while medium-term needs are most likely to be satisfied in the ______ market.

a. International money; international credit

A MNC's long-term financing needs are most likely to be satisfied in the _____
market and the ______ market.

c. International bond; international stock

0. Assume that Bank America's bid price for the Danish kroner is $/k = 0.1875 and
it's ask rate is $/k = 0.1895. If you convert $1000 to Danish kroner (k) and you
immediately turn around and convert the Danish kroner back to dollars, how many
dollars will you have left?

e. None of the above

. Most trading activity in the foreign exchange market is dominated by:

. Interbank trading

. Which of the following is not a major currency trading center?

Chicago

Which of the following would likely have the least direct influence on a country's current account?

Tax on income earned on foreign stocks

______________ is (are) income received by investors on investments in foreign financial assets (securities).

Factor income

Also known as the "Central Banks' Central Bank," the ___________ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.

Bank for International Settlements (BIS)

___________ is not a factor that causes currency supply and demand schedules to change.

Change in exchange rates

A large increase in the income level in Mexico along with no growth in the U.S. income level, ceteris paribus, is expected to cause a/an _________ in Mexican demand for U.S. goods, and the Mexican peso should ____________

Increase; depreciate

An increase in U.S. interest (real) rates relative to German interest rates would likely ___________ the U.S. demand for euros and ____________ the supply of euros for sale.

Reduce; increase

If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

An increased U.S. demand for euros and a decreased supply of euros for sale

Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects

An increase in the supply of British pounds for sale

Assume that the U.S. places a strict quota on goods imported from China and that China does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chinese Yuan to _____and the value of the Yuan to_____

Decrease; depreciate

Any event that increases the U.S. demand for euros should result in a (an) _________ in the value of the euro with respect to ___________, other things being equal

Increase; U.S. dollar

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a (an) ___________ in the value of the Swiss franc with respect to ________, other things being equal

Increase; U.S. dollar

A weak dollar is normally expected to cause

Low unemployment and high inflation in the U.S

A strong dollar is normally expected to cause

High unemployment and low inflation in the U.S

The interest rate of a country with a currency board

Will move in tandem with the interest rate of the currency to which it is tied

Assume a central bank exchanges (sells) its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

Non-sterilized intervention

. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should

Exchange (sell) dollars for foreign currencies, and sell equivalent value of its existing Treasury Security holdings for dollars

Which of the following is an example of direct intervention in foreign exchange markets?

Exchanging (selling) dollars for foreign currency

A strong dollar places__________ pressure on inflation, which in turn places __________ pressure on the dollar

Downward; upward

A weak dollar places ______ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ______ pressure on U.S. bond prices

Upward; upward; downward

To strengthen the dollar using sterilized intervention, the Fed would ____________ dollars and simultaneously _______________ Treasury Securities

Buy, Buy

The term "target zone arrangement" refers to a

Situation where countries adjust their national economic policies to maintain exchange rates within some pre-determined limits

Which of the following are examples of currency control measures

all of the above

If it was determined that current movement of exchange rates was not related to previous exchange rate values, this implies that a ________ will not be valuable for speculating on expected exchange rate movements

Technical forecasting

The "twin deficits" phenomena in the USA mean

The deficits of the federal government and the U.S. current account deficit

A strong dollar places ______ pressure on U.S. inflation, which in turn places _____ pressure on U.S. interest rates, which places ______ pressure on U.S. bond prices

Downward; downward; upward

__________ typically has (have) maturities of less than one year

Euro-commercial paper

The term "privatization" is typically used to describe

Government enterprises that are purchased by corporations and other investors

In general, products and services are generally becoming ________ standardized across countries, which tends to _________ the globalization of business

More; encourage

________ are most commonly classified as a Foreign Direct Investment (FDI)

Foreign acquisitions

Which of the following is not an additional risk resulting from international business

Interest rate risk

An increase in the current account deficit will place ________ pressure on the home currency value, other things equal

downward

If the home currency begins to appreciate against other currencies, this should ___________ the current account balance, other things equal

reduce

The World Bank was established to

Enhance economic development through provision of market interest loans

The components of the current account are

Balance on goods, services, factors and transfer payments

The demand for U.S. exports tends to increase when

The currencies of foreign countries strengthen against the dollar

Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. Compute the value of the Canadian dollar in terms of the pound (the pound price of one Canadian dollar or £/C$)?

.50

The International Money Market primarily concentrates on

Short-term lending (one year or less)

The International Credit Market primarily concentrates on

Medium-term lending (2 to 5 years)

The LIBOR is the

Interest rate commonly charged for loans between international banks

A Syndicated Euro Credit loan

Represents a loan by a group of banks to borrower

The foreign exchange market is the world's largest financial market. The size of daily global transaction is about___________ in 2010

$4 trillion

The real interest rate adjusts the nominal interest rate for

inflation

If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ___________ pressure on the value of the Australian dollar with respect to the U.S. dollar

downward

Any event that reduces the U.S. demand for Japanese yen should result in a (an) __________ in the value of the Japanese yen with respect to _______, other things being equal

Decrease; U.S. dollar

Any event that increase the supply of British pounds to be exchanged for U.S. dollars should result in a (an) __________ in the value of the British pound with respect to ________, other things begin equal

Decrease; U.S. dollar

News of a potential surge in U.S. inflation and zero Chilean inflation places ______ pressure on the value of the Chilean peso. The pressure will occur _______

Upward; immediately

Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to __________ and the value of the Canadian dollar to ___________.

Decrease; increase

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