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Review Questions - CH 7

The document contains 8 multiple choice questions about concepts related to foreign exchange including: 1) The law of one price, which states that identical goods sold in different markets should have the same price when there are no restrictions or transportation costs. 2) Using exchange rates and prices to determine if the price of Big Mac hamburgers in Japan is correctly priced based on the price in the US. 3) Applying relative PPP theory to predict the current exchange rate between US dollars and Canadian dollars based on past inflation rates. 4) Using the Fisher effect equation to calculate the expected inflation rate in the US over the next year given nominal and real interest rates. 5) Calculating the degree

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1K views

Review Questions - CH 7

The document contains 8 multiple choice questions about concepts related to foreign exchange including: 1) The law of one price, which states that identical goods sold in different markets should have the same price when there are no restrictions or transportation costs. 2) Using exchange rates and prices to determine if the price of Big Mac hamburgers in Japan is correctly priced based on the price in the US. 3) Applying relative PPP theory to predict the current exchange rate between US dollars and Canadian dollars based on past inflation rates. 4) Using the Fisher effect equation to calculate the expected inflation rate in the US over the next year given nominal and real interest rates. 5) Calculating the degree

Uploaded by

bigbadbear3
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Ch.

1) If an identical product can be sold in two different markets, and no restrictions exist on the sale or transportation costs, the product's price should be the same in both markets. This is known as: A) relative purchasing power parity. B) interest rate parity. C) the law of one price. D) equilibrium. 2) If the current exchange rate is 113 Japanese yen per U.S. dollar, the price of a Big Mac hamburger in the United States is $3.41, and the price of a Big Mac hamburger in Japan is 280 yen, then other things equal, the Big Mac hamburger in Japan is: A) correctly priced. B) under priced. C) over priced. D) There is not enough information to determine if the price is appropriate or not. 3) One year ago the spot rate of U.S. dollars for Canadian dollars was $1/C$1. Since that time the rate of inflation in the U.S. has been 4% greater than that in Canada. Based on the theory of Relative PPP, the current spot exchange rate of U.S. dollars for Canadian dollars should be approximately: A) $0.96/C$ B) $1/C$ C) $1.04/C$ D) Relative PPP provides no guide for this type of question. 4) Assume a nominal interest rate on one-year U.S. Treasury Bills of 3.80% and a real rate of interest of 2.00%. Using the Fisher Effect Equation, what is the exact expected rate of inflation in the U.S. over the next year? A) 1.84% B) 1.80% C) 1.76% D) 1.72% 5) Phillips NV produces DVD players and exports them to the United States. Last year the exchange rate was $1.25/euro and Plillips charged 120 euro per player in Euroland and $150 per DVD player in the United States. Currently the spot exchange rate is $1.45/euro and Phillips is charging $160 per DVD player. What is the degree of pass through by Phillips NV on their DVD players? A) 92% B) 33.3% C) 41.7% D) 4.1%

Ch. 7

6) If the forward rate is an unbiased predictor of the expected spot rate, which of the following is NOT true? A) The expected value of the future spot rate at time 2 equals the present forward rate for time 2 delivery, available now. B) The distribution of possible actual spot rates in the future is centered on the forward rate. C) The future spot rate will actually be equal to what the forward rate predicts. D) All of the above are true. 7) Assume the current U.S. dollar-yen spot rate is 90 /$. Further, the current nominal 180day rate of return in Japan is 1% and 2% in the United States. What is the approximate forward exchange rate for 180 days? A) 89.12/$ B) 89.55/$ C) 90.89/$ D) 90.45/$ 8) The current U.S. dollar-yen spot rate is 125/$. If the 90-day forward exchange rate is 127 /$ then the yen is selling at a per annum ________ of ________. A) premium; 1.57% B) premium; 6.30% C) discount; 1.57% D) discount; 6.30%

AK 1. 2. 3. 4. 5. 6. 7. 8. C B C C C C B D

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