1. Award: 10.00 points  

The law of one price (LOP) is referring to

 a legal condition imposed by the U.S. Commodity Futures Trading Commission.

 the same or equivalent things trading at the same price across different locations or markets,
precluding profitable arbitrage opportunities.

 the act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making certain guaranteed profits.

 the composition of a standard commodity basket.

References

Multiple Choice Difficulty: 1 Easy

 
 2. Award: 10.00 points
 

An arbitrage is best defined as

 a legal condition imposed by the U.S. Commodity Futures Trading Commission.

 the act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making reasonable profits.

 the act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making certain guaranteed profits.

 a parity relationship that should hold in equilibrium.

References

Multiple Choice Difficulty: 1 Easy

  
 3. Award: 10.00 points  

Interest Rate Parity (IRP) is best defined as

 occurring when a government brings its domestic interest rate in line with other major financial
markets.

 occurring when the central bank of a country brings its domestic interest rate in line with its major
trading partners.

 an arbitrage condition that must hold when international financial markets are in equilibrium.

 the act of simultaneously buying and selling the same or equivalent assets or commodities for the
purpose of making certain guaranteed profits.

References

Multiple Choice Difficulty: 1 Easy

 
 4. Award: 10.00 points  

When Interest Rate Parity (IRP) does not hold

 there is usually a high degree of inflation in at least one country.

 the financial markets are in equilibrium.

 there are opportunities for covered interest arbitrage.

 the financial markets are in equilibrium and there are opportunities for covered interest arbitrage.

References

Multiple Choice Difficulty: 1 Easy

  
 5. Award: 10.00 points
 

Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 5% per annum in the U.S. and 3%
per annum in the euro zone, what is the no-arbitrage one-year forward rate?

 €1.0704/$

 $1.0704/€

 €1.0300/$

 $1.0300/€

F = S[1 + i$)/(1 +i€)] = ($1.05/€)(1.05/1.03) = $1.0704/€.

References

Multiple Choice Difficulty: 2 Medium

 
 6. Award: 10.00 points  

Suppose you observe a spot exchange rate of $1.0500/€. If interest rates are 3 percent per annum in the U.S.
and 5 percent per annum in the euro zone, what is the no-arbitrage one-year forward rate?

 €1.0704/$

 $1.0704/€

 €1.0300/$

 $1.0300/€

F = S[1 + i$)/(1 +i€)] = $1.05(1.03/1.05) = $1.0300/€.

References

Multiple Choice Difficulty: 2 Medium

  
 7. Award: 10.00 points
 

Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5 percent per annum in the U.S.
and 2 percent per annum in the U.K., what is the no-arbitrage one-year forward rate?

 £2.0588/$

 $2.0588/£

 £1.9429/$

 $1.9429/£

F = S[1 + i$)/(1 +i£)] = 2(1.05/1.02) = 2.0588.

References

Multiple Choice Difficulty: 2 Medium

 
 8. Award: 10.00 points
 

A formal statement of IRP is

1+i$
 F( $ / € )
= .
S( $ / € ) 1+i€

1+i€
 F( $ / € )
= .
S( $ / € ) 1+i$
 

1+i$
 F( $ / € ) -S( $ / € )
= .
S( $ / € ) 1+i€
 

 F ( $ / € ) - S( $ / € ) = i $ + i € .

References

Multiple Choice Difficulty: 1 Easy

  
 9. Award: 10.00 points
 

The two main reasons that IRP may not hold precisely at all time, especially over short periods is:

 transaction costs and capital controls.

 transaction costs and inflation rates

 inflation rates and capital controls

 inflation rates and interest rates

References

Multiple Choice Difficulty: 1 Easy

 
 10. Award: 10.00 points
 

Suppose that the one-year interest rate is 5.0 percent in the United States. The spot exchange rate is $1.20/€,
and the one-year forward exchange rate is $1.16/€. What must the one-year interest rate be in the euro zone to
avoid arbitrage opportunities?

 5.0%

 6.09%

 8.62%

 none of the options

Solve the following for X: 1.2(1.05 / (1 + x)) = 1.16.

References

Multiple Choice Difficulty: 2 Medium

  
 11. Award: 10.00 points  

Suppose that the one-year interest rate is 3.0 percent in Italy. The spot exchange rate is $1.20/€, and the one-
year forward exchange rate is $1.18/€. What must the one-year interest rate be in the United States to avoid
arbitrage opportunities?

 1.2833%

 1.0128%

 4.75%

 none of the options

Solve the following for X: 1.2((1 + X) / 1.03) = 1.18.

References

Multiple Choice Difficulty: 2 Medium

 
 12. Award: 10.00 points
 

Suppose that the one-year interest rate is 4.0 percent in Italy. The spot exchange rate is $1.60/€, and the one-
year forward exchange rate is $1.58/€. What must the one-year interest rate be in the United States to avoid
arbitrage opportunities?

 2%

 2.7%

 5.32%

 none of the options

Solve the following for X: 1.6((1 + X) / 1.04) = 1.58.

References

Multiple Choice Difficulty: 2 Medium

  
 13. Award: 10.00 points
 

Covered Interest Arbitrage (CIA) transactions will result in

 unstable international financial markets.

 restoring equilibrium prices quickly.

 higher interest rates across all international financial markets.

 no effect on the market.

References

Multiple Choice Difficulty: 1 Easy

 
 14. Award: 10.00 points  

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and
that the spot exchange rate is $1.12/€ and the one-year forward exchange rate is $1.16/€. Assume that an
arbitrageur can borrow up to $1,000,000.

 This is an example where interest rate parity holds.

 This is an example of an arbitrage opportunity; interest rate parity does not hold.

 This is an example of a Purchasing Power Parity violation and an arbitrage opportunity.

 none of the options

1.12 (1.05 / 1.035) = 1.13, which is less than 1.16, suggesting that an arbitrage opportunity exists.

References

Multiple Choice Difficulty: 2 Medium

  
 15. Award: 10.00 points  

Suppose that you are the treasurer of IBM with an extra $1,000,000 to invest for six months. You are
considering the purchase of U.S. T-bills that yield 1.810 percent over a six-month period. The spot exchange
rate is $1.00 = ¥100, and the six-month forward rate is $1.00 = ¥110. Alternatively, the six-month interest rate in
Japan on an investment of comparable risk is 13 percent. What is your strategy to maximize guaranteed dollar
proceeds in six months?

 Take $1mn and invest in U.S. T-bills.

 Take $1mn, convert them into yen at the spot rate, invest in Japan, and repatriate your yen earnings
back into dollars at the spot rate prevailing in six months.

 Take $1mn, convert them into yen at the spot rate, invest in Japan, and hedge with a short position
on the forward contract.

 Take $1mn, convert them into yen at the forward rate, invest in Japan, and hedge with a short
position on the spot contract.

References

Multiple Choice Difficulty: 2 Medium

 
 16. Award: 10.00 points
 

Suppose that the annual interest rate is 2.0 percent in the United States and 4 percent in Germany, and that
the spot exchange rate is $1.60/€ and the forward exchange rate, with one-year maturity, is $1.58/€. Assume
that an arbitrager can borrow up to $1,000,000 or €625,000. If an astute trader finds an arbitrage opportunity,
what is the net cash flow in one year?

 $238.65

 $14,000

 $46,207

 $7,000

[F/S] (1+i€) = (1.58/1.6) (1.04) = 1.027, which is greater than (1+i$) = 1.02. This suggests
that IRP is not holding. After adjusting for the exchange rates (F/S), the interest rate is lower in the U.S. than in
Germany. The arbitrager should borrow $1,000,000, and repayment in one year will be $1,020,000 =
($1,000,000 × 1.02). Then, the $1,000,000 should be used to purchase $1,000,000 / ($1.6/€) = €625,000. The
euros will be invested in Germany, where the maturity value will be €625,000 × 1.04 = €650,000. In the
meantime, the arbitrager should also agree to sell €650,000 forward. In one year, he/she will sell the euros in
exchange for $1,027,000 (found by €650,000 × ($1.58/€)). The arbitrage profit is found by $1,027,000 −
$1,020,000 = $7,000.

References

Multiple Choice Difficulty: 2 Medium

  
 17. Award: 10.00 points
 

An American currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year.
The one-year interest rate is i$ = 2% in the U.S. and i€ = 6% in the euro zone, respectively. The spot
exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how you can
realize a certain dollar profit via covered interest arbitrage.

 Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest euros at i€ = 6%;
translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Gross proceeds will be
$1,017,600.

 Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest euros at i€ = 6%;
translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net profit will be $17,600.

 Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars in the U.S. at
i$ = 2% for one year; translate dollars back to €850,000 at the forward rate of $1.20 = €1.00. Net
profit will be €2,000.

 Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars in the U.S. at
i$ = 2% for one year; translate dollars back to €848,000 at the forward rate of $1.20 = €1.00. Net
profit will be $2,400.

[1.2 / 1.25] (1.06) = 1.0176, which is less than 1.02. Thus, the effective interest rate is lower in the euro zone after
adjusting for the exchange rates (F/S), meaning an arbitrage opportunity should involve borrowing in the euro
zone and lending in the U.S.

References

Multiple Choice Difficulty: 2 Medium

  
 18. Award: 10.00 points
 

Currently, interest rate is 2 percent per annum in the U.S. and 6 percent per annum in the euro zone,
respectively. The spot exchange rate is $1.25 = €1.00, and the one-year forward exchange rate is $1.20 = €1.00.
As informed traders recognize the deviation from IRP and start carrying out covered interest arbitrage
transactions to earn a certain profit, how will IRP be restored as a result?

 Interest rate in the euro zone will rise; interest rate in the U.S. will fall; euro will appreciate in the spot
market; euro will appreciate in the forward market

 Interest rate in the euro zone will fall; interest rate in the U.S. will rise; euro will depreciate in the spot
market; euro will depreciate in the forward market

 Interest rate in the euro zone will rise; interest rate in the U.S. will fall; euro will depreciate in the spot
market; euro will appreciate in the forward market

 Interest rate in the euro zone will fall; interest rate in the U.S. will rise; euro will appreciate in the spot
market; euro will depreciate in the forward market

Since [1.2 / 1.25] < [1.02/1.06], only actions in Answer C could all possibly result in equilibrium.

References

Multiple Choice Difficulty: 2 Medium

  
 19. Award: 10.00 points  

An Italian currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The
one-year interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The
spot exchange rate is $1.25 = €1.00 and the one-year forward exchange rate is $1.20 = €1.00. Show how you
can realize a certain euro profit via covered interest arbitrage.

 Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest euros at i€ = 6%;
translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Gross proceeds will be
$1,017,600.

 Borrow $1,000,000 at 2%; trade $1,000,000 for €800,000 at the spot rate; invest euros at i€ = 6%;
translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net profit will be $17,600.

 Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars in the U.S. at
i$ = 2% for one year; translate dollars back to €850,000 at the forward rate of $1.20 = €1.00. Net
profit will be €2,000.

 Borrow €800,000 at i€ = 6%; translate euros to dollars at the spot rate, invest dollars in the U.S. at
i$ = 2% for one year; translate dollars back to €848,000 at the forward rate of $1.20 = €1.00. Net
profit will be $2,400.

[1.2 / 1.25] (1.06) = 1.0176, which is less than 1.02. Thus, the effective interest rate is lower in the euro zone after
adjusting for the exchange rates (F/S), meaning an arbitrage opportunity should involve borrowing in the euro
zone and lending in the U.S.

References

Multiple Choice Difficulty: 2 Medium

  
 20. Award: 10.00 points  

A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000 for one year. The
one-year interest rate in the U.S. is i$ = 6% and in the euro zone the one-year interest rate is i€ = 2%. The
spot exchange rate is $1.20 = €1.00 and the one-year forward exchange rate is $1.25 = €1.00. Show how you
can realize a certain euro profit via covered interest arbitrage.

 Borrow $2,000,000 at 6%; trade $2,000,000 for €1,666,667 at the spot rate; invest euros at i€ =
2%; translate euro proceeds back to dollars at the forward rate of $1.25 = €1.00 for gross proceeds
of $2,125,000. Net profit will be $5,000

 Borrow $2,000,000 at 6%; trade $2,000,000 for €800,000 at the spot rate; invest euros at i€ =
2%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net profit will be
$17,600.

 Borrow €1,600,000 at i€ = 2%; translate euros to dollars at the spot rate, invest dollars in the U.S.
at i$ = 6% for one year; translate dollars back to $2,000,000 at the forward rate of $1.20 = €1.00.
Net profit will be €2,000.

 Arbitrage opportunity does not exit

[1.25 / 1.20] (1.02) = 1.0625, which is greater than 1.06. Thus, the effective interest rate is higher in the euro zone
after adjusting for the exchange rates (F/S), meaning an arbitrage opportunity should involve borrowing in the
euro zone and lending in the U.S.

References

Multiple Choice Difficulty: 2 Medium

  
 21. Award: 10.00 points  

A Polish currency dealer has good credit and can borrow either €1,600,000 or $2,000,000 for one year. The
one-year interest rate in the U.S. is i$ = 6.25% and in the euro zone the one-year interest rate is i€ = 2%.
The spot exchange rate is $1.20 = €1.00 and the one-year forward exchange rate is $1.25 = €1.00. Show how
you can realize a certain euro profit via covered interest arbitrage.

 Borrow $2,000,000 at 6.25%; trade $2,000,000 for €1,666,667 at the spot rate; invest euros at i€ =
2%; translate euro proceeds back to dollars at the forward rate of $1.25 = €1.00 for gross proceeds
of $2,125,000. Net profit will be $5,000

 Borrow $2,000,000 at 6.25%; trade $2,000,000 for €800,000 at the spot rate; invest euros at i€ =
2%; translate euro proceeds back to dollars at the forward rate of $1.20 = €1.00. Net profit will be
$17,600.

 Borrow €1,600,000 at i€ = 2%; translate euros to dollars at the spot rate, invest dollars in the U.S.
at i$ = 6.25% for one year; translate dollars back to $2,000,000 at the forward rate of $1.20 =
€1.00. Net profit will be €2,000.

 Arbitrage opportunity does not exit

[1.25 / 1.20] (1.02) = 1.0625. Thus, no arbitrage opportunity exists.

References

Multiple Choice Difficulty: 2 Medium

  
 22. Award: 10.00 points  

Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany. The spot
exchange rate is $1.12/€, and the forward exchange rate with one-year maturity is $1.16/€. Assume that an
arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage opportunity, what is the net cash
flow in one year?

 $10,690

 $15,000

 $46,207

 $21,964

[F/S] (1+i€) = (1.16/1.12) (1.035) = 1.0720, which is greater than (1+i$) = 1.05. This
suggests that IRP is not holding. After adjusting for the exchange rates (F/S), the interest rate is lower in the
U.S. than in Germany. The arbitrager should borrow $1,000,000, and repayment in one year will be $1,050,000
= ($1,000,000 × 1.05). Then, the $1,000,000 should be used to purchase $1,000,000 / ($1.12/€) = €892,857 at
the spot rate. The euros will be invested in Germany, where the maturity value will be €892,857 × 1.035 =
€924.107. Finally, agree to sell the euros in exchange for $1,071,964 (found by €924,107 × 1.16) at the forward
rate. In one year, the net cash flow will be $1,071,964 − $1,050,000 = $21,964.

References

Multiple Choice Difficulty: 2 Medium

 
 23. Award: 10.00 points  

How high does the lending rate in the euro zone have to be before an arbitrageur would not consider
borrowing dollars, trading them for euro at the spot rate, investing those euros in the euro zone, and hedging
with a short position in the forward euro contract?
 
    Bid   Ask   Borrowing   Lending
$1.40-
S0($/€)     $1.43-€1.00 i$ 4.20%APR   4.10%APR
€1.00
F360($/€)   $1.44-€1.00   $1.49-€1.00 i€      

 The bid-ask spreads are too wide for any profitable arbitrage when i€> 0

 3.47%

 −2.09%

 none of the options

Solve the following for X:[(1/1.49) / (1/1.40)] (1 + X) = 4.2

References

Multiple Choice Difficulty: 2 Medium

  
 24. Award: 10.00 points
 

Suppose that the one-year interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and the
one-year forward exchange rate is $1.16/€. What must the spot exchange rate be according to the IRP?

 $1.1768/€

 $1.1434/€

 $1.12/€

 none of the options

Solve the following for X: 1.16 = X (1.05/1.035)

References

Multiple Choice Difficulty: 2 Medium

 
 25. Award: 10.00 points  

A higher U.S. interest rate (i$) relative to interest rates abroad, ceteris paribus, will result in

 a stronger dollar.

 a weaker dollar.

 a lower spot exchange rate (expressed as foreign currency per U.S. dollar).

 a higher spot exchange rate (expressed as U.S. dollar per foreign currency).

References

Multiple Choice Difficulty: 1 Easy

  
 26. Award: 10.00 points  

If the interest rate in the U.S. is i$ = 5 percent for the next year and interest rate in the U.K. is i£ = 8 percent
for the next year, uncovered IRP suggests that

 the pound is expected to depreciate against the dollar by about 3 percent.

 the pound is expected to appreciate against the dollar by about 3 percent.

 the dollar is expected to depreciate against the pound by about 3 percent.

 exchange rate will remain unchanged.

References

Multiple Choice Difficulty: 1 Easy

 
 27. Award: 10.00 points  

A currency dealer has good credit and can borrow either $1,000,000 or €800,000 for one year. The one-year
interest rate in the U.S. is i$ = 2% and in the euro zone the one-year interest rate is i€ = 6%. The one-year
forward exchange rate is $1.20 = €1.00; what must the spot rate be to eliminate arbitrage opportunities?

 $1.2471 = €1.00

 $1.20 = €1.00

 $1.1547 = €1.00

 none of the options

Solve the following for X: (1.06/1.02) × 1.2 = X

References

Multiple Choice Difficulty: 2 Medium

  
 28. Award: 10.00 points  

Will an arbitrageur facing the following prices be able to make money?

 
  Borrowing   Lending   Bid   Ask
$ 5%   4.5% Spot $1.00 = €1.00   $1.01 = €1.00
€ 6%   5.5% Forward $0.99 = €1.00   $1.00 = €1.00

 Yes, borrow $1,000 at 5 percent; trade for € at the ask spot rate $1.01 = €1.00; Invest €990.10 at 5.5
percent; hedge this with a forward contract on €1,044.55 at $0.99 = €1.00; receive $1.034.11.

 Yes, borrow €1,000 at 6 percent; trade for $ at the bid spot rate $1.00 = €1.00; invest $1,000 at 4.5
percent; hedge this with a forward contract on €1,045 at $1.00 = €1.00.

 No; the transactions costs are too high.

 none of the options

References

Multiple Choice Difficulty: 2 Medium

 
 29. Award: 10.00 points  

If IRP fails to hold,

 pressure from arbitrageurs should bring exchange rates and interest rates back into line.

 it may fail to hold due to transactions costs.

 it may be due to government-imposed capital controls.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

  
 30. Award: 10.00 points  

Although IRP tends to hold, it may not hold precisely all the time

 due to transactions costs, like the bid-ask spread only.

 due to arbitrage transactions only

 due to capital controls imposed by governments only.

 due to transactions costs, like the bid-ask spread, as well as capital controls imposed by
governments.

References

Multiple Choice Difficulty: 1 Easy

 
 31. Award: 10.00 points  

The interest rate at which the arbitrager borrows tends to be higher than the rate at which he lends, reflecting
the

 capital controls

 midpoint.

 bid-ask spread.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 32. Award: 10.00 points  

Governments sometimes restrict capital flows, inbound and/or outbound. They achieve this objective by means
of

 jawboning.

 imposing taxes on capital flows.

 bans on cross-border capital movements.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

 
 33. Award: 10.00 points  

Will an arbitrageur facing the following prices be able to make money?

 
    Bid   Ask   Borrowing   Lending
S0($/€)   $1.40 / €1.00   $1.43 / €1.00 i$ 4.20%   4.10%
F360($/€)   $1.44 / €1.00   $1.49 / €1.00 i€ 3.65%   3.50%

 Yes, borrow €1,000,000 at 3.65 percent; trade for $ at the bid spot rate of $1.40 = €1.00; invest $ at
4.1 percent; hedge the maturity value by going long on a forward contract and agreeing to buy € at
the ask price of $1.49/€ in one year. The net cash flow will be positive in one year.

 Yes, borrow $1,000,000 at 4.2 percent; trade for € at the spot ask exchange rate of $1.43 = €1.00;
invest €699,300.70 at 3.5 percent; hedge the maturity value by going short on a forward and
agreeing to sell € at the bid price of $1.44/€ in one year. The net cash flow will be positive in one
year.

 No; the transactions costs are too high.

 none of the options

References

Multiple Choice Difficulty: 2 Medium

  
 34. Award: 10.00 points
 

If a foreign county experiences a hyperinflation,

 its currency will depreciate against stable currencies.

 its currency may appreciate against stable currencies.

 its currency may be unaffected; it's difficult to say.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 35. Award: 10.00 points  

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next
year in the U.S. is 2 percent and 3 percent in the euro zone. What is the one-year forward rate that should
prevail?

 €1.00 = $1.2379

 €1.00 = $1.2623

 €1.00 = $0.9903

 $1.00 = €1.2623

Solve the following for X: 1.25 = (1.03/1.02)X

References

Multiple Choice Difficulty: 2 Medium

  
 36. Award: 10.00 points  

Purchasing Power Parity (PPP) theory states that

 the exchange rate between currencies of two countries should be equal to the ratio of the countries'
price levels.

 as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will
depreciate against stable currencies.

 the prices of standard commodity baskets in two countries are not related.

 Both A and B are correct.

References

Multiple Choice Difficulty: 1 Easy

 
 37. Award: 10.00 points  

As of today, the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next
year in the U.S. is 2 percent and 3 percent in the euro zone. What is the one-year forward rate that should
prevail?

 €1.00 = $1.6157

 €1.6157 = $1.00

 €1.00 = $1.5845

 $1.00 × 1.03 = €1.60 × 1.02

Solve the following for X: 1.6 = (1.03/1.02)X

References

Multiple Choice Difficulty: 2 Medium

  
 38. Award: 10.00 points
 

If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K., and the dollar
depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP initially held, is

 0.07.

 0.9849.

 −0.0198.

 4.5.

(1 + 0.055) / ((1 + 0.03) (1 + 0.04)) = 0.9849

References

Multiple Choice Difficulty: 2 Medium

 
 39. Award: 10.00 points
 

In view of the fact that PPP is the manifestation of the law of one price applied to a standard commodity
basket,

 it will hold only if the prices of the constituent commodities are equalized across countries in a given
currency.

 it will hold only if the composition of the consumption basket is the same across countries.

 both of the options

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 40. Award: 10.00 points
 

If PPP holds for tradables and the relative prices between tradables and nontradables are maintained, then:

 PPP can hold in its relative version

 PPP will increase

 PPP will decrease

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 41. Award: 10.00 points
 

Some commodities never enter into international trade. Examples include

 nontradables.

 haircuts.

 housing.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

  
 42. Award: 10.00 points
 

Generally unfavorable evidence on PPP suggests that

 substantial barriers to international commodity arbitrage exist.

 tariffs and quotas imposed on international trade can explain at least some of the evidence.

 shipping costs can make it difficult to directly compare commodity prices.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

 
 43. Award: 10.00 points  

The price of a McDonald's Big Mac sandwich

 is about the same in the 120 countries that McDonalds does business in.

 varies considerably across the world in dollar terms.

 supports PPP.

 none of the options.

References

Multiple Choice Difficulty: 1 Easy

  
 44. Award: 10.00 points  

The Fisher effect can be written for the United States as:
 
A. is = ρs + E(πs) + ρs × E(πs)
   
B. ρs = is + E(πs) + is × E(πs)
   
1+π$
C. q =
(1+e) ( 1+π£ )
   
F( $ / € ) 1+i$
D. =
S( $ / € ) 1  +  i€

 Option A

 Option B

 Option C

 Option D

References

Multiple Choice Difficulty: 1 Easy

 
 45. Award: 10.00 points  

Forward parity states that

 any forward premium or discount is equal to the expected change in the exchange rate.

 any forward premium or discount is equal to the actual change in the exchange rate.

 the nominal interest rate differential reflects the expected change in the exchange rate.

 an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase
(decrease) in the interest rate in the country.

References

Multiple Choice Difficulty: 1 Easy

  
 46. Award: 10.00 points
 

The International Fisher Effect suggests that

 any forward premium or discount is equal to the expected change in the exchange rate.

 any forward premium or discount is equal to the actual change in the exchange rate.

 the nominal interest rate differential reflects the expected change in the exchange rate.

 an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase
(decrease) in the interest rate in the country.

References

Multiple Choice Difficulty: 1 Easy

 
 47. Award: 10.00 points
 

The Fisher effect states that

 any forward premium or discount is equal to the expected change in the exchange rate.

 any forward premium or discount is equal to the actual change in the exchange rate.

 the nominal interest rate differential reflects the expected change in the exchange rate.

 an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase
(decrease) in the interest rate in the country.

References

Multiple Choice Difficulty: 1 Easy

  
 48. Award: 10.00 points
 

The main approaches to forecasting exchange rates are

 Efficient market, fundamental, and technical approaches.

 Efficient market and technical approaches only.

 Efficient market and fundamental approaches only.

 Fundamental and technical approaches only.

References

Multiple Choice Difficulty: 1 Easy

 
 49. Award: 10.00 points  

The benefit to forecasting exchange rates

 are greatest during periods of fixed exchange rates.

 are nonexistent now that the euro and dollar are the biggest game in town.

 accrue to, and are a vital concern for, MNCs formulating international sourcing, production, financing,
and marketing strategies.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

  
 50. Award: 10.00 points  

The Efficient Markets Hypothesis states

 markets tend to evolve to low transactions costs and speedy execution of orders.

 current asset prices (e.g., exchange rates) fully reflect all the available and relevant information.

 current exchange rates cannot be explained by such fundamental forces as money supplies, inflation
rates and so forth.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 51. Award: 10.00 points
 

Good, inexpensive, and fairly reliable predictors of future exchange rates include

 today's exchange rate.

 current forward exchange rates

 esoteric fundamental models that take an econometrician to use and that no one can explain.

 today's exchange rate, as well as current forward exchange rates

References

Multiple Choice Difficulty: 1 Easy

  
 52. Award: 10.00 points
 

Which of the following is a true statement?

 While researchers found it difficult to reject the random walk hypothesis for exchange rates on
empirical grounds, there is no theoretical reason why exchange rates should follow a pure random
walk.

 While researchers found it easy to reject the random walk hypothesis for exchange rates on
empirical grounds, there are strong theoretical reasons why exchange rates should follow a pure
random walk.

 While researchers found it difficult to reject the random walk hypothesis for exchange rates on
empirical grounds, there are compelling theoretical reasons why exchange rates should follow a pure
random walk.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 53. Award: 10.00 points
 

If an exchange rate follows a random walk

 the future exchange rate is unpredictable.

 the future exchange rate is expected to be the same as the current exchange rate, St = E(St+
1).

 the best predictor of future exchange rates is the forward rate Ft = E(St+ 1|It).

 the future exchange rate is expected to be the same as the current exchange rate, St = E(St+ 1),
and the best predictor of future exchange rates is the forward rate Ft = E(St+ 1|It).

References

Multiple Choice Difficulty: 1 Easy

  
 54. Award: 10.00 points  

One implication of the random walk hypothesis is

 given the efficiency of foreign exchange markets, it is difficult to outperform the market-based
forecasts unless the forecaster has access to private information that is not yet reflected in the
current exchange rate.

 given the efficiency of foreign exchange markets, it is difficult to outperform the market-based
forecasts unless the forecaster has access to private information that is already reflected in the
current exchange rate.

 given the relative inefficiency of foreign exchange markets, it is difficult to outperform the technical
forecasts unless the forecaster has access to private information that is not yet reflected in the
current futures exchange rate.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 55. Award: 10.00 points
 

The random walk hypothesis suggests that

 the best predictor of the future exchange rate is the current exchange rate.

 the best predictor of the future exchange rate is the current interest rate differential.

 the best predictor of the future exchange rate is the current inflation differential.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 56. Award: 10.00 points
 

With regard to fundamental forecasting versus technical forecasting of exchange rates

 the technicians tend to use "cause and effect" models.

 the fundamentalists tend to believe that "history will repeat itself" is the best model.

 the fundamentalists tend to believe that exchange rates follow a random walk.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 57. Award: 10.00 points
 

Generating exchange rate forecasts with the fundamental approach involves

 looking at charts of the exchange rate and extrapolating the patterns into the future.

 estimation of a cyclical model.

 substituting the estimated values of the dependent variables into the estimated structural model to
generate the forecast.

 estimation of a structural model and substitution of the estimated values of the independent
variables into the estimated structural model to generate the forecast.

References

Multiple Choice Difficulty: 1 Easy

  
 58. Award: 10.00 points
 

Which of the following issues are difficulties for the fundamental approach to exchange rate forecasting?

 One has to forecast a set of independent variables to forecast the exchange rates. Forecasting the
former will certainly be subject to errors and may not be necessarily easier than forecasting the latter.

 The parameter values, that is the α's and β's, that are estimated using historical data may change
over time because of changes in government policies and/or the underlying structure of the
economy. Either difficulty can diminish the accuracy of forecasts even if the model is correct.

 The model itself can be wrong.

 All of the options

References

Multiple Choice Difficulty: 1 Easy

 
 59. Award: 10.00 points
 

Researchers have found that the fundamental approach to exchange rate forecasting

 outperforms the efficient market approach.

 fails to more accurately forecast exchange rates than either the random walk model or the forward
rate model.

 fails to more accurately forecast exchange rates than the random walk model but is better than the
forward rate model.

 outperforms the random walk model, but fails to more accurately forecast exchange rates than the
forward rate model.

References

Multiple Choice Difficulty: 1 Easy

  
 60. Award: 10.00 points  

Academic studies tend to discredit the validity of technical analysis. Which of the following is true?

 This can be viewed as support for technical analysis.

 It can be rational for individual traders to use technical analysis. If enough traders use technical
analysis, the predictions based on technical analysis can become self-fulfilling to some extent, at
least in the short-run.

 The statement can be explained by the difficulty professors may have in differentiating between
technical analysis and fundamental analysis.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 61. Award: 10.00 points
 

The moving average crossover rule

 is a fundamental approach to forecasting exchange rates.

 states that a crossover of the short-term moving average above the long-term moving average
signals that the foreign currency is appreciating.

 states that a crossover of the short-term moving average above the long-term moving average
signals that the foreign currency is depreciating.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 62. Award: 10.00 points
 

According to the technical approach, what matters in exchange rate determination

 is the past behavior of exchange rates.

 is the velocity of money.

 is the future behavior of exchange rates.

 is the beta.

References

Multiple Choice Difficulty: 1 Easy

 
 63. Award: 10.00 points  

Studies of the accuracy of paid exchange rate forecasters

 tend to support the view that "you get what you pay for".

 tend to support the view that forecasting is easy, at least with regard to major currencies like the
euro and Japanese yen.

 tend to support the view that banks do their best forecasting with the yen.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

  
 64. Award: 10.00 points  

According to the research in the accuracy of paid exchange rate forecasters,

 as a group, they do not do a better job of forecasting the exchange rate than the forward rate does.

 the average forecaster is better at forecasting than the forward rate.

 the forecasters do a better job of predicting the future exchange rate than the market does.

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 65. Award: 10.00 points
 

According to the monetary approach, what matters in exchange rate determination are

 the relative money supplies.

 the relative velocities of monies.

 the relative national outputs.

 all of the options

References

Multiple Choice Difficulty: 1 Easy

  
 66. Award: 10.00 points
 

According to the monetary approach, the exchange rate can be expressed as


S=
( )( )( )
M$
M£
×
V$
V£
×
y£
y$

 M $V $
P$ =
y$


S=
( )( )( )
M$
M£
×
V$
V£
×
y$
y£

 none of the options

References

Multiple Choice Difficulty: 1 Easy

 
 67. Award: 10.00 points  

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.60  = €1.00    i$     2%
F360($/€)  $1.58  = €1.00    i€     4%
 
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?

€1,000,000 × 1.04 = €1,040,000

References

Short Answer Difficulty: 2 Medium

  
 68. Award: 10.00 points
 

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.60  = €1.00    i$     2%
F360($/€)  $1.58  = €1.00    i€     4%
 
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

$1,000,000 × 1.02 = €1,020,000

References

Short Answer Difficulty: 2 Medium

 
 69. Award: 10.00 points
 

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.60  = €1.00    i$     2%
F360($/€)  $1.58  = €1.00    i€     4%
 
If you had borrowed $1,000,000, traded them for euro at the spot rate, and invested those euros in Europe,
how many euros will you receive in one year?

€1
$1,000,000 × = €625,000
$1.60

References

Short Answer Difficulty: 2 Medium

  
 70. Award: 10.00 points  

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.60  = €1.00    i$     2%
F360($/€)  $1.58  = €1.00    i€     4%
 
If you had €1,000,000, traded them for USD at the spot rate, and invested those dollars in the U.S., how many
USD will you get in one year?

$1.60
€1,000,000 × = $1,600,000
€1.00

References

Short Answer Difficulty: 2 Medium

 
 71. Award: 10.00 points  

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.45  = €1.00    i$     4%
F360($/€)   
$1.48 = €1.00    i€     3%
 
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?

€1,000,000 × 1.03 = €1,030,000

References

Short Answer Difficulty: 2 Medium

  
 72. Award: 10.00 points
 

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.45  = €1.00    i$     4%
F360($/€)  $1.48  = €1.00    i€     3%
 
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

$1,000,000 × 1.04 = €1,040,000

References

Short Answer Difficulty: 2 Medium

 
 73. Award: 10.00 points  

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.45  = €1.00    i$     4%
F360($/€)  $1.48  = €1.00    i€     3%
 
If you had borrowed $1,000,000, traded them for euros at the spot rate, and invested those euros in Europe,
how many euros do you receive in one year?

€1
$1,000,000 × = €689,655.17
$1.45

References

Short Answer Difficulty: 2 Medium

  
 74. Award: 10.00 points  

Use the information below to answer the following question.

 
    Exchange Rate   Interest Rate   APR
S0($/€)  $1.45  = €1.00    i$     4%
F360($/€)  $1.48  = €1.00    i€     3%
 
If you had €1,000,000, traded them for USD at the spot rate, and invested those dollars in the U.S., how many
USD will you get in one year?

$1.45
€1,000,000 × = $1,450,000
€1.00

References

Short Answer Difficulty: 2 Medium

 
 75. Award: 10.00 points  

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask       APR
S0($/€)  $1.42  = €1.00    $ 1.45   = € 1.00    i$     4%
F360($/€)   
$1.48 = €1.00    $ 1.50  = € 1.00    i€     3%
 
If you borrowed €1,000,000 for one year, how much money would you owe at maturity?

€1,000,000 × 1.03 = €1,030,000

References

Short Answer Difficulty: 2 Medium

  
 76. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.

 
    Bid   Ask       APR
S0($/€)  $1.42  = €1.00    $ 1.45   = € 1.00    i$     4%
F360($/€)  $1.48  = €1.00    $ 1.50  = € 1.00    i€     3%
 
If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

$1,000,000 × 1.04 = €1,040,000

References

Short Answer Difficulty: 2 Medium

 
 77. Award: 10.00 points  

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask       APR
S0($/€)   
$1.42 = €1.00    $ 1.45   = € 1.00    i$     4%
F360($/€)   
$1.48 = €1.00    $ 1.50  = € 1.00    i€     3%
 
If you had borrowed $1,000,000, traded them for euros at the spot rate, and invested those euros in Europe,
how many euros do you receive in one year?

€1
$1,000,000 × = €689,655.17
$1.45

References

Short Answer Difficulty: 2 Medium

  
 78. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask       APR
S0($/€)  $1.42  = €1.00    $ 1.45   = € 1.00    i$     4%
F360($/€)  $1.48  = €1.00    $ 1.50  = € 1.00    i€     3%
 
If you had €1,000,000 and traded it for USD at the spot rate, how many USD will you get?

$1.42
€1,000,000 × = $1,420,000
€1.00

References

Short Answer Difficulty: 2 Medium

 
 79. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.42 = €1.00   $1.45 = €1.00   i$ 4.25% APR   4% APR
F360($/€)   $1.48 = €1.00   $1.50 = €1.00   i€ 3.10% APR   3% APR

If you borrowed €1,000,000 for one year, how much money would you owe at maturity?

€1,000,000 × 1.031 = €1,031,000

References

Short Answer Difficulty: 2 Medium

  
 80. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.42 = €1.00   $1.45 = €1.00   i$ 4.25% APR   4% APR
F360($/€)   $1.48 = €1.00   $1.50 = €1.00   i€ 3.10% APR   3% APR

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

$1,000,000 × 1.0425 = $1,042,500

References

Short Answer Difficulty: 2 Medium

 
 81. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.42 = €1.00   $1.45 = €1.00   i$ 4.25% APR   4% APR
F360($/€)   $1.48 = €1.00   $1.50 = €1.00   i€ 3.10% APR   3% APR

If you had borrowed $1,000,000, traded them for euros at the spot rate, and invested those euros in Europe,
how many euros do you receive in one year?

€1
$1,000,000 × = €689,655.17
$1.45

References

Short Answer Difficulty: 2 Medium

  
 82. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.42 = €1.00   $1.45 = €1.00   i$ 4.25% APR   4% APR
F360($/€)   $1.48 = €1.00   $1.50 = €1.00   i€ 3.10% APR   3% APR

If you had €1,000,000, traded those euros for USD at the spot rate, and invested the dollars in the U.S., how
many USD will you get in one year?

$1.42
€1,000,000 × = €1,420,000
€1.00

References

Short Answer Difficulty: 2 Medium

 
 83. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.40 = €1.00   $1.43 = €1.00   i$ 4.20% APR   4.10% APR
F360($/€)   $1.44 = €1.00   $1.49 = €1.00   i€ 3.65% APR   3.50% APR

If you borrowed €1,000,000 for one year, how much money would you owe at maturity?

€1,000,000 × 1.0365 = €1,036,500

References

Short Answer Difficulty: 2 Medium

  
 84. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.40 = €1.00   $1.43 = €1.00   i$ 4.20% APR   4.10% APR
F360($/€)   $1.44 = €1.00   $1.49 = €1.00   i€ 3.65% APR   3.50% APR

If you borrowed $1,000,000 for one year, how much money would you owe at maturity?

$1,000,000 × 1.0420 = €1,042,000

References

Short Answer Difficulty: 2 Medium

 
 85. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.40 = €1.00   $1.43 = €1.00   i$ 4.20% APR   4.10% APR
F360($/€)   $1.44 = €1.00   $1.49 = €1.00   i€ 3.65% APR   3.50% APR

If you had borrowed $1,000,000 and traded for euro at the spot rate, how many € do you receive?

€1
$1,000,000 × = €699,300.70
$1.43

References

Short Answer Difficulty: 2 Medium

  
 86. Award: 10.00 points
 

Assume that you are a retail customer. Use the information below to answer the following question.
 
    Bid   Ask     Borrowing   Lending
S0($/€)   $1.40 = €1.00   $1.43 = €1.00   i$ 4.20% APR   4.10% APR
F360($/€)   $1.44 = €1.00   $1.49 = €1.00   i€ 3.65% APR   3.50% APR

If you had €1,000,000, traded them for USD at the spot rate, and invested the dollars in the U.S., how many
USD will you get in one year?

$1.40
€1,000,000 × = €1,400,000
€1.00

References

Short Answer Difficulty: 2 Medium

 
 87. Award: 10.00 points
 

According to a survey study conducted by Rossi (2013), the exchange rate predictability depends on:

 the choice of predictor

 forecast horizon and evaluation method

 sample period and model

 all of the options

References

Multiple Choice Difficulty: 1 Easy