Student name:__________ 1) The law of one

price (LOP) is referring to

same or equivalent assets

A) a legal condition imposed by the U.S. or commodities for the
Commodity Futures Trading Commission. purpose of making certain
B) the same or equivalent things trading at the same guaranteed profits.
price across different locations or markets, precluding D) the
profitable arbitrage opportunities. composition of a standard
C) the act of simultaneously buying and selling the commodity basket.

2) An arbitrage is best defined as

same or equivalent assets

A) a legal condition imposed by the U.S. or commodities for the
Commodity Futures Trading Commission. purpose of making certain
B) the act of simultaneously buying and selling the guaranteed profits.
same or equivalent assets or commodities for the purpose of D) a parity
making reasonable profits. relationship that should
C) the act of simultaneously buying and selling the hold in equilibrium.

3) Interest Rate Parity (IRP) is best defined as

D) the act of
A) occurring when a government brings its domestic simultaneously buying and
interest rate in line with other major financial markets. selling the same or
B) occurring when the central bank of a country equivalent assets or
brings its domestic interest rate in line with its major trading commodities for the
partners. purpose of making certain
C) an arbitrage condition that must hold when guaranteed profits.
international financial markets are in equilibrium.

4) When Interest Rate

Parity (IRP) does not hold

Version 1 1
 D) the financial
A) there is usually a high degree of inflation in at markets are in equilibrium
least one country. and there are opportunities
B) the financial markets are in equilibrium. for covered interest
C) there are opportunities for covered interest arbitrage.
arbitrage.

5) 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?

C) €1.0300/$
A) €1.0704/$ D) $1.0300/€
B) $1.0704/€

6) Suppose you observe a spot exchange rate of arbitrage one-year forward

$1.0500/€. If interest rates are 3 percent per annum in the U.S. rate?
and 5 percent per annum in the euro zone, what is the no-

C) €1.0300/$
A) €1.0704/$ D) $1.0300/€
B) $1.0704/€

7) 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?

C) £1.9429/$
A) £2.0588/$ D) $1.9429/£
B) $2.0588/£

Version 1 2
8) A formal statement of IRP is

C)

A)

D)
B)

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

D) inflation rates
A) transaction costs and capital controls. and interest rates
B) transaction costs and inflation rates
C) inflation rates and capital controls

10) 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?

C) 8.62%
A) 5.0% D) none of the
B) 6.09% options

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

A) 1.2833%

Version 1 3
 B) 1.0128% D) none of the
C) 4.75% options

12) 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?

C) 5.32%
A) 2% D) none of the
B) 2.7% options

13) Covered Interest Arbitrage (CIA) transactions will

result in

financial markets.
A) unstable international financial markets. D) no effect on
B) restoring equilibrium prices quickly. the market.
C) higher interest rates across all international

14) 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.

violation and an arbitrage

A) This is an example where interest rate parity opportunity.
holds. D) none of the
B) This is an example of an arbitrage opportunity; options
interest rate parity does not hold.
C) This is an example of a Purchasing Power Parity

Version 1 4
15) Suppose that you are the treasurer of IBM with an investment of comparable
extra $1,000,000 to invest for six months. You are risk is 13 percent. What is
considering the purchase of U.S. T-bills that yield 1.810 your strategy to maximize
percent over a six-month period. The spot exchange rate is guaranteed dollar proceeds
$1.00 = ¥100, and the six-month forward rate is $1.00 = ¥110. in six months?
Alternatively, the six-month interest rate in Japan on an

forward contract.
A) Take $1mn and invest in U.S. T-bills. D) Take $1mn,
B) Take $1mn, convert them into yen at the spot convert them into yen at
rate, invest in Japan, and repatriate your yen earnings back the forward rate, invest in
into dollars at the spot rate prevailing in six months. Japan, and hedge with a
C) Take $1mn, convert them into yen at the spot short position on the spot
rate, invest in Japan, and hedge with a short position on the contract.

16) Suppose that the annual interest rate is 2.0 percent in an arbitrageopportunity,
the United States and 4 percent in Germany, and that the spot what is the net cash flow in
exchange rate is $1.60/€ and the forward exchange rate, with one year?
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

C) $46,207
A) $238.65 D) $7,000
B) $14,000

17) 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.

Version 1 5
 rate of $1.20 = €1.00. Net
A) Borrow $1,000,000 at 2%; trade $1,000,000 for profit will be €2,000.
€800,000 at the spot rate; invest euros at i€ = 6%; translate D) Borrow
euro proceeds back to dollars at the forward rate of $1.20 = €800,000 at i€ = 6%;
€1.00. Gross proceeds will be $1,017,600. translate euros to dollars at
B) Borrow $1,000,000 at 2%; trade $1,000,000 for the spot rate, invest dollars
€800,000 at the spot rate; invest euros at i€ = 6%; translate in the U.S. at i$ = 2% for
euro proceeds back to dollars at the forward rate of $1.20 = one year; translate dollars
€1.00. Net profit will be $17,600. back to €848,000 at the
C) Borrow €800,000 at i€ = 6%; translate euros to forward rate of $1.20 =
dollars at the spot rate, invest dollars in the U.S. at i$ = 2% for €1.00. Net profit will be
one year; translate dollars back to €850,000 at the forward $2,400.

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

D) Interest rate in
A) Interest rate in the euro zone will rise; interest the euro zone will fall;
rate in the U.S. will fall; euro will appreciate in the spot interest rate in the U.S.
market; euro will appreciate in the forward market will rise; euro will
B) Interest rate in the euro zone will fall; interest appreciate in the spot
rate in the U.S. will rise; euro will depreciate in the spot market; euro will
market; euro will depreciate in the forward market depreciate in the forward
C) Interest rate in the euro zone will rise; interest market
rate in the U.S. will fall; euro will depreciate in the spot
market; euro will appreciate in the forward market

19) An Italian currency

dealer has good credit and
can borrow either
$1,000,000 or €800,000 for
one year. The one-year
interest rate in the U.S. is i$

Version 1 6
= 2% and in the euro zone the one-year interest rate is i€ = realize a certain euro profit
6%. The spot exchange rate is $1.25 = €1.00 and the one-year via covered interest
forward exchange rate is $1.20 = €1.00. Show how you can arbitrage.

rate of $1.20 = €1.00. Net

A) Borrow $1,000,000 at 2%; trade $1,000,000 for profit will be €2,000.
€800,000 at the spot rate; invest euros at i€ = 6%; translate D) Borrow
euro proceeds back to dollars at the forward rate of $1.20 = €800,000 at i€ = 6%;
€1.00. Gross proceeds will be $1,017,600. translate euros to dollars at
B) Borrow $1,000,000 at 2%; trade $1,000,000 for the spot rate, invest dollars
€800,000 at the spot rate; invest euros at i€ = 6%; translate in the U.S. at i$ = 2% for
euro proceeds back to dollars at the forward rate of $1.20 = one year; translate dollars
€1.00. Net profit will be $17,600. back to €848,000 at the
C) Borrow €800,000 at i€ = 6%; translate euros to forward rate of $1.20 =
dollars at the spot rate, invest dollars in the U.S. at i$ = 2% for €1.00. Net profit will be
one year; translate dollars back to €850,000 at the forward $2,400.

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

dollars at the spot rate,

A) Borrow $2,000,000 at 6%; trade $2,000,000 for invest dollars in the U.S. at
€1,666,667 at the spot rate; invest euros at i€ = 2%; translate i$ = 6% for one year;
euro proceeds back to dollars at the forward rate of $1.25 = translate dollars back to
€1.00 for gross proceeds of $2,125,000. Net profit will be $2,000,000 at the forward
$5,000 rate of $1.20 = €1.00. Net
B) Borrow $2,000,000 at 6%; trade $2,000,000 for profit will be €2,000.
€800,000 at the spot rate; invest euros at i€ = 2%; translate D) Arbitrage
euro proceeds back to dollars at the forward rate of $1.20 = opportunity does not exit
€1.00. Net profit will be $17,600.
C) Borrow €1,600,000 at i€ = 2%; translate euros to

21) A Polish currency

Version 1 7
dealer has good credit and can borrow either €1,600,000 or can realize a certain euro
$2,000,000 for one year. The one-year interest rate in the U.S. profit via covered interest
is i$ = 6.25% and in the euro zone the one-year interest rate is arbitrage.
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

dollars at the spot rate,

A) Borrow $2,000,000 at 6.25%; trade $2,000,000 invest dollars in the U.S. at
for €1,666,667 at the spot rate; invest euros at i€ = 2%; i$ = 6.25% for one year;
translate euro proceeds back to dollars at the forward rate of translate dollars back to
$1.25 = €1.00 for gross proceeds of $2,125,000. Net profit $2,000,000 at the forward
will be $5,000 rate of $1.20 = €1.00. Net
B) Borrow $2,000,000 at 6.25%; trade $2,000,000 profit will be €2,000.
for €800,000 at the spot rate; invest euros at i€ = 2%; translate D) Arbitrage
euro proceeds back to dollars at the forward rate of $1.20 = opportunity does not exit
€1.00. Net profit will be $17,600.
C) Borrow €1,600,000 at i€ = 2%; translate euros to

22) Suppose that the annual interest rate is 5.0 percent in opportunity, what is the net
the United States and 3.5 percent in Germany. The spot cash flow in one year?
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

C) $46,207
A) $10,690 D) $21,964
B) $15,000

23) 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 Borrow Lendin

ing g
S0($/ $1.40- $1.43- i$ 4.20%A 4.10%A
€) €1.00 €1.00 PR PR

Version 1 8
F360($/ $1.44- $1.49- i€
€) €1.00 €1.00 A) The bid-ask
spreads are too wide for
any profitable arbitrage
when i€> 0
B) 3.47%
C) −2.09%
D) none of the
options

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

C) $1.12/€
A) $1.1768/€ D) none of the
B) $1.1434/€ options

25) A higher U.S. interest rate (i$) relative to interest rates

abroad, ceteris paribus, will result in

D) a higher spot
A) a stronger dollar. exchange rate (expressed
B) a weaker dollar. as U.S. dollar per foreign
C) a lower spot exchange rate (expressed as foreign currency).
currency per U.S. dollar).

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

dollar by about 3 percent.

A) the pound is expected to depreciate against the C) the dollar is
dollar by about 3 percent. expected to depreciate
B) the pound is expected to appreciate against the against the pound by about

Version 1 9
3 percent.
D) exchange rate will remain unchanged.

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

D) none of the
A) $1.2471 = €1.00 options
B) $1.20 = €1.00
C) $1.1547 = €1.00

28) Will an arbitrageur facing the following prices be able

to make money?

Borro Lend Bid Ask

wing ing
$ 5% 4.5% Spot $1.00 = $1.01 =
€1.00 €1.00
€ 6% 5.5% Forwar $0.99 = $1.00 =
d €1.00 €1.00

A) 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.
B) 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.
C) No; the transactions costs are too high.
D) none of the options

Version 1 10
29) If IRP fails to hold,

controls.
A) pressure from arbitrageurs should bring exchange D) all of the
rates and interest rates back into line. options
B) it may fail to hold due to transactions costs.
C) it may be due to government-imposed capital

30) Although IRP tends to hold, it may not hold precisely

all the time

D) due to
A) due to transactions costs, like the bid-ask spread transactions costs, like the
only. bid-ask spread, as well as
B) due to arbitrage transactions only capital controls imposed
C) due to capital controls imposed by governments by governments.
only.

31) The interest rate at which the arbitrager borrows tends

to be higher than the rate at which he lends, reflecting the

D) none of the
A) capital controls options
B) midpoint.
C) bid-ask spread.

32) Governments sometimes restrict capital flows,

inbound and/or outbound. They achieve this objective by
means of

D) all of the
A) jawboning. options
B) imposing taxes on capital flows.
C) bans on cross-border capital movements.

Version 1 11
33) Will an arbitrageur facing the following prices be able
to make money?

Bid Ask Borro Lendi

wing ng
S0($/ $1.40 / $1.43 / i$ 4.20% 4.10%
€) €1.00 €1.00
F360($ $1.44 / $1.49 / i€ 3.65% 3.50%
/€) €1.00 €1.00

A) 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.
B) 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.
C) No; the transactions costs are too high.
D) none of the options

34) If a foreign county experiences a hyperinflation,

C) its currency
A) its currency will depreciate against stable may be unaffected; it's
currencies. difficult to say.
B) its currency may appreciate against stable D) none of the
currencies. options

35) As of today, the

Version 1 12
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?

D) $1.00 =
A) €1.00 = $1.2379 €1.2623
B) €1.00 = $1.2623
C) €1.00 = $0.9903

36) Purchasing Power Parity (PPP) theory states that

C) the prices of
A) the exchange rate between currencies of two standard commodity
countries should be equal to the ratio of the countries' price baskets in two countries
levels. are not related.
B) as the purchasing power of a currency sharply D) Both A and B
declines (due to hyperinflation) that currency will depreciate are correct.
against stable currencies.

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

D) $1.00 × 1.03 =
A) €1.00 = $1.6157 €1.60 × 1.02
B) €1.6157 = $1.00
C) €1.00 = $1.5845

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

B) 0.9849.
A) 0.07.

Version 1 13
 C) −0.0198.
D) 4.5.

Version 1 14
39) In view of the fact that PPP is the manifestation of the
law of one price applied to a standard commodity basket,

C) both of the
A) it will hold only if the prices of the constituent options
commodities are equalized across countries in a given D) none of the
currency. options
B) it will hold only if the composition of the
consumption basket is the same across countries.

40) If PPP holds for tradables and the relative prices

between tradables and nontradables are maintained, then:

D) none of the
A) PPP can hold in its relative version options
B) PPP will increase
C) PPP will decrease

41) Some commodities never enter into international

trade. Examples include

C) housing.
A) nontradables. D) all of the
B) haircuts. options

42) Generally unfavorable evidence on PPP suggests that

C) shipping costs
A) substantial barriers to international commodity
arbitrage exist.
B) tariffs and quotas imposed on international trade
can explain at least some of the evidence.

Version 1 15
can make it difficult to directly compare commodity prices.
D) all of the options

Version 1 16
43) The price of a McDonald's Big Mac sandwich

terms.
A) is about the same in the 120 countries that C) supports PPP.
McDonalds does business in. D) none of the
B) varies considerably across the world in dollar options.

44) The Fisher effect can be written for the United States
as:

A. is = ρs + E(πs) +ρs × E(πs)

C
B. ρs = is + E(πs) + is × E(πs) .

C) Option C
A) Option A D) Option D
B) Option B

45) Forward parity states that

D) an increase
A) any forward premium or discount is equal to the (decrease) in the expected
expected change in the exchange rate. inflation rate in a country
B) any forward premium or discount is equal to the will cause a proportionate
actual change in the exchange rate. increase (decrease) in the
C) the nominal interest rate differential reflects the interest rate in the country.
expected change in the exchange rate.

46) The International

Fisher Effect suggests that

Version 1 17
 D) an increase
A) any forward premium or discount is equal to the (decrease) in the expected
expected change in the exchange rate. inflation rate in a country
B) any forward premium or discount is equal to the will cause a proportionate
actual change in the exchange rate. increase (decrease) in the
C) the nominal interest rate differential reflects the interest rate in the country.
expected change in the exchange rate.

47) The Fisher effect states that

D) an increase
A) any forward premium or discount is equal to the (decrease) in the expected
expected change in the exchange rate. inflation rate in a country
B) any forward premium or discount is equal to the will cause a proportionate
actual change in the exchange rate. increase (decrease) in the
C) the nominal interest rate differential reflects the interest rate in the country.
expected change in the exchange rate.

48) The main approaches to forecasting exchange rates are

only.
A) Efficient market, fundamental, and technical D) Fundamental
approaches. and technical approaches
B) Efficient market and technical approaches only. only.
C) Efficient market and fundamental approaches

49) The benefit to forecasting exchange rates

formulating international
A) are greatest during periods of fixed exchange sourcing, production,
rates. financing, and marketing
B) are nonexistent now that the euro and dollar are strategies.
the biggest game in town. D) all of the
C) accrue to, and are a vital concern for, MNCs options

Version 1 18
50) The Efficient Markets Hypothesis states

such fundamental forces as

A) markets tend to evolve to low transactions costs money supplies, inflation
and speedy execution of orders. rates and so forth.
B) current asset prices (e.g., exchange rates) fully D) none of the
reflect all the available and relevant information. options
C) current exchange rates cannot be explained by

51) Good, inexpensive, and fairly reliable predictors of

future exchange rates include

D) today's
A) today's exchange rate. exchange rate, as well as
B) current forward exchange rates current forward exchange
C) esoteric fundamental models that take an rates
econometrician to use and that no one can explain.

52) Which of the following is a true statement?

random walk hypothesis

A) While researchers found it difficult to reject the for exchange rates on
random walk hypothesis for exchange rates on empirical empirical grounds, there
grounds, there is no theoretical reason why exchange rates are compelling theoretical
should follow a pure random walk. reasons why exchange
B) While researchers found it easy to reject the rates should follow a pure
random walk hypothesis for exchange rates on empirical random walk.
grounds, there are strong theoretical reasons why exchange D) none of the
rates should follow a pure random walk. options
C) While researchers found it difficult to reject the

53) If an exchange rate

follows a random walk

Version 1 19
 same as the current
A) the future exchange rate is unpredictable. exchange rate, St = E(St+
B) the future exchange rate is expected to be the 1), and the best predictor
same as the current exchange rate, St = E(St+ 1). of future exchange rates is
C) the best predictor of future exchange rates is the the forward rate Ft = E(St+
forward rate Ft = E(St+ 1|It). 1|It).
D) the future exchange rate is expected to be the

54) One implication of the random walk hypothesis is

exchange markets, it is
A) given the efficiency of foreign exchange markets, difficult to outperform the
it is difficult to outperform the market-based forecasts unless technical forecasts unless
the forecaster has access to private information that is not yet the forecaster has access to
reflected in the current exchange rate. private information that is
B) given the efficiency of foreign exchange markets, not yet reflected in the
it is difficult to outperform the market-based forecasts unless current futures exchange
the forecaster has access to private information that is already rate.
reflected in the current exchange rate. D) none of the
C) given the relative inefficiency of foreign options

55) The random walk hypothesis suggests that

the current inflation

A) the best predictor of the future exchange rate is differential.
the current exchange rate. D) none of the
B) the best predictor of the future exchange rate is options
the current interest rate differential.
C) the best predictor of the future exchange rate is

56) With regard to fundamental forecasting versus

technical forecasting of exchange rates

A) the

Version 1 20
technicians tend to use "cause and effect" models. rates follow a random
B) the fundamentalists tend to believe that "history walk.
will repeat itself" is the best model. D) none of the
C) the fundamentalists tend to believe that exchange options

57) Generating exchange rate forecasts with the

fundamental approach involves

of the estimated values of

A) looking at charts of the exchange rate and the independent variables
extrapolating the patterns into the future. into the estimated
B) estimation of a cyclical model. structural model to
C) substituting the estimated values of the dependent generate the forecast.
variables into the estimated structural model to generate the
forecast.
D) estimation of a structural model and substitution

58) Which of the following issues are difficulties for the

fundamental approach to exchange rate forecasting?

diminish the accuracy of

A) One has to forecast a set of independent variables forecasts even if the model
to forecast the exchange rates. Forecasting the former will is correct.
certainly be subject to errors and may not be necessarily C) The model
easier than forecasting the latter. itself can be wrong.
B) The parameter values, that is the α's and β's, that D) All of the
are estimated using historical data may change over time options
because of changes in government policies and/or the
underlying structure of the economy. Either difficulty can

59) Researchers have found that the fundamental approach

to exchange rate forecasting

A) outperforms

Version 1 21
the efficient market approach. D) outperforms
B) fails to more accurately forecast exchange rates the random walk model,
than either the random walk model or the forward rate model. but fails to more accurately
C) fails to more accurately forecast exchange rates forecast exchange rates
than the random walk model but is better than the forward than the forward rate
rate model. model.

60) Academic studies tend to discredit the validity of

technical analysis. Which of the following is true?

professors may have in

A) This can be viewed as support for technical differentiating between
analysis. technical analysis and
B) It can be rational for individual traders to use fundamental analysis.
technical analysis. If enough traders use technical analysis, D) none of the
the predictions based on technical analysis can become self- options
fulfilling to some extent, at least in the short-run.
C) The statement can be explained by the difficulty

61) The moving average crossover rule

average above the long-

A) is a fundamental approach to forecasting term moving average
exchange rates. signals that the foreign
B) states that a crossover of the short-term moving currency is depreciating.
average above the long-term moving average signals that the D) none of the
foreign currency is appreciating. options
C) states that a crossover of the short-term moving

62) According to the technical approach, what matters in

exchange rate determination

B) is the velocity
A) is the past behavior of exchange rates.

Version 1 22
of money.
C) is the future behavior of exchange rates.
D) is the beta.

Version 1 23
63) Studies of the accuracy of paid exchange rate
forecasters

C) tend to support
A) tend to support the view that "you get what you the view that banks do
pay for". their best forecasting with
B) tend to support the view that forecasting is easy, the yen.
at least with regard to major currencies like the euro and D) none of the
Japanese yen. options

64) According to the research in the accuracy of paid

exchange rate forecasters,

future exchange rate than

A) as a group, they do not do a better job of the market does.
forecasting the exchange rate than the forward rate does. D) none of the
B) the average forecaster is better at forecasting than options
the forward rate.
C) the forecasters do a better job of predicting the

65) According to the monetary approach, what matters in

exchange rate determination are

D) all of the
A) the relative money supplies. options
B) the relative velocities of monies.
C) the relative national outputs.

66) According to the monetary approach, the exchange

rate can be expressed as

A)

Version 1 24
 D) none of the
options
B)

C)

67) According to a survey study conducted by Rossi

(2013), the exchange rate predictability depends on:

D) all of the
A) the choice of predictor options
B) forecast horizon and evaluation method
C) sample period and model

68) Use the information below to answer the following

question.

Ex In APR 5 0
ch te 8 0
an re
ge st
Ra Ra If you borrowed
te te €1,000,000 for one year,
S0($/€) $ 1. = € 1. i$ 2% how much money would
60 00 you owe at maturity?
F360($/€) $ 1. = € 1. i€ 4%

69) Use the information below to answer the following

question.

Ex In APR g s
ch te e t
an re R R

Version 1 25
 at at
e e
S0($/€) $ 1. = € 1. i$ 2% If you borrowed
60 00 $1,000,000 for one year,
F360($/€) $ 1. = € 1. i€ 4% how much money would
58 00 you owe at maturity?

70) Use the information below to answer the following

question.

Ex In APR
ch te
an re If you had borrowed
ge st $1,000,000, traded them
Ra Ra for euro at the spot rate,
te te and invested those euros in
S0($/€) $ 1. = € 1. i$ 2% Europe, how many euros
60 00 will you receive in one
F360($/€) $ 1. = € 1. i€ 4%
year?
58 00

71) Use the information below to answer the following

question.

Ex In APR
ch te
an re
ge st
Ra Ra
te te
S0($/€) $ 1. = € 1. i$ 2%
60 00
F360($/€) $ 1. = € 1. i€ 4%
58 00

Version 1 26
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?

72) Use the information below to answer the following

question.

Ex In APR 4 0
ch te 8 0
an re
ge st
Ra Ra If you borrowed
te te €1,000,000 for one year,
S0($/€) $ 1. = € 1. i$ 4% how much money would
45 00 you owe at maturity?
F360($/€) $ 1. = € 1. i€ 3%

73) Use the information below to answer the following

question.

Ex In APR If you borrowed

ch te $1,000,000 for one year,
an re how much money would
ge st
you owe at maturity?
Ra Ra
te te
S0($/€) $ 1. = € 1. i$ 4%
45 00
F360($/€) $ 1. = € 1. i€ 3%
48 00

Version 1 27
74) Use the information below to answer the following
question.

Ex In APR
ch te
an re If you had borrowed
ge st $1,000,000, traded them
Ra Ra for euros at the spot rate,
te te and invested those euros in
S0($/€) $ 1. = € 1. i$ 4% Europe, how many euros
45 00 do you receive in one
F360($/€) $ 1. = € 1. i€ 3%
year?
48 00

75) Use the information below to answer the following

question.

Ex In APR If you had €1,000,000,

ch te traded them for USD at the
an re spot rate, and invested
ge st
those dollars in the U.S.,
Ra Ra
how many USD will you
te te
S0($/€) $ 1. = € 1. i$ 4%
get in one year?
45 00
F360($/€) $ 1. = € 1. i€ 3%
48 00

Version 1 28
76) Assume that you are a retail customer. Use the
information below to answer the following question.

B A APR
i s
d k If you borrowed
S0($/€) $ 1. = € 1. $ 1. = € 1. i 4% €1,000,000 for one year,
42 00 45 00 $ how much money would
F360($/ $ 1. = € 1. $ 1. = € 1. i 3% you owe at maturity?
€) 48 00 50 00 €

77) Assume that you are a retail customer. Use the

information below to answer the following question.

B A APR
i s
d k If you borrowed
S0($/€) $ 1. = € 1. $ 1. = € 1. i 4% $1,000,000 for one year,
42 00 45 00 $ how much money would
F360($/ $ 1. = € 1. $ 1. = € 1. i 3% you owe at maturity?
€) 48 00 50 00 €

Version 1 29
 B A APR If you had borrowed
i s $1,000,000, traded them
d k for euros at the spot rate,
S0($/€) $ 1. = € 1. $ 1. = € 1. i 4% and invested those euros in
42 00 45 00 $
Europe, how many euros
F360($/ $ 1. = € 1. $ 1. = € 1. i 3%
€) 48 00 50 00 do you receive in one
€
year?

79) Assume that you are a retail customer. Use the

information below to answer the following question.

B A APR
i s
d k If you had €1,000,000 and
S0($/€) $ 1. = € 1. $ 1. = € 1. i 4% traded it for USD at the
42 00 45 00 $ spot rate, how many USD
F360($/ $ 1. = € 1. $ 1. = € 1. i 3% will you get?
€) 48 00 50 00 €

80) Assume that you are a retail customer. Use the

information below to answer the following question.

Bid Ask Borrow Lendin

ing g If you borrowed
S0($/ $1.42 = $1.45 = i$ 4.25% 4% APR €1,000,000 for one year,
€) €1.00 €1.00 APR
how much money would
F360($/ $1.48 = $1.50 = i€ 3.10% 3% APR
you owe at maturity?
€) €1.00 €1.00 APR

Version 1 30
81) Assume that you are a retail customer. Use the
information below to answer the following question.

Bid Ask Borrow Lendin

ing g If you borrowed
S0($/ $1.42 = $1.45 = i$ 4.25% 4% APR $1,000,000 for one year,
€) €1.00 €1.00 APR
how much money would
F360($/ $1.48 = $1.50 = i€ 3.10% 3% APR
you owe at maturity?
€) €1.00 €1.00 APR

Version 1 31
82) Assume that you are a retail customer. Use the
information below to answer the following question.

Bid Ask Borrow Lendin

ing g If you had borrowed
S0($/ $1.42 = $1.45 = i$ 4.25% 4% APR $1,000,000, traded them
€) €1.00 €1.00 APR
for euros at the spot rate,
F360($/ $1.48 = $1.50 = i€ 3.10% 3% APR
and invested those euros in
€) €1.00 €1.00 APR
Europe, how many euros
do you receive in one
year?

83) Assume that you are a retail customer. Use the

information below to answer the following question.

Bid Ask Borrow Lendin

ing g
S0($/ $1.42 = $1.45 = i$ 4.25% 4% APR If you had €1,000,000,
€) €1.00 €1.00 APR
traded those euros for USD
F360($/ $1.48 = $1.50 = i€ 3.10% 3% APR
at the spot rate, and
€) €1.00 €1.00 APR
invested the dollars in the
U.S., how many USD will
you get in one year?

Version 1 32
84) Assume that you are a retail customer. Use the
information below to answer the following question.

Bid Ask Borrow Lendin

ing g If you borrowed
S0($/ $1.40 = $1.43 = i$ 4.20% 4.10% €1,000,000 for one year,
€) €1.00 €1.00 APR APR
how much money would
F360($/ $1.44 = $1.49 = i€ 3.65% 3.50%
you owe at maturity?
€) €1.00 €1.00 APR APR

Version 1 33
85) Assume that you are a retail customer. Use the
information below to answer the following question.

Bid Ask Borrow Lendin

ing g If you borrowed
S0($/ $1.40 = $1.43 = i$ 4.20% 4.10% $1,000,000 for one year,
€) €1.00 €1.00 APR APR
how much money would
F360($/ $1.44 = $1.49 = i€ 3.65% 3.50%
you owe at maturity?
€) €1.00 €1.00 APR APR

Version 1 34
86) Assume that you are a retail customer. Use the
information below to answer the following question.

Bid Ask Borrow Lendin

ing g If you had borrowed
S0($/ $1.40 = $1.43 = i$ 4.20% 4.10% $1,000,000 and traded for
€) €1.00 €1.00 APR APR
euro at the spot rate, how
F360($/ $1.44 = $1.49 = i€ 3.65% 3.50%
many € do you receive?
€) €1.00 €1.00 APR APR

Version 1 35
87) Assume that you are a retail customer. Use the
information below to answer the following question.

Bid Ask Borrow Lendin

ing g If you had €1,000,000,
S0($/ $1.40 = $1.43 = i$ 4.20% 4.10% traded them for USD at the
€) €1.00 €1.00 APR APR
spot rate, and invested the
F360($/ $1.44 = $1.49 = i€ 3.65% 3.50%
dollars in the U.S., how
€) €1.00 €1.00 APR APR
many USD will you get in
one year?

Version 1 36
Answer Key

Test name: Test6

Version 1 37
1) B
2) C
3) C
4) C
5) B
6) D
7) B
8) A
9) A
10) C
11) A
12) B
13) B
14) B
15) C
16) D
17) D
18) C
19) C
20) A
21) D

Version 1 38
22) D
23) B
24) B
25) A
26) A
27) A
28) C
29) D
30) D
31) C
32) D
33) B
34) A
35) A
36) D
37) C
38) B
39) C
40) A
41) D
42) D

Version 1 39
43) B
44) A
45) A
46) C
47) D
48) A
49) C
50) B
51) D
52) A
53) B
54) A
55) A
56) D
57) D
58) D
59) B
60) B
61) B
62) A
63) D

Version 1 40
64) A
65) D
66) A
67) D
68) €1,000,000 × 1.04 = €1,040,000

69) $1,000,000 × 1.02 = €1,020,000

70)
$1,000,000 × €1 = €625,000 71)
$1.60

€1,000,000 × $1.60 = $1,600,000 72) €1,000,000 ×

€1.00
1.03 = €1,030,000

73) $1,000,000 × 1.04 = €1,040,000

74)
$1,000,000 × €1 = €689,655.17 75)
$1.45

€1,000,000 × $1.45 = $1,450,000 76) €1,000,000 ×

€1.00
1.03 = €1,030,000

77) $1,000,000 × 1.04 = €1,040,000

78)
$1,000,000 × €1 = €689,655.17 $1.
45

Version 1 41
79)
€1,000,000 × $1.42 = $1,420,000 80) €1,000,000 ×
€1.00
1.031 = €1,031,000

81) $1,000,000 × 1.0425 = $1,042,500

82)
$1,000,000 × €1 = €689,655.17 83)
$1.45

€1,000,000 × $1.42 = €1,420,000

€1.00

84) €1,000,000 × 1.0365 = €1,036,500

85) $1,000,000 × 1.0420 = €1,042,000

86)
$1,000,000 × €1 = €699,300.70 87)
$1.43

€1,000,000 × $1.40 = €1,400,000

€1.00

Version 1 42