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International Finance

Homework2 Chapter3&4 1. Calls for a new gold standard reflect

a. fundamental distrust of government’s willingness to maintain the integrity of fiat money

b. a general willingness to accept fiat money c. a short memory of what actually transpired under the gold standard d. the durability and desirability of gold

2. Under the gold standard a. price levels rose dramatically b. price levels stayed constant over time

c. the long-run stability of the price level includes alternating periods of inflation and deflation

d. fiat money is more valuable 3. Under a fixed-rate system, a country that followed policies that would lead to a

higher rate of inflation than that experienced by its trading partners would a. experience a balance-of-payments deficit as its goods became more

expensive b. see a decrease in the supply of its currency on the foreign exchange

markets

c. find its currency exchange rate subject to upward pressure d. experience a balance-of-payments surplus.

4. Under a fixed-rate system, a country that followed policies leading to a lower inflation rate than that experienced by its trading partners would

a. come under pressure to expand its money supply b. restrict the growth of its money supply c. experience a balance-of-payments deficit

d. be forced to buy its currency in the foreign exchange market

5. Underlying the emerging markets currency crises is a fundamental conflict

among policy objectives that the target nations have failed to resolve. Which one

of the following is NOT? a. IMF bailouts b. fixed exchange rates

c. independent domestic monetary policy d. free capital movement

6. In a fixed-rate system, central banks maintain currency values by

a. reducing the money supplies of nations with overvalued currencies

b. boosting the money supplies of nations with undervalued currencies c. buying up overvalued currencies in the foreign exchange market

d. buying undervalued currencies in the foreign exchange market

7. Governments intervene in the foreign exchange markets for all of the following

except to

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a. earn foreign exchange b. reduce economic uncertainty

c. improve the nation’s export competitiveness d. reduce inflation

8. Under a fixed-rate system, which of the following four alternatives to

devaluation is MOST likely to succeed?

a. foreign borrowing b. austerity c. wage and price controls

d. exchange controls

9. In order to boost the value of the euro relative to the dollar a. the Fed should sell dollars for euros and the European central bank

should buy DM with dollars

b. the Fed should sell dollars for euros and the European central bank should buy dollars with euros

c. the Fed should sell euros for dollars and the European central bank should sell dollars for DM

d. the Fed should sell DM for dollars and the European central bank should

buy euros with dollars

10. Suppose annual inflation rates in the U.S. and Mexico are expected to be 6% and 80%, respectively, over the next several years. If the current spot rate for the

Mexican peso is $.005, then the best estimate of the peso’s spot value in 3 years is

a. $.00276

b. $.01190 c. $.00321

d. $.00102 11. If the expected inflation rate is 5% and the real required return is 6%, then the

Fisher effect says that the nominal interest rate should be a. 1%

b. 11.3%

c. 11% d. 6%

12. Annual inflation rates in the U.S. and Greece are expected to be 3% and 8%, respectively. If the current spot rate for the drachma is $.007, then the expected

spot rate in three years is a. $.00607 b. $.00823

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c. $.00751 d. $.00694

13. If a country’s freely floating currency is undervalued in terms of purchasing

power parity, its capital account is likely to be a. in deficit or tending toward a deficit b. in surplus or tending toward a surplus

c. Subsidized by the International Monetary Fund d. a candidate for loans from the World Bank

14. If the average rate of inflation in the world rises from 5% to 7%, this will tend to make forward exchange rates move toward

a. smaller premiums or larger discounts in relation to the dollar b. larger premiums or smaller discounts in relation to the dollar c. no change on average

d. can’t tell what will happen

15. A 150% real return in Brazil is higher than a 15% dollar return in the U.S. a. because arbitrage opportunities exist b. when the inflation controls are suspended in Brazil

c. it depends on whether these are nominal or real returns d. regardless of nominal or real returns

16. Annual inflation rates in the U.S. and Italy are expected to be 4% and 7%, respectively. If the current spot rate is $1 = L2,000, then the expected spot rate

for the lira in three years is a. $.0004591 b. $.0011590

c. $.0009892 d. $.0005471

17. Annual inflation rates in the U.S. and France are expected to be 4% and 6%,

respectively. If the current spot rate is $.1250/FF, then the expected spot rate in two years is

a. $.1299

b. $.1150 c. $.1203

d. $.1335

18. Suppose five-year deposit rates on Eurodollars and Euromarks are 12% and 8%, respectively. If the current spot rate for the mark is $0.50, then the spot rate for

the mark five years from now implied by these interest rates is a. .5997 b. .4169

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c. .5185 d. .4821

19. The direct spot quote for the Canadian dollar is $.76 and the 180-day forward

rate is $.74. The difference between the two rates is likely to mean that a. inflation in the U.S. during the past year was lower than in Canada b. interest rates are rising faster in Canada than in the U.S.

c. prices in Canada are expected to rise more rapidly than in the U.S. d. the Canadian dollar’s spot rate is expected to rise in terms of the U.S.

dollar

20. The spot rate on the Dutch guilder is $0.39 and the 180-day forward rate is $0.40.

The difference between the spot and forward rates means that a. interest rates are higher in the U.S. than in the Netherlands b. the guilder has risen in relation to the dollar

c. the inflation rate in the Netherlands is declining d. the guilder is expected to fall in value relative to the dollar

there is a high inflation rate in the U.S. 21. Suppose the spot rates for the pound, mark, and Swiss franc are $1.20, $.32, and

$.40, respectively. The associated 90-day interest rates (annualized) are 16%, 8%, and 4%, while the U.S. 90-day interest rate is 12%. What is the 90-day forward rate (to the nearest cent) on a TCU (TCU 1 = £1 + DM1 + SFr1) if interest parity

holds? a $1.92

b $1.98 c $1.94 d $1.87

22. The current five-year Euroyen rate is 6% per annum (compounded annually). The five-year Eurodollar rate is 8.5%. What is the implied forward premium or discount of the yen (over the current spot rate) for a five-year forward contract?

a. 4.17% premium b. 18.46% discount c. 11.00% discount

d. 12.36% premium

23. Suppose the spot rates for the pound, mark, and Swiss franc are $1.50, $.42, and $.48, respectively. The associated 90-day interest rates (annualized) are 12%, 6%, and 4%, while the U.S. 90-day interest rate (annualized) is 8%. What is the

90-day forward rate on a DCU (DCU 1 = £1 + DM1 + SFr1) if interest parity holds?

a. $2.4027 b. $2.3923 c. $2.4196

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d. $2.3738

24. Suppose that spot pounds are selling at $1.7342, while 90-day forward pounds are selling at $1.7156. At the same time, DM spot and 90-day forward rates are

$0.6138 and $0.6014, respectively. According to these quotes the a. pound is selling at a 3.87% forward discount relative to the DM b. pound is selling at a 2.37% forward premium relative to the DM

c. DM is selling at a 0.97% forward discount relative to the pound d. DM is selling at a 1.54% forward premium relative to the pound

25. If annualized interest rates in the U.S. and France are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180-day forward rate will interest rate parity hold?

a. $.1070 b. $.1150

c. $.1088 d. $.1130

26. If annualized interest rates in the U.S. and Switzerland are 10% and 4%, respectively, and the 90-day forward rate for the Swiss franc is $.3864, at what current spot rate will interest rate parity hold?

a. $.3902 b. $.3874

c. $.3807 d. $.3792

27. The spot rate on the euro is $1.40 and the 180-day forward rate is $1.50. The difference between the two rates means

a. interest rates are higher in the U.S. than in the European Union b. the mark has risen in relation to the dollar c. the inflation rate in Germany is declining

d. the euro is expected to fall in value relative to the dollar

28. Suppose the spot rates for the pound, mark, and Swiss franc are $1.30, $.35, and $.40, respectively. The associated 90-day interest rates (annualized) are 16%, 8%,

and 4%, while the U.S. 90-day interest rate (annualized) is 12%. What is the 90-day forward rate on an ACU (ACU 1 = £1 + DM1 + SFr1) if interest parity holds?

a. $2.0512 b. $2.1134

c. $2.0397 d. $2.0489

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29. The current five-year Euroyen and Eurodollar rates are 8% and 12.5% per annum,

respectively. What is the implied forward premium or discount of the yen (over the current spot rate for a five-year forward contract)?

a. 4.17% premium b. 18.46% discount c. 17.74% discount

d. 22.64% premium 30. The 90-day interest rates (annualized) in the U.S. and Japan are, respectively,

10% and 7%, while the direct spot quote for the yen in New York is $.004300. At what 90-day forward rate would interest rate parity hold?

a. .004430 b. .004271 c. .004332

d. .004176

31. If annualized interest rates in the U.S. and France are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180-day forward rate will interest rate parity hold?

a. $.1070 b. $.1150 c. $.1088

d. $.1130

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