Test Bank International Financial Management, 13th Edition Jeff Madura A+

$35.00

Test Bank International Financial Management, 13th Edition Jeff Madura A+

Name: Test Bank International Financial Management, 13th Edition Jeff Madura A+
SKU: Test Bank International Financial Management, 13th Edition Jeff Madura A+
Price: 35.0 USD
Availability: InStock

$35.00

SKU: Test Bank International Financial Management, 13th Edition Jeff Madura A+

Description

1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

	a.	sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
	b.	sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.
	c.	sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene.
	d.	sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

2. A weak dollar is normally expected to cause:

	a.	high unemployment and high inflation in the U.S.
	b.	high unemployment and low inflation in the U.S.
	c.	low unemployment and low inflation in the U.S.
	d.	low unemployment and high inflation in the U.S.

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

3. A strong dollar is normally expected to cause:

	a.	high unemployment and high inflation in the U.S.
	b.	high unemployment and low inflation in the U.S.
	c.	low unemployment and low inflation in the U.S.
	d.	low unemployment and high inflation in the U.S.

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

4. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

	a.	sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
	b.	sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.
	c.	sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.
	d.	sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

5. Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system.

	a.	floating rate; fixed rate
	b.	floating rate; floating rate
	c.	fixed rate; fixed rate
	d.	fixed rate; floating rate

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

6. A primary result of the Bretton Woods Agreement was:

	a.	the establishment of the European Monetary System (EMS).
	b.	establishing specific rules for when tariffs and quotas could be imposed by governments.
	c.	establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.
	d.	establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

7. A primary result of the Smithsonian Agreement was:

	a.	the establishment of the European Monetary System (EMS).
	b.	establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values.
	c.	establishing specific rules for when tariffs and quotas could be imposed by governments.
	d.	establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

8. Under a fixed exchange rate system:

	a.	a foreign exchange market does not exist.
	b.	central bank intervention in the foreign exchange market is not necessary.
	c.	central bank intervention in the foreign exchange market is often necessary.
	d.	central bank intervention in the foreign exchange market is not allowed.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar’s value should ____ the U.S. demand for products produced by major foreign countries.

	a.	weakening; increase
	b.	weakening; decrease
	c.	strengthening; increase
	d.	strengthening; decrease

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

10. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:

	a.	pegged system.
	b.	fixed system.
	c.	managed float system.
	d.	crawling peg system.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

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

	a.	is less stable than it would be without a currency board.
	b.	is typically below the interest rate of the currency to which it is tied.
	c.	will move in tandem with the interest rate of the currency to which it is tied.
	d.	is completely independent of the interest rate of the currency to which it is tied.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

12. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

	a.	more; more
	b.	less; less
	c.	more; less
	d.	less; more

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

13. Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A’s currency floats against Country B’s currency, and that Country C’s currency is pegged to B’s. If A’s currency depreciates against B, then A’s exports to C should ____, and A’s imports from C should ____.

	a.	decrease; increase
	b.	decrease; decrease
	c.	increase; decrease
	d.	increase; increase

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

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

	a.	pegged intervention.
	b.	indirect intervention.
	c.	nonsterilized intervention.
	d.	sterilized intervention.
	e.	A and D

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

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

	a.	exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
	b.	exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
	c.	exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
	d.	exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

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

	a.	lowering interest rates.
	b.	increasing the inflation rate.
	c.	exchanging dollars for foreign currency.
	d.	imposing barriers on international trade.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

17. A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

	a.	upward; upward
	b.	downward; upward
	c.	upward; downward
	d.	downward; downward

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

18. The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar’s value is expected to:

	a.	remain stable.
	b.	strengthen.
	c.	weaken.
	d.	none of the above will have an impact on inflation.

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

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

	a.	upward; downward; upward
	b.	upward; downward; downward
	c.	upward; upward; downward
	d.	downward; upward; upward
	e.	downward; downward; upward

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

20. The euro is the currency:

	a.	adopted in all western European countries as of 1999.
	b.	adopted in all eastern European countries as of 1999.
	c.	adopted in all European countries as of 1999.
	d.	none of the above

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

21. The euro has not been adopted by:

	a.	Slovenia.
	b.	the U.K.
	c.	Germany.
	d.	France.

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

22. The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.

	a.	Latin American
	b.	European
	c.	Asian
	d.	North American

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

23. Countries that have adopted the euro must agree on a single ____ policy.

	a.	monetary
	b.	fiscal
	c.	worker compensation
	d.	foreign relations

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

24. Countries that have adopted the euro tend to have very similar ____.

	a.	interest rates
	b.	inflation rates
	c.	income tax rates
	d.	budget deficits

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

25. The risk-free interest rates among countries that have adopted the euro should:

	a.	not necessarily be similar to risk-free rates in other countries.
	b.	equal the U.S. risk-free rate.
	c.	equal the risk-free rates in other European countries.
	d.	equal the risk-free rates in Asian countries.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

26. Which of the following is true regarding the euro?

	a.	Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
	b.	It allows for more consistent economic conditions across countries.
	c.	It prevents each country from conducting its own monetary policy.
	d.	All of the above are true.

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

27. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

	a.	Weaken the dollar
	b.	Strengthen the dollar
	c.	Buy dollars with foreign currency in the foreign exchange market
	d.	Implement a tight monetary policy

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

28. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?

	a.	Sell dollars for foreign currency
	b.	Buy dollars with foreign currency
	c.	Lower interest rates
	d.	None of the above

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

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

	a.	buy; sell
	b.	sell; buy
	c.	buy; buy
	d.	sell; sell

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

30. As foreign exchange activity has grown, a given degree of central bank intervention has become:

	a.	more effective.
	b.	more frequent.
	c.	less effective.
	d.	none of the above

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

31. When using indirect intervention, a central bank is likely to focus on:

	a.	inflation.
	b.	interest rates.
	c.	income levels.
	d.	expectations of future exchange rates.

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

32. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

	a.	Thailand.
	b.	Indonesia.
	c.	Russia.
	d.	China.
	e.	Malaysia.

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.App.
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

33. Which of the following is not true regarding Thailand?

	a.	Thailand was one of the slowest growing countries before the Asian crisis.
	b.	High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand’s local interest rate.
	c.	Thailand’s baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors.
	d.	Thai banks provided many loans that were very risky in their attempt to make use of all of their funds.
	e.	All of the above are true.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.App.
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

34. China’s yuan is presently:

	a.	allowed to fluctuate freely without any central bank intervention.
	b.	allowed to fluctuate but with central bank intervention.
	c.	pegged to the dollar.
	d.	pegged to the euro.

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

35. During the period 1944-1971, the U.S. used a ____ system.

	a.	euro exchange rate
	b.	fixed
	c.	dirty float
	d.	flexible

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

36. Which of the following are examples of currency controls?

	a.	import restrictions.
	b.	prohibition of remittance of funds.
	c.	ceilings on granting credit to foreign firms.
	d.	all of the above

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

37. From a financial management perspective, which of the following is true regarding the introduction of the Euro?

	a.	U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros.
	b.	The euro is pegged to all other European currencies.
	c.	Transactions costs decline for MNCs that conduct transactions within Europe.
	d.	The euro replaced the British pound.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

38. Which of the following countries have not adopted the euro?

	a.	Germany
	b.	Italy
	c.	Switzerland
	d.	France

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

39. Which of the following are true about the Southeast Asian currency crisis?

	a.	It was preceded by several years of large capital inflows to Asia.
	b.	It was preceded by a five-year recession in Asia.
	c.	Asian interest rates declined during the crisis.
	d.	Asian exchange rates were pegged to the Japanese yen to resolve the crisis.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.App.
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

40. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

41. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

42. Under the system known as the “dirty” float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

43. Under a pegged exchange rate system, the home currency’s value is pegged to a foreign currency.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

44. A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

45. The European countries conforming to the euro are completely insulated from movements in the euro’s value with respect to other currencies.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

46. The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

47. The Asian crisis is generally believed to have started in Japan.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.App.
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

48. A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on financial flows than the governments of other Asian countries.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.App.
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

49. Currency devaluation can boost a country’s exports, but currency revaluation can increase foreign competition.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

50. Market forces are the determinant of exchange rates in a freely floating exchange rate system.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

51. If a government wishes to stimulate its economy in the form of increased foreign demand for its country’s products, it could attempt to weaken its currency.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

52. In a sterilized exchange rate arrangement, a country’s home currency value is pegged to a foreign currency or to some unit of account.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.03
KEYWORDS:	Bloom’s: Knowledge

53. The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

54. The Fed’s indirect method of intervention is to trade dollars for or against other currencies.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

55. China is commonly criticized for keeping the yuan’s value at superficially high levels.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

56. The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

57. Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

58. The euro is pegged to other currencies of European countries that have not adopted the euro.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

59. The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

60. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

61. A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

62. An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

63. All European countries now use the euro as their currency.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

64. A country with a currency board does not have control over its local interest rates.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

65. Dollarization refers to the replacement of local currency with U.S. dollars.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

66. A country with fixed exchange rates often faces constraints on growth.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

67. The Bretton Woods Agreement called for the establishment of a single European currency.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

68. The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

69. A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only change if the country’s government breaks the peg and sets a new exchange rate.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

70. If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency before the peg is broken.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

71. Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

72. Which one of the following is a disadvantage of a fixed exchange rate system:

	a.	Importers are insulated from the risk that the currency will appreciate over time.
	b.	Management of an MNC is less difficult.
	c.	The government might change the value of the currency.
	d.	Exporters are insulated from the risk that the currency will depreciate over time.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

73. The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.

	a.	2.25
	b.	6
	c.	10
	d.	8

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

74. Which of the following did not occur as a result of Bretton Woods Agreement?

	a.	Each currency was valued in terms of gold.
	b.	Values of all currencies were fixed with respect to each other.
	c.	Currencies were allowed to fluctuate no more than 1% above or below the initially set rates.
	d.	The United States experienced no balance-of-trade deficits.

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

75. Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

	a.	upward; reduce; unchanged
	b.	upward; increase; higher
	c.	downward; reduce; unchanged
	d.	downward; increase; higher

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

76. Which one is not a disadvantage of a freely floating exchange rate system?

	a.	It can adversely affect a country that has high unemployment.
	b.	It can adversely affect a country that has high inflation.
	c.	The government may intervene to change the value of a given currency.
	d.	The exchange rate risk is high and may be costly to manage.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

77. A “dirty” float represents a system of:

	a.	freely floating exchange rates.
	b.	fixed exchange rates.
	c.	floating exchange rates, but the central bank can manipulate the currency.
	d.	fixed exchange rates, but the central bank can manipulate the currency.

ANSWER:	c
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

78. If a U.S. firm plans to frequently purchases goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.App.
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

79. If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

80. The European Central Bank is located in:

	a.	London.
	b.	Denmark.
	c.	Luxembourg.
	d.	Frankfurt.

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

81. Which of the following is not true regarding the eurozone?

	a.	Members cannot set unique monetary policy individually.
	b.	Members cannot apply their own fiscal policies.
	c.	Members have to agree on the ideal monetary policy.
	d.	Its creation allowed for greater political union among its members.

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

83. Which of the following is not a reason for devaluation of a currency?

	a.	high inflation.
	b.	to reduce balance-of-trade deficit.
	c.	to decrease the amount of imports.
	d.	high unemployment.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

84. Which of the following is the most likely reason for revaluation of a currency?

	a.	To reduce inflation.
	b.	To stimulate the local economy.
	c.	To increase the amount of exports.
	d.	To increase balance-of-trade surplus.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

85. To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.

	a.	buy; sell
	b.	sell; sell
	c.	sell; buy
	d.	buy; sell

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

86. The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

87. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:

	a.	exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.
	b.	exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.
	c.	exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.
	d.	exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

ANSWER:	d
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros.

	a.	inward shift in demand for; outward shift in supply of
	b.	inward shift in demand for; inward shift in supply of
	c.	outward shift in supply of; outward shift in demand for
	d.	outward shift in supply of; inward shift in demand for

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

89. If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the value of dollar will ____ and the economy may ____.

	a.	increases; appreciate; weaken
	b.	decreases; appreciate; weaken
	c.	increases; depreciate; strengthen
	d.	decreases; appreciate; strengthen

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

90. A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

91. A common way to reduce inflation is to weaken the value of the domestic currency.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention.

	a.	purchase yen put options
	b.	sell yen futures contracts
	c.	purchase yen call options
	d.	buy U.S. Treasury bonds

ANSWER:	c
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

93. If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.

	a.	purchase euro put options
	b.	purchase euro futures contracts
	c.	purchase yen call options
	d.	sell U.S. Treasury bonds

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

94. If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

95. A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices.

	a.	downward; upward; upward
	b.	downward; downward; upward
	c.	upward; upward; downward
	d.	upward; downward; upward

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

96. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

	a.	more; more
	b.	more; less
	c.	less; less
	d.	less; more

ANSWER:	d
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

97. If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

98. Under the ____________ from 1979-1992 (before the euro existed), the currencies of many European countries were currencies of most of these member countries were allowed to fluctuate by no more than 2.25 percent (6 percent for some currencies) from the initially established values.

	a.	European Monetary System (EMS).
	b.	snake agreement.
	c.	Maastricht Treaty.
	d.	Bretton Woods agreement.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

99. Direct intervention is usually more effective than indirect intervention.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

101. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

102. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

103. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

104. Under the system known as the “dirty” float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

105. In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its currency.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

106. Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

107. Using indirect intervention, the Fed attempts to affect the dollar’s value indirectly by influencing the factors that determine it, such as interest rates.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

108. While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

109. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from a strong home currency.

	a.	True
	b.	False

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.04
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

110. Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.

	a.	True
	b.	False

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

111. Which of the following is not true regarding the Mexican peso crisis?

	a.	Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been.
	b.	Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico.
	c.	In December of 1994, the central bank of Mexico allowed the peso to float freely.
	d.	The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico’s debt securities.
	e.	All of the above are true.

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

112. Which of the following is true regarding the euro?

	a.	Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
	b.	It allows for more consistent economic conditions across countries.
	c.	It prevents each country from conducting its own monetary policy.
	d.	All of the above are true.

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

113. Among the reasons for government intervention are:

	a.	to smooth exchange rate movement.
	b.	to establish implicit exchange rate boundaries.
	c.	to respond to temporary disturbances.
	d.	all of the above

ANSWER:	d
POINTS:	1
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

114. Which of the following is not true regarding government intervention?

	a.	Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies.
	b.	Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting the money supply.
	c.	Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury markets.
	d.	Under indirect intervention, the Fed would attempt to affect the dollar’s value by indirectly influencing the factors that determine it, such as interest rates.
	e.	All of the above are true.

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would

	a.	buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
	b.	buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
	c.	sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
	d.	sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
	e.	none of the above

ANSWER:	b
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

116. Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would

	a.	buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
	b.	buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
	c.	sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
	d.	sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
	e.	none of the above

ANSWER:	a
POINTS:	1
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.06.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

Chapter 7

1. Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies

	a.	forward realignment arbitrage
	b.	triangular arbitrage
	c.	covered interest arbitrage
	d.	locational arbitrage

ANSWER:	c
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

2. Due to ____, market forces should realign the spot rate of a currency among banks.

	a.	forward realignment arbitrage
	b.	triangular arbitrage
	c.	covered interest arbitrage
	d.	locational arbitrage

ANSWER:	d
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

3. Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.

	a.	forward realignment arbitrage
	b.	triangular arbitrage
	c.	covered interest arbitrage
	d.	locational arbitrage

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

4. If interest rate parity exists, then ____ is not feasible.

	a.	forward realignment arbitrage
	b.	triangular arbitrage
	c.	covered interest arbitrage
	d.	locational arbitrage

ANSWER:	c
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

5. In which case will locational arbitrage most likely be feasible?

	a.	One bank’s ask price for a currency is greater than another bank’s bid price for the currency.
	b.	One bank’s bid price for a currency is greater than another bank’s ask price for the currency.
	c.	One bank’s ask price for a currency is less than another bank’s ask price for the currency.
	d.	One bank’s bid price for a currency is less than another bank’s bid price for the currency.

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

6. When using ____, funds are not tied up for any length of time

	a.	covered interest arbitrage
	b.	locational arbitrage
	c.	triangular arbitrage
	d.	B and C

ANSWER:	d
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

7. When using ____, funds are typically tied up for a significant period of time

	a.	covered interest arbitrage
	b.	locational arbitrage
	c.	triangular arbitrage
	d.	B and C

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

8. Assume that the interest rate in the home country of Currency X is much higher than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

	a.	should exhibit a discount.
	b.	should exhibit a premium.
	c.	should be zero (i.e., it should equal its spot rate).
	d.	B or C

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

9. If the interest rate is higher in the United States than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound’s spot rate, then:

	a.	U.S. investors could possibly benefit from covered interest arbitrage.
	b.	British investors could possibly benefit from covered interest arbitrage.
	c.	neither U.S. nor British investors could benefit from covered interest arbitrage.
	d.	A and B

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

10. If the interest rate is lower in the United States than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

	a.	U.S. investors could possibly benefit from covered interest arbitrage
	b.	British investors could possibly benefit from covered interest arbitrage.
	c.	neither U.S. nor British investors could benefit from covered interest arbitrage.
	d.	A and B

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

11. Assume that U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from this covered interest arbitrage activity?

	a.	downward pressure on the euro’s spot rate
	b.	downward pressure on the euro’s forward rate
	c.	downward pressure on the U.S. interest rate
	d.	upward pressure on the euro’s interest rate

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from this covered interest arbitrage activity?

	a.	upward pressure on the Swiss franc’s spot rate
	b.	upward pressure on the U.S. interest rate
	c.	downward pressure on the Swiss interest rate
	d.	upward pressure on the Swiss franc’s forward rate

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

13. Assume that a U.S. firm can invest funds for one year in the United States at 12 percent or invest funds in Mexico at 14 percent. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

	a.	Spot rate of peso increases; forward rate of peso decreases.
	b.	Spot rate of peso decreases; forward rate of peso increases.
	c.	Spot rate of peso decreases; forward rate of peso decreases.
	d.	Spot rate of peso increases; forward rate of peso increases.

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

14. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

	a.	$15,385
	b.	$15,625
	c.	$22,136
	d.	$31,250

ANSWER:	a
RATIONALE:	$1,000,000/$.325 = NZ$3,076,923 ´ $.33 = $1,015,385. Thus, the profit is $15,385.
DIFFICULTY:	Challenging
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

15. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:

	a.	larger will be the forward discount of the foreign currency.
	b.	larger will be the forward premium of the foreign currency.
	c.	smaller will be the forward premium of the foreign currency.
	d.	smaller will be the forward discount of the foreign currency.

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

16. Assume the following information:

You have $1,000,000 to invest:

Current spot rate of pound	=	$1.30
90-day forward rate of pound	=	$1.28
3-month deposit rate in United States	=	3%
3-month deposit rate in Great Britain	=	4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

	a.	$1,024,000.
	b.	$1,030,000.
	c.	$1,040,000.
	d.	$1,034,000.
	e.	none of the above

ANSWER:	a
RATIONALE:	$1,000,000/$1.30 = 769,231 pounds ´ (1.04) = 800,000 pounds ´ 1.28 = $1,024,000
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

17. Assume that the U.S. interest rate is 10 percent, while the British interest rate is 15 percent. If interest rate parity exists, then:

	a.	British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States.
	b.	U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States.
	c.	U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States.
	d.	U.S. investors will earn 10 percent whether they use covered interest arbitrage or invest in the United States.

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

18. Assume the following information:

Current spot rate of New Zealand dollar	=	$.41
Forecasted spot rate of New Zealand dollar 1 year from now	=	$.43
One-year forward rate of the New Zealand dollar	=	$.42
Annual interest rate on New Zealand dollars	=	8%
Annual interest rate on U.S. dollars	=	9%

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____ percent.

	a.	about 11.97
	b.	about 9.63
	c.	about 11.12
	d.	about 11.64
	e.	about 10.63

ANSWER:

RATIONALE:

$500,000/$.41	= NZ$1,219,512 ´ (1.08)
	= NZ$1,317,073 ´ .42 = $553,171
Yield = ($553,171 – $500,000)/$500,000 = 10.63%

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.02

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

19. Assume the following bid and ask rates of the pound for two banks as shown below:

	Bid	Ask
Bank A	$1.41	$1.42
Bank B	$1.39	$1.40

As locational arbitrage occurs:

	a.	the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.
	b.	the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.
	c.	the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.
	d.	the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

20. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

	a.	$11,764.
	b.	-$11,964.
	c.	$36,585.
	d.	$24,390.
	e.	$18,219.

ANSWER:	d
RATIONALE:	$1,000,000/$.41 = S2,439,024 ´ $.42 = $1,024,390
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

21. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:

	a.	larger will be the forward discount of the foreign currency.
	b.	larger will be the forward premium of the foreign currency.
	c.	smaller will be the forward premium of the foreign currency.
	d.	smaller will be the forward discount of the foreign currency.

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

22. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.

	a.	appreciate; depreciate
	b.	depreciate; appreciate
	c.	depreciate; depreciate
	d.	appreciate; appreciate
	e.	remain stable; appreciate

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

23. Assume the following information:

Spot rate today of Swiss franc	=	$.60
1-year forward rate as of today for Swiss franc	=	$.63
Expected spot rate 1 year from now	=	$.64
Rate on 1-year deposits denominated in Swiss francs	=	7%
Rate on 1-year deposits denominated in U.S. dollars	=	9%

From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____ percent.

	a.	5.00
	b.	12.35
	c.	15.50
	d.	14.13
	e.	11.22

ANSWER:

RATIONALE:

$1,000,000/$.60	= SF1,666,667 ´ (1.07)
	= SF1,783,333 ´ $.63 = $1,123,500
Yield = ($1,123,500 – $1,000,000)/$1,000,000 = 12.35%

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.01

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

24. Assume the following information for a bank quoting on spot exchange rates:

Exchange rate of Singapore dollar in U.S $	=	$.32
Exchange rate of pound in U.S.$	=	$1.50
Exchange rate of pound in Singapore dollars	=	S$4.50

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

	a.	The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
	b.	The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.
	c.	The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.
	d.	The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate

ANSWER:	d
DIFFICULTY:	Challenging
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

25. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?

	a.	2.0.
	b.	2.40.
	c.	.80.
	d.	.50.
	e.	none of the above

ANSWER:	d
RATIONALE:	$.80/$1.60 = 0.50
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

26. Assume that the euro’s interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

	a.	Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage.
	b.	Americans who invest in the United States earn the same rate of return as Germans who attempt covered interest arbitrage.
	c.	Americans who invest in the United States earn the same rate of return as Germans who invest in Germany
	d.	A and B
	e.	None of the above

ANSWER:	e
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

27. Assume the U.S. interest rate is 2 percentage points higher than the Swiss rate, and the forward rate of the Swiss franc has a 4 percent premium. Given this information:

	a.	Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland.
	b.	U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the United States.
	c.	A and B
	d.	none of the above

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

28. Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound’s spot rate and ____ pressure on the pound’s forward rate.

	a.	downward; downward
	b.	downward; upward
	c.	upward; downward
	d.	upward; upward

ANSWER:	c
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

29. Assume that interest rate parity holds, and the euro’s interest rate is 9 percent while the U.S. interest rate is 12 percent. Then the euro’s interest rate increases to 11 percent while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro’s forward ____ will ____ in order to maintain interest rate parity.

	a.	discount; increase
	b.	discount; decrease
	c.	premium; increase
	d.	premium; decrease

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

30. Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

	a.	$7,067
	b.	$8,556
	c.	$10,114
	d.	$12,238

ANSWER:	a
RATIONALE:	$1,000,000/$.566 = SF1,766,784 ´ $.57 = $1,007,067. Thus, the profit is $7,067.
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

31. Assume the following information:

You have $1,000,000 to invest:

Current spot rate of pound	=	$1.60
90-day forward rate of pound	=	$1.57
3-month deposit rate in U.S.	=	3%
3-month deposit rate in U.K.	=	4%

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

	a.	$1,020,500
	b.	$1,045,600
	c.	$1,073,330
	d.	$1,094,230
	e.	$1,116,250

ANSWER:	a
RATIONALE:	$1,000,000/$1.60 = 625,000 pounds ´ (1.04) = 650,000 pounds ´ 1.57 = $1,020,500
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

32. Assume the following information:

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered by U.S. banks	=	12%
1-year deposit rate offered on Swiss francs	=	10%
1-year forward rate of Swiss francs	=	$.62
Spot rate of Swiss franc	=	$.60

Given this information:

	a.	interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
	b.	interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
	c.	interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
	d.	interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

ANSWER:

RATIONALE:

$1,000,000/$.60 = SF1,666,667 ´ (1.1) = SF1,833,333 ´ $.62 = $1,136,667

Yield = ($1,136,667 – $1,000,000)/$1,000,000 = 13.7%

This yield exceeds what is possible domestically.

DIFFICULTY:

Challenging

LEARNING OBJECTIVES:

INFM.MADU.15.07.02

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

33. Assume the following information:

Current spot rate of Australian dollar	=	$.64
Forecasted spot rate of Australian dollar 1 year from now	=	$.59
1-year forward rate of Australian dollar	=	$.62
Annual interest rate for Australian dollar deposit	=	9%
Annual interest rate in the United States	=	6%

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____percent.

	a.	about 6.00
	b.	about 9.00
	c.	about 7.33
	d.	about 8.14
	e.	about 5.59

ANSWER:

RATIONALE:

$500,000/$.64	= A$781,250 ´ (1.09)
	= A$851,563 ´ $.62 = $527,969
Yield = ($527,969 – $500,000)/$500,000 = 5.59%

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.01

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

34. Assume the following bid and ask rates of the pound for two banks as shown below:

	Bid	Ask
Bank C	$1.61	$1.63
Bank D	$1.58	$1.60

As locational arbitrage occurs:

	a.	the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase.
	b.	the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease.
	c.	the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease.
	d.	the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

35. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

	a.	$10,003
	b.	$12,063
	c.	$14,441
	d.	$16,393
	e.	$18,219

ANSWER:

RATIONALE:

$1,000,000/$.61 = A$1,639,344 ´ $.62 = $1,016,393. Thus, the profit is $16,393.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.01

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

36. Assume the following information for a bank quoting on spot exchange rates:

Exchange rate of Singapore dollar in U.S $	=	$.60
Exchange rate of pound in U.S.$	=	$1.50
Exchange rate of pound in Singapore dollars	=	S$2.6

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

	a.	The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate
	b.	The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate
	c.	The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate
	d.	The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate

ANSWER:	b
DIFFICULTY:	Challenging
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

37. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?

	a.	$2,041,667
	b.	$9,804
	c.	$500
	d.	$1,639

ANSWER:	d
RATIONALE:	$500,000/$.305 = MYR1,639,344 ´ $.306 = $501,639. Thus, the profit is $1,639.
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

38. Which of the following is an example of triangular arbitrage initiation?

	a.	buying a currency at one bank’s ask and selling at another bank’s bid, which is higher than the former bank’s ask
	b.	buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20
	c.	buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20
	d.	converting funds to a foreign currency and investing the funds overseas

ANSWER:	c
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

39. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?

	a.	A$39.93
	b.	A$25,043.48
	c.	A$553.00
	d.	none of the above

ANSWER:	a
RATIONALE:	$.023/$.576 ´ THB1,000 = A$39.93.
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

40. National Bank quotes the following for the British pound and the New Zealand dollar:

	Quoted Bid Price	Quoted Ask Price
Value of a British pound (£) in $	$1.61	$1.62
Value of a New Zealand dollar (NZ$) in $	$.55	$.56
Value of a British pound in
New Zealand dollars	NZ$2.95	NZ$2.96

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

	a.	$77.64
	b.	$197.53
	c.	$15.43
	d.	$111.80

ANSWER:

RATIONALE:

$10,000/$1.62	= £6,172.84 ´ 2.95
	= NZ$18,209.88 ´ $.55
	= $10,015.43.
Thus, the profit is $15.43.

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.01

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

41. Assume the following information:

You have $900,000 to invest:

Current spot rate of Australian dollar (A$)	=	$.62
180-day forward rate of the Australian dollar	=	$.64
180-day interest rate in the United States	=	3.5%
180-day interest rate in Australia	=	3.0%

If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?

	a.	$56,903
	b.	$61,548
	c.	$27,000
	d.	$31,500

ANSWER:	a
RATIONALE:	$900,000/$.62 = A$1,451,612 ´ (1.03) = A$1,495,161 ´ $.64 = $956,903. Thus, the profit is $56,903.
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

Assume the following information:

You have $300,000 to invest:

The spot bid quote for the euro (€) is $1.08

The spot ask quote for the euro is $1.10

The 180-day forward rate (bid) of the euro is $1.08

The 180-day forward rate (ask) of the euro is $1.10

The 180-day interest rate in the United States is 6%

The 180-day interest rate in Europe is 8%

42. Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what amount will you have after 180 days?

	a.	$318,109.10
	b.	$330,000.00
	c.	$312,218.20
	d.	$323,888.90
	e.	none of the above

ANSWER:

RATIONALE:

$300,000/$1.10	= €277,777.80 ´ (1.08)
	= €294,444.40 ´ $1.08
	= $318,109.10

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.01

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

43. Refer to Exhibit 7-1 above. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?

	a.	7.96 percent; feasible
	b.	6.04 percent; feasible
	c.	6.04 percent; not feasible
	d.	4.07 percent; not feasible
	e.	10.00 percent; feasible

ANSWER:	b
RATIONALE:	$318,109.10/$300,000 – 1 = 6.04%. Since this rate is slightly higher than the U.S. interest rate of 6%, covered interest arbitrage is feasible.
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

44. According to interest rate parity (IRP):

	a.	the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.
	b.	the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.
	c.	the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.
	d.	the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

ANSWER:	d
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

45. Assume that interest rate parity holds. The Mexican interest rate is 50 percent, and the U.S. interest rate is 8 percent. Subsequently, the U.S. interest rate decreases to 7 percent. According to interest rate parity, the peso’s forward ____ will ____.

	a.	premium; increase
	b.	discount; decrease
	c.	discount; increase
	d.	premium; decrease

ANSWER:	c
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

46. If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

47. For locational arbitrage to be possible, one bank’s ask rate must be higher than another bank’s bid rate for a currency

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

48. Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank’s ask rate and would decrease the other bank’s bid rate

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

49. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

50. The interest rate on euros is 8 percent. The interest rate in the United States is 5 percent. The euro’s forward rate should exhibit a premium of about 3 percent

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

51. Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

52. Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

53. Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

54. To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

55. If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

56. If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

57. Forward rates are driven by the government rather than market forces

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

58. Arbitrage involves capitalizing on a discrepancy in quoted prices in an attempt to make a profit, but it entails substantial risk.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

59. The yield curve of every country has its own unique shape

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.03
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

60. Assume the following information:

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered by U.S. banks	=	10%
1-year deposit rate offered on British pounds	=	13.5%
1-year forward rate of Swiss francs	=	$1.26
Spot rate of Swiss franc	=	$1.30

Given this information:

	a.	interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
	b.	interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
	c.	interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
	d.	interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

ANSWER:

RATIONALE:

$1,000,000/$1.30 = 793,651 pounds ´ (1.135) = 900,794 ´ $1.26 = $1,100,076.

Yield: ($1,100,076 – $1,000,000)/($1,000,000) = 10%.

DIFFICULTY:

Challenging

LEARNING OBJECTIVES:

INFM.MADU.15.07.02

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Analysis

61. If quoted exchange rates are the same across different locations, then ____ is not feasible.

	a.	triangular arbitrage
	b.	covered interest arbitrage
	c.	locational arbitrage
	d.	A and C

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

62. Points above the IRP line represent situations where:

	a.	covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.
	b.	covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.
	c.	covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.
	d.	covered interest arbitrage is feasible for neither domestic nor foreign investors.

ANSWER:	c
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

63. Points below the IRP line represent situations where:

	a.	covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.
	b.	covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.
	c.	covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.
	d.	covered interest arbitrage is feasible for neither domestic nor foreign investors.

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

64. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

	a.	transaction costs
	b.	political risk
	c.	differential tax laws
	d.	all of the above

ANSWER:	d
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

65. Assume that interest rate parity holds. The U.S. interest rate is 13 percent and the British interest rate is 10 percent. The forward rate on British pounds exhibits a ____ of ____ percent.

	a.	discount; 2.73
	b.	premium; 2.73
	c.	discount; 3.65
	d.	premium; 3.65

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

66. Assume the following information:

Exchange rate of Japanese yen in U.S.$	=	$.011
Exchange rate of euro in U.S.$	=	$1.40
Exchange rate of euro in Japanese yen	=	140 yen

What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

	a.	$100,000
	b.	-$90,909
	c.	10 percent
	d.	-9.09 percent

ANSWER:

RATIONALE:

Exchange dollars for euros = $1,000,000/$1.4 = 714.286; exchange euros for yen = 714,286 ´ 140 = 100,000,000 yen. Exchange yen for dollars = 100,000,000 yen ´ $.011 = $1,100,000. Yield = ($1,100,000 – $1,000,000)/$1,000,000 = 10%

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.01

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

67. Assume the following information:

	Quoted Bid Price	Quoted Ask Price
Value of an Australian dollar (A$) in $	$0.67	$0.69
Value of Mexican peso in $	$.074	$.077
Value of an Australian dollar in
Mexican pesos	8.2	8.5

Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy?

	a.	$6,133
	b.	$2,368
	c.	$6,518
	d.	$13,711

ANSWER:

RATIONALE:

$100,000/$.077 = 1,298,701 pesos/8.5 = A$152,788 ´ $0.67 = $102,368

Profit = $102,368 – $100,000

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

INFM.MADU.15.07.02

NATIONAL STANDARDS:

United States – BUSPROG.INFM.MADU.15.03

STATE STANDARDS:

United States – OH – DISC.INFM.MADU.15.02

KEYWORDS:

Bloom’s: Application

68. The interest rate on yen is 7 percent. The interest rate in the United States is 9 percent. The yen’s forward rate should exhibit a premium of about 2 percent.

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

69. The interest rate on pounds in the United Kingdom is 8 percent. The interest rate in the United States is 5 percent. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

70. Assume that the real interest rate in the United States and in the United Kingdom is 3 percent. The expected annual inflation in the United States is 3 percent, while in the United Kingdom it is 4 percent. The forward rate on the pound should exhibit a premium of about 1 percent

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

71. Triangular arbitrage involves 3 transactions that must be executed at a single bank.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

72. Locational arbitrage is focused on capitalizing on the difference in nominal interest rates in two different locations

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

73. Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

74. The yield curve for the United States normally has an upward slope, meaning that the annualized interest rate is higher for longer terms to maturity

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

75. Locational arbitrage explains why spot exchange rates among banks at different locations normally will not differ by a significant amount

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

76. From the U.S. perspective, an example of a cross exchange rate is the exchange rate between a non-U.S. country and the U.S.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

77. The word “covered” in “covered interest arbitrage” refers to the investors hedging their position to protect against the possibility of default risk.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

78. The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

79. Interest rate parity suggests that an exchange rate should change over time based on the difference in interest rates between foreign versus domestic risk-free interest-bearing securities as of today.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

80. Interest rate parity (IRP) states that the foreign currency’s forward rate premium or discount is roughly equal to the interest rate differential between the United States and the foreign country.

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

81. The interest rate in South Africa is 8 percent. The interest rate in the United States is 5 percent. The South African forward rate should exhibit a premium of about 3 percent

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

82. The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

83. For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor’s perspective, but is possible from a foreign investor’s perspective

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

84. If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.

	a.	True
	b.	False

ANSWER:	b
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

85. If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

	a.	True
	b.	False

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

86. Which of the following is not mentioned in the text as a form of international arbitrage?

	a.	Locational arbitrage
	b.	Triangular arbitrage
	c.	Transactional arbitrage
	d.	Covered interest arbitrage
	e.	All of the above are mentioned in the text as forms of international arbitrage.

ANSWER:	c
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

87. American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:

	a.	buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.
	b.	buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.
	c.	buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.
	d.	buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.
	e.	Locational arbitrage is not possible in this case.

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Knowledge

88. Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs’ actions, the following adjustments must take place.

	a.	One bank’s ask price will rise, and the other bank’s bid price will fall.
	b.	One bank’s ask price will fall, and the other bank’s bid price will rise.
	c.	One bank’s bid/ask spread will widen, and the other bank’s bid/ask spread will fall.
	d.	A and C

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

89. Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?

	a.	$6,053.27
	b.	$5,030.45
	c.	$6,090.13
	d.	Triangular arbitrage is not possible in this case.

ANSWER:	b
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Application

90. Which of the following is not true regarding covered interest arbitrage?

	a.	Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.
	b.	Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk.
	c.	Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.
	d.	If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically.
	e.	All of the above are true regarding covered interest arbitrage.

ANSWER:	c
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

91. Which of the following is not true regarding covered interest arbitrage?

	a.	Covered interest arbitrage is a reason for observing interest rate parity (IRP).
	b.	If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country.
	c.	When interest rate parity holds, covered interest arbitrage is not possible.
	d.	When interest rate disparity exists, covered interest arbitrage may not be profitable.
	e.	All of the above are true.

ANSWER:	a
DIFFICULTY:	Easy
LEARNING OBJECTIVES:	INFM.MADU.15.07.01
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Analysis

92. Which of the following is not true regarding interest rate parity (IRP)?

	a.	When interest rate parity holds, covered interest arbitrage is not possible.
	b.	When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country’s currency should exhibit a discount.
	c.	When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country’s currency should exhibit a premium.
	d.	When covered interest arbitrage is not feasible, interest rate parity must hold.
	e.	All of the above are true.

ANSWER:	d
DIFFICULTY:	Moderate
LEARNING OBJECTIVES:	INFM.MADU.15.07.02
NATIONAL STANDARDS:	United States – BUSPROG.INFM.MADU.15.03
STATE STANDARDS:	United States – OH – DISC.INFM.MADU.15.02
KEYWORDS:	Bloom’s: Comprehension

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Test Bank International Financial Management, 13th Edition Jeff Madura A+

Test Bank International Financial Management, 13th Edition Jeff Madura A+

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