TCQT 1

7. What is the correct limitation of IFE theory

• a. It is complicated to determine the exact movements of exchange rate

• b. There is no numbers available about interest rates, inflation rates in the future

• c. The contradiction with the strengthening effect of high interest rate on currency

• d. All of the above are correct

8. Which position to indicate the more favourable purchasing power for home country goods

• a. Points to the left of PPP line

• b. Points to the right of PPP line

• c. Points on the PPP line

• d. Can not be determined

9. Which statement is true

• a. Exchange rate movements will not always move according to the inflation differential between the two countries

• b. MNCs still rely on the inflation differential to derive the best forecast of expected exchange rate movement

• c. Exchange rate movements will not always move according to the interest rate differential between the two countries

• d.All of the above are correct

10. Assume that the NZ inflation rate is higher than the US inflation rate. This will cause IS consumers to _____ their imports from NZ and NZ consumers to ____ their imports from the US. Accordng to PPP, this will result in a(n) ____ of the New Zealand dollar

• a. reduce, increase, appreciation

• b. increase, reduce, depreciation

• c. reduce, increase, depreciation

• d. increase, increase, appreciation

4. Assume that interest rate parity exists. As of this morning, the 1-month interest rate in Canada was lower than the 1-month interest rate in the United States. Assume that as a result of the Fed’s monetary policy this afternoon, the 1-month interest rate in the United States declined this afternoon, but was still higher than the Canadian 1-month interest rate. The 1-month interest rate in Canada remained unchanged.

Based on the information, the forward rate of the Canadian dollar exhibited a ___________ this morning that _________ this afternoon

• a. discount, increased

• b. discount, decreased

• c. premium, increased

• d. premium, decreased

7. Assume that the interest rate in the home country of currency X is _______ interest rate than the foreign interest rate. According to interest rate parity, the forward rate of currency X ______

• a. higher, exhibits the discount

• b. higher, exhibits the premium

• c. lower, remains the same

• d. A and C are correct

9. Suppose one bank gives the following quotes:

S(USD/JPY, t) = 0.1
S(GBP/USD,t )= 0.625
S(GBP/JPY,t) = 0.08
What are the steps involved in arbitrage activity if you start with USD amount of investment?

• a. Sell GBP/Buy JPY – Sell JPY/Buy USD – Sell USD/ Buy GBP

• b. Sell USD/Buy GBP – Sell GBP/Buy JPY – Sell JPY/Buy USD

• c. Sell USD/ Buy JPY – Sell JPY/ Buy GBP – Sell GBP/Buy USD

• d. Buy USD/Sell JPY - Buy JPY/Sell GBP - Sell JPY/Buy USD

13. Capitalising on discrepancies in quoted prices means:

• a. involves no risk

• b. no requirements of funds tied up for period of time

• c. a type of international arbitrage

• d. All of above are correct

43. Which statement is true

• a. For points to the right of the IRP line, home investors should consider using covered interest arbitrage

• b. For points to the right of the IRP line, foreign investors should consider using covered interest arbitrage

• c. Only point on the IRP line, there will be covered interest rate arbitrage taking place

• d. All of the above

44. Which statement is true about covered interest arbitrage 

• a. based on the relationship between forward rate premium and interest rate diffential

• b. forward rate of foreign currency will contain a discount if foreign interest rate is higher than the local interest rate

• c. covered interest arbitrage is not possible when forward premium is equal to interest rate difference of two countries

• d. All of the above