Finance Management Quiz

Which of the following is a legitimate reason for international investment?

• Dividends from a foreign subsidiary are tax exempt in the United States.

• Most governments do not tax foreign corporations.

• There are possible benefits from international diversification.

• International investments have less political risk than domestic investments.

By definition, currency appreciation occurs when

• The value of all currencies falls relative to gold.

• The value of all currencies rises relative to gold.

• The value of one currency rises relative to another currency.

• The value of one currency falls relative to another currency.

Theory which considers change in exchange rate with fluctuations in inflation rates is classified as

• Liquidated power parity

• Purchasing power parity

• Selling power parity

• Volatile power parity

If purchasing power parity were to hold even in the short run, then:

• Real exchange rates should tend to decrease over time.

• Quoted nominal exchange rates should be stable over time.

• Real exchange rates should tend to increase over time.

• Real exchange rates should be stable over time.

Given a home country and a foreign country, purchasing power parity suggests that:

• The home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.

• The home currency will depreciate if the current home interest rate exceeds the current foreign interest rate.

• The home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.

• The home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.

Interest Rate Parity (IRP) implies that:

• Interest rates should change by an equal amount but in the opposite direction to the difference in inflation rates between two countries.

• The difference in interest rates in different currencies for securities of similar risk and maturity should be consistent with the forward rate discount or premium for the foreign currency.

• The interest rates between two countries start in equilibrium, any change in the differential rate of inflation between the two countries tends to be offset over the long term by an equal but opposite change in the spot exchange rate.

• In the long run, real interest rate between two countries will be equal.

• Nominal interest rates in each country are equal to the required real rate plus compensation for expected inflation

In equilibrium position, spread between foreign and domestic rate of interest must be equal to spread of

• Domestic rates

• Forward and spot exchange rates

• Forward rate

• Spot rates

Rule which states that similar set of goods and services produced in various countries should have equal price is classified as

• Law of similar mortgage rate

• Law of one type manufacturing

• Law of similar labor rules

• Law of one price

Example of derivative securities includes

• Swap contract

• Option contract

• Futures contract

• All of above

Authority which intervenes directly or indirectly in foreign exchange markets by altering interest rates is considered as

• Central government

• Centralized stocks

• Central corporations

• Centralized instruments