International Monetary System Quiz

Given a spot rate of $1.8655 and a 90-day forward rate of $1.8723, the pound sterling in the forward market is:

• Being quoted at a premium

• Being quoted at a discount

• Undervalued

• Overvalued

If the exchange rate has changed from 1 U.S. dollar being worth 0.75 euro to a rate of 1 U.S. dollar being worth 0.90 euro,

• The U.S. dollar has appreciated by 20%.

• The U.S. dollar has appreciated by 26.67%

• The euro has appreciated by 10%

• The euro has depreciated by 10%

A publicly traded company based in Japan is planning on expanding its operations into Germany. The expansion is estimated to cost Ұ500 million, but the company needs euros to implement the expansion. The company is not well known in Germany and therefore hesitant to issue a euro denominated bond in the German marketplace. If the company were to issue a yen-denominated twenty-year bond in Japan, which one of the following contracts should the company use?

• Currency forward

• Currency swap

• Currency futures

• Currency options

The U.S. dollar has a free-floating exchange rate. When the dollar has fallen considerably in relation to other currencies, the

• Trade account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates

• Capital account in the U.S. balance of payments is neither in a deficit nor in a surplus because of the floating exchange rates

• Fall in the dollar's value cannot be expected to have any effect on the U.S. trade balance

• Cheaper dollar helps U.S. exporters of domestically produced goods

One may characterize the current international monetary system developed by the industrialized countries as a

• clean float. Freely floating exchange rates are determined solely by the forces of demand and supply

• managed or dirty float. Central banks intervene in the foreign exchange market to influence the exchange rates

• stable-rate system

• gold-based system

The Baker Company, a U.S. corporation headquartered in California, has a manufacturing affiliate in Mexico. Baker wants to expand the capability of this plant. The plant is very profitable and generates a substantial positive cash flow. Approximately $1,000,000 (U.S.) is available to be paid in dividends to the U.S. parent from the Mexican affiliate. In addition, another affiliate, located in Brazil, has $750,000 (U.S.) available to be paid in dividends. Which one of the following would be the best way to finance a $500,000 investment in the Mexican facility?

• Have the parent transfer funds for the $500,000 investment

• Have Brazil transfer the $500,000

• Have the parent transfer $250,000, and Brazil transfer $250,000

• Have the Mexican facility reduce its dividends to the U.S. parent by the $500,000

The purchasing-power parity exchange rate

• is a fixed (pegged) exchange rate

• is always equal to the market exchange rate

• results in an undervalued currency of countries that are net importers

• holds constant the relative price levels in two countries when measured in a common currency

A currency exchange trader needed to calculate the exchange rate between the Canadian dollar (CAD) and the Swiss Franc (CHF); however this rate is not given on the currency exchanges. The trader had the exchange rates of the USD / CAD and the USD / CHF, so the trader was able to calculate the CAD/CHF cross rate. If the exchange rate of the USD/CAD = 0.9250 and the exchange rate of the USD/CHF = 1.6250, what would be the CAD/CHF cross rate?

• 1.7367

• 0.5692

• 1.7568

• The correct cross rate is not given

A firm in Australia imports chairs from Bangladesh and resells them in Australia for 45 AUD (Australian dollars) per unit. The firm placed an order for 1,000 chairs with the supplier in Bangladesh at a cost of 60 BDT (Bangladeshi Taka) per unit. As per the terms of the agreement, payment is not required until the goods arrive in 30 days. The current exchange rate is BDT 1.5753 for AUD 1. The firm expects the exchange rate to decline to BDT 1.5500 to AUD 1. In order to manage short-term exchange rate risk, the firm decides to hedge and lock in an exchange rate of BDT 1.5650 for AUD 1. What would be the pre-tax profit from the sale of chairs?

• AUD 6,640

• AUD 6,660

• AUD 6,810

• AUD 9,585

If consumers in Japan decide they would like to increase their purchases of consumer products made in the United States, in foreign currency markets there will be a tendency for:

• The supply of dollars to increase

• The supply of dollars to decrease

• The Japanese yen to appreciate relative to the U.S. dollar

• The demand for dollars to increase