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WorksheetsInternational Finance
Total questions: 15
Worksheet time: 15mins
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.
triangular arbitrage
forward realignment arbitrage
covered interest arbitrage
locational arbitrage
If interest rate parity exists, then ____ is not feasible
forward realignment arbitrage
triangular arbitrage
covered interest arbitrage
locational arbitrage
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:
U.S. investors could possibly benefit from covered interest arbitrage.
British investors could possibly benefit from covered interest arbitrage.
neither U.S. nor British investors could benefit from covered interest arbitrage.
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?
upward pressure on the Swiss franc's spot rate
upward pressure on the U.S. interest rate
downward pressure on the Swiss interest rate
upward pressure on the Swiss franc's forward rate
Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries?
If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.
If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken.
If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen.
If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.
Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
the home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.
the home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.
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 inflation rate exceeds the current foreign inflation rate.
The international Fisher effect (IFE) suggests that the foreign currency will appreciate when:
the current home nominal interest rate exceeds the current foreign nominal interest rate.
the current home real interest rate exceeds the current foreign real interest rate.
the current home inflation rate exceeds the current foreign nominal interest rate.
the current foreign inflation rate exceeds the current home inflation rate.
If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher effect (IFE) to hold:
the value of the euro would often appreciate against the dollar.
the value of the euro would often depreciate against the dollar.
the value of the euro would remain constant most of the time.
the value of the euro would appreciate in some periods and depreciate in other periods, but on average have a zero rate of appreciation.
According to the international Fisher effect, if U.S. investors expect a 5 percent rate of domestic inflation over one year and a 2 percent rate of inflation in European countries that use the euro, and if they require a 3 percent real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:
2 percent.
8 percent.
3 percent.
-2 percent.
Assume U.S. and Swiss investors require a real rate of return of 3 percent. Assume the nominal U.S. interest rate is 6 percent and the nominal Swiss rate is 4 percent. According to the international Fisher effect, the franc will ____ by about ____.
appreciate; 3 percent
depreciate; 3 percent
depreciate; 2 percent
appreciate; 2 percent
Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.
lower U.S. inflation; depreciate
lower U.S. inflation; appreciate
higher U.S. inflation; depreciate
higher U.S. inflation; appreciate
Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of:
interest rate parity.
locational arbitrage.
purchasing power parity.
the exchange rate mechanism.
Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the United States. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).
reduce; increase; appreciation
increase; reduce; appreciation
reduce; increase; depreciation
reduce; increase; appreciation
According to the international Fisher effect (IFE):
the nominal rate of return on a foreign investment should be equal to the nominal rate of return on the domestic investment.
the exchange rate–adjusted rate of return on a foreign investment should be equal to the interest rate on a local money market investment.
the percentage change in the foreign spot exchange rate will be positive if the foreign interest rate is higher than the local interest rate.
the percentage change in the foreign spot exchange rate will be negative if the foreign interest rate is lower than the local interest rate.
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
forward realignment arbitrage
triangular arbitrage
covered interest arbitrage
locational arbitrage
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