FIN 350 Week 8 Quiz – Strayer

FIN 350 Week 8 Quiz – Strayer

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Quiz 7 Chapter 16 and 17

Chapter 16—Foreign Exchange Derivative Markets

1. At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.
a. higher than
b. lower than
c. the same as
d. none of the above






2. Which of the following is most likely to provide currency forward contracts to their customers?
a. commercial banks
b. international mutual funds
c. brokerage firms
d. insurance companies






3. The ____ allowed for the devaluation of the dollar in 1971.
a. Bretton Woods Agreement
b. Louvre Accord
c. Smithsonian Agreement
d. none of the above






4. The Bretton Woods Era was the era
a. of free-floating exchange rates.
b. of floating rates without boundaries, but subject to government intervention.
c. in which governments maintained exchange rates within 1 percent of a specified rate.
d. in which exchange rates were maintained within 10 percent of a specified rate.






5. A system whereby exchange rates are market determined without boundaries but subject to government intervention is called
a. a dirty float.
b. a free float.
c. the gold standard.
d. the Bretton Woods era.






6. A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a
a. pegged system.
b. free float.
c. dirty float.
d. managed float.






7. A country that pegs its currency is still able to maintain complete control over its local interest rates.
a. True
b. False





8. If the demand for British pounds ____, the pound will ____, other things being equal.
a. increases; appreciate
b. decreases; appreciate
c. increases; depreciate
d. B and C






9. A(n) ____ in the supply of euros for sale will cause the euro to ____.
a. increase; appreciate
b. increase; depreciate
c. decrease; depreciate
d. none of the above






10. Beginning with an equilibrium situation, if European inflation suddenly ____ than U.S. inflation, this forced ____ pressure on the value of the euro.
a. becomes much higher; upward
b. becomes much higher; downward
c. becomes much less; upward
d. becomes much less; downward
e. B and C






11. Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.
a. income
b. interest rate
c. inflation
d. tax






12. In reality, exchange rates do not always change as suggested by purchasing power parity.
a. True
b. False





13. If U.S. interest rates suddenly become much higher than European interest rates (and if it does not cause concern about higher inflation there), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.
a. increase; increase
b. increase; decrease
c. decrease; increase
d. decrease; decrease






14. Assume interest rate parity exists. If the spot rate on the British pound is $2 and the 1-year British interest rate is 7 percent, and the 1-year U.S. interest rate is 11 percent, what is the pound's forward discount or premium?
a. 3.74 percent premium
b. 3.74 percent discount
c. 3.60 percent premium
d. 3.60 percent discount






15. When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of
a. direct intervention.
b. indirect intervention.
c. a freely floating system.
d. a pegged system.






16. Which of the following statements is incorrect?
a. Central banks often consider adjusting a currency's value to influence economic conditions.
b. If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar.
c. A weaker dollar could cause U.S. inflation by reducing foreign competition.
d. Direct intervention occurs when the central bank influences the factors that determine the dollar's value.






17. Direct intervention is always extremely effective.
a. True
b. False





18. If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies, and would place ____ pressure on the values of foreign currencies (with respect to the dollar).
a. increase; upward
b. increase, downward
c. limit; upward
d. limit; downward






19. If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.
a. short; short
b. long; short
c. short; long
d. long; long






20. Generally, a ____ home currency can ____ domestic economic growth.
a. weak; dampen
b. strong; stimulate
c. strong; dampen
d. A and B






21. A ____ home currency can ____ domestic inflation.
a. strong; increase
b. weak; decrease
c. strong; decrease
d. A and B






22. If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.
a. exceeds; discount
b. is below; premium
c. is below; discount
d. A and B






23. ____ forecasting involves the use of historical exchange rate data to predict future values.
a. Technical
b. Fundamental
c. Market-based
d. Mixed






24. ____ forecasting is usually based on either the spot rate or the forward rate.
a. Technical
b. Fundamental
c. Market-based
d. Mixed






25. Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.
a. True
b. False





26. Which of the following is not a method of forecasting exchange rate volatility?
a. using the volatility of historical exchange rate movements
b. using a time series of volatility patterns in previous periods
c. using the volatility of future exchange rate movements
d. using the exchange rate's implied standard deviation






27. Assume the following information.

• Interest rate on borrowed euros is 5 percent annualized
• Interest rate on dollars loaned out is 6 percent annualized
• Spot rate for €0.83 per dollar (one € = $1.20)
• Expected spot rate in five days is €0.85 per dollar
• Alonso Bank can borrow €10 million

What is the euro profit to Alonso Bank over the five-day period from shorting euros and going long on dollars?
a. €200,311.11
b. €207,111.11
c. €201,555.56
d. none of the above






28. Which of the following statements is incorrect?
a. Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date.
b. The forward market is located in New York City.
c. Many of the commercial banks that offer foreign exchange on a spot basis also offer forward transactions for the widely traded currencies.
d. Forward contracts can hedge a corporation's risk that a currency's value may appreciate over time.






29. If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?
a. 2.5 percent discount
b. 2.5 percent premium
c. 10 percent premium
d. 5 percent discount
e. 5 percent premium






30. Currency futures contracts differ from forward contracts in that they
a. are an obligation.
b. are not an obligation.
c. are standardized.
d. can specify any amount and maturity date.






31. If the spot rate ____ the exercise price, a currency ____ option would not be exercised.
a. remains below; call
b. remains below; put
c. remains below; put
d. A and B






32. The pegged exchange rate system is no longer used by any countries.
a. True
b. False





33. If a firm planning to hedge receivables is certain of the future direction a spot rate will move, and requires a tailor-made hedge in terms of amount and maturity date, it should use a
a. call options contract traded on an exchange.
b. futures contract traded on an exchange.
c. forward contract.
d. put options contract traded on an exchange.






34. Assume that a British pound put option has a premium of $.03 per unit, and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date if at all. What is the expected per unit net gain (or loss) resulting from purchasing the put option?
a. $.01 loss
b. $.09 loss
c. $.09 gain
d. $.05 gain






35. The speculative risk of purchasing a ____ is that the foreign currency value ____ over time.
a. put option; increases
b. put option; decreases
c. call option; increases
d. futures contract; increases






36. Bank A asks $.555 for Swiss francs and Banks B and C are willing to pay $.557 for francs. An institution could capitalize on these differences by engaging in
a. covered interest arbitrage.
b. triangular arbitrage.
c. locational arbitrage.
d. witching hour arbitrage.






37. According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign country will have a ____.
a. higher; discount
b. lower; premium
c. higher; premium
d. A and B






38. ____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.
a. Pension funds
b. International mutual funds
c. Insurance companies
d. Commercial banks
e. None of the above






39. In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.65. The Australian dollar (A$) is quoted for $0.60. What is the value of the Australian dollar in British pounds?
a. A$2.75
b. A$0.36
c. £2.75
d. £0.36
e. none of the above