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.



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