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International Financial Management: Practice Multiple Choice Questions

6.      Which of the following items is not a flow?

(a)    Unilateral transfers.

(b)    The increase in foreign assets held by Australian investors over a period of six months.

(c)    Foreign  exchange reserves  lost by the Reserve Bank  as a result of intervention in the foreign exchange market.

(d)    The foreign currency and gold reserves of the Reserve Bank.

7.      The balancing item appears on the balance of payments to

(a)    account for errors and omissions in the data.

(b)    equate the trade and services accounts.

(c)    account for changes in official reserves.

(d)    balance the current account.

8.      The sale of foreign bonds leads to

(a)    an increase in the supply of the foreign currency.

(b)    an increase in the demand for the foreign currency.

(c)    an increase in the supply of the domestic currency.

(d)    (b) and (c).

9.      If the US  inflation rate is lower than the Australian inflation rate by 5 per cent then according to relative PPP

(Hint: please use the approximate version of PPP to answer this question)

(a)    the Australian dollar should depreciate by 5 per cent.

(b)    the Australian dollar should depreciate by less than 5 per cent.

(c)    the Australian dollar should appreciate by 5 per cent.

(d)    anything could happen depending on the interest rate differential.

10.    If the foreign currency equivalent of the domestic price of a commodity is less than  the foreign price of the same commodity, then the LOP implies that

(a)    the foreign currency is overvalued.

(b)    the foreign currency is undervalued.

(c)    the domestic currency is overvalued.

(d)    none of the above.

11.    If the interest rate differential and the forward spread are positive and equal then

(a)    the foreign currency should offer a higher interest rate and sell at a discount.

(b)    the foreign currency should offer a higher interest rate and sell at a premium.

(c)    the domestic currency should offer a higher interest rate and sell at a premium.

(d)    the domestic currency should offer a higher interest rate and sell at a discount.

17.    According to interest rate parity, the currency of the country with the lower interest rate should be at a forward                    in terms of the currency of the country with the higher rate.

(a)    premium

(b)    discount

(c)    equilibrium

18.    The current five-year Yen (¥) rate is 6% per annum (compounded annually). The five- year US$ rate is 8.5%. What is the implied forward premium or discount of the ¥ (over the current spot rate for a five-year forward contract?

(a)    4.17% premium

(b)    18.46% discount

(c)     11.00% discount

(d)    12.36% premium

19.    In a freely floating exchange rate system, if the capital account surplus for Australia rises, what will most likely happen to the real value of the dollar in the very short-run?

(a)    it will decline

(b)    it will rise

(c)    can’t tell

20.    Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991, financed by a five- year loan from the U.S. Export-Import Bank. There is a one-year grace period on principal and interest payments. The net impact of this sale in 1991 is

(a)    a $150 million reduction in the U.S. trade deficit

(b)    a $150 million reduction in the U.S. capital account surplus

(c)    a 0 change in the U.S. balance of payments in 1991

(d)    all of the above

(e)    none of the above

21     Which of the following is not a direct investment from the viewpoint of the Australian balance of payments?

(a)    Opening a representative office for the Commonwealth Bank in Oslo.

(b)    Buying 20 per cent of the equity capital of an offshore oil exploration company.

(c)    Buying three-month US Treasury bills.

(d)    Acquisition of a small financial services company in Zurich.

(a) Exchange $1M for pounds at £1 = $1.60. Next, exchange for euros at €2 = £1.00. Finally, exchange for dollars at €1 = $.85.

(b) Exchange $1M for euros at €1 = $.85. Next, exchange for pounds at €2.00 = £1.00. Finally,   exchange for dollars at £1 = $1.60.

(c) Start with euros; exchange for pounds; exchange for dollars; exchange for euros.

(d) No arbitrage profit is possible.

28. Considering the spot and forward rate quotations for the Swiss franc below, calculate the three month forward premium (p.a.) in American terms. Assume 30–day months, 360–day years, and F1 = one-month forward rate. [Kelvin Tan updated on 22 May 2015].

 

(a) 0.0353

(b) 0.4235

(c) 0.1364

(d) 0.1412

29. Suppose you observe the following exchange rates: S($/€) = 1.50 (i.e., €1 = $1.50). The one-year forward rate is F1($/€) = 1.55 (i.e., €1 = $1.55). The risk-free interest rate is 5% in the U.S. and 2.5% in the euro zone. How can a euro-based investor (with good credit at home and abroad) make money?

(a) Borrow $1,000 in the U.S. at 5%, exchange for euros at the spot rate, and invest in the euro zone at 2.5%. At the end of one year, buy $1,050 with euro.

(b) Borrow €1,000, translate into dollars at the spot, and invest in the U.S. at 5% for one year. At the end of the year, translate your dollar investment back into euros at the forward rate to repay your euro debt.

(c) Borrow $1,000 in the U.S. at 5%, exchange for euros at the spot rate, and invest in the euro zone at 2.5%. Enter into a short forward contract to buy $1,050 at €.6452 per $. In one year, exchange €677.42 back into $1,050 at the forward rate to repay your dollar borrowing.

(d) There are no profitable arbitrage opportunities.

30. Purchasing power parity (PPP) theory provides that

(a) the cost of a haircut in Columbia, Missouri should be exactly the same as the cost of a haircut in Hong Kong.

(b) rates of inflation must be the same everywhere.

(c) spot exchange rates are the best predictor of expected inflation rates.

(d) the cost of a Big Mac sandwich should be reflected in the cost of two all-beef patties, special sauce, lettuce, cheese, pickles, onions, and a sesame seed bun.

(e) None of the above