FIN 480 EXAM 1 - 3 QUESTIONS AND ANSWERS
The international monetary system can be defined as the institutional framework within
which - Answers - Exchange rates among currencies are determined, movement of
capital is accommodated, and international payments are made
If the United States imports more than it exports, then - Answers - The supply of dollars
is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one
can infer that the U.S. dollar would be under pressure to depreciate against other
currencies.
Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. 3)
If the British pound depreciates against the U.S. dollar, - Answers - your firm may be
priced out of the U.K. market, to the extent that your dollar costs stay constant and your
pound prices will rise, and to protect U.K. market share, your firm may have to cut the
dollar price of your goods to keep the pound price the same.
When a country's currency depreciates against the currencies of major trading partners
- Answers - the country's exports tend to rise and imports fall.
Generally speaking, any transaction that results in a payment to foreigners - Answers -
will be recorded as a debit, with a negative sign, in the U.S. balance of payments
What major dimension sets apart international finance from domestic finance? -
Answers - Expanded opportunity set, market imperfections, and foreign exchange
Restrictions or impediments to free trade include such things as - Answers - import
tariffs, import quotas and costly transportation
The monetary system of bimetallism is unstable. Due to the fluctuation of the 8)
commercial value of the metals, - Answers - the metal with a commercial value higher
than the currency value tends to be used as metal and is withdrawn from circulation as
money (Gresham's Law).
A currency depreciation will begin to improve the trade balance immediately - Answers -
if the demand for imports and exports are elastic.
An example of a political risk is - Answers - both the expropriation of assets and
adverse changes in tax rules are correct.
The forward price - Answers - may be higher than the spot price, may be the same as
the spot price and may be less than the spot price
The international monetary system went through several distinct stages of evolution.
These stages are summarized, in alphabetic order, as follows: - Answers - Bimetallism,
, classical gold standard, interwar period, Bretton Woods system, and Flexible exchange
rate regime
An arbitrage is best defined - Answers - The act of simultaneously buying and selling
the same of equivalent assets or commodities for the purpose of making a certain
guaranteed profit
Covered Interest Arbitrage (CIA) activities will result in - Answers - Restoring equilibrium
prices quickly
The interest rate at which the arbitrager borrows tends to be higher than the rate at
which he lends, reflecting the - Answers - bid-ask spread
If a foreign country experiences a hyperinflation, - Answers - its currency will depreciate
against stable currencies
Purchasing power parity theory states that - Answers - The exchange rate between
currencies of two countries should be equal to the ratio of the countries' price levels,
and as the purchasing power of a currency sharply declines that currency will
depreciate against stable currencies.
The main approaches to forecasting exchange rates are - Answers - Efficient market,
Fundamental, and technical approaches
According to the research in the accuracy of paid exchange rate forecasters, - Answers
- as a group, they do not do a better job of forecasting the exchange rate than the
forward rate does
Comparing "forward" and "futures" exchange contracts, we can say that - Answers -
Their major difference is in the way the underlying asset is priced for future purchase or
sale: futures settle daily and forwards settle at maturity, and a futures contract is
negotiated by open outcry between floor brokers or traders ad is traded on organized
changes, while a forward contract is tailor-made by an international bank for its clients
and is traded OTC.
If you think that the dollar is going to appreciate against the euro, you should - Answers
- Buy call option on the euro
An option is - Answers - A contract giving the owner (buyer) of the option the right, but
not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified
price at some time in the future.
American Option - Answers - can be exercised any time at or before the maturity of the
option
European - Answers - can be exercised only at expiration
The international monetary system can be defined as the institutional framework within
which - Answers - Exchange rates among currencies are determined, movement of
capital is accommodated, and international payments are made
If the United States imports more than it exports, then - Answers - The supply of dollars
is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one
can infer that the U.S. dollar would be under pressure to depreciate against other
currencies.
Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. 3)
If the British pound depreciates against the U.S. dollar, - Answers - your firm may be
priced out of the U.K. market, to the extent that your dollar costs stay constant and your
pound prices will rise, and to protect U.K. market share, your firm may have to cut the
dollar price of your goods to keep the pound price the same.
When a country's currency depreciates against the currencies of major trading partners
- Answers - the country's exports tend to rise and imports fall.
Generally speaking, any transaction that results in a payment to foreigners - Answers -
will be recorded as a debit, with a negative sign, in the U.S. balance of payments
What major dimension sets apart international finance from domestic finance? -
Answers - Expanded opportunity set, market imperfections, and foreign exchange
Restrictions or impediments to free trade include such things as - Answers - import
tariffs, import quotas and costly transportation
The monetary system of bimetallism is unstable. Due to the fluctuation of the 8)
commercial value of the metals, - Answers - the metal with a commercial value higher
than the currency value tends to be used as metal and is withdrawn from circulation as
money (Gresham's Law).
A currency depreciation will begin to improve the trade balance immediately - Answers -
if the demand for imports and exports are elastic.
An example of a political risk is - Answers - both the expropriation of assets and
adverse changes in tax rules are correct.
The forward price - Answers - may be higher than the spot price, may be the same as
the spot price and may be less than the spot price
The international monetary system went through several distinct stages of evolution.
These stages are summarized, in alphabetic order, as follows: - Answers - Bimetallism,
, classical gold standard, interwar period, Bretton Woods system, and Flexible exchange
rate regime
An arbitrage is best defined - Answers - The act of simultaneously buying and selling
the same of equivalent assets or commodities for the purpose of making a certain
guaranteed profit
Covered Interest Arbitrage (CIA) activities will result in - Answers - Restoring equilibrium
prices quickly
The interest rate at which the arbitrager borrows tends to be higher than the rate at
which he lends, reflecting the - Answers - bid-ask spread
If a foreign country experiences a hyperinflation, - Answers - its currency will depreciate
against stable currencies
Purchasing power parity theory states that - Answers - The exchange rate between
currencies of two countries should be equal to the ratio of the countries' price levels,
and as the purchasing power of a currency sharply declines that currency will
depreciate against stable currencies.
The main approaches to forecasting exchange rates are - Answers - Efficient market,
Fundamental, and technical approaches
According to the research in the accuracy of paid exchange rate forecasters, - Answers
- as a group, they do not do a better job of forecasting the exchange rate than the
forward rate does
Comparing "forward" and "futures" exchange contracts, we can say that - Answers -
Their major difference is in the way the underlying asset is priced for future purchase or
sale: futures settle daily and forwards settle at maturity, and a futures contract is
negotiated by open outcry between floor brokers or traders ad is traded on organized
changes, while a forward contract is tailor-made by an international bank for its clients
and is traded OTC.
If you think that the dollar is going to appreciate against the euro, you should - Answers
- Buy call option on the euro
An option is - Answers - A contract giving the owner (buyer) of the option the right, but
not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified
price at some time in the future.
American Option - Answers - can be exercised any time at or before the maturity of the
option
European - Answers - can be exercised only at expiration
