International Financial Management: Practice Multiple Choice Questions
1. A fixed exchange rate regime
(a) forces a country to give up free international flows of capital.
(b) forces a country to abandon independent monetary policy
(c) can eliminate exchange rate uncertainty
(d) is the model used by the U.S. Federal Reserve.
2. If the exchange rate between the Australian dollar and the US dollar is expressed in direct quotation from an Australian perspective, then a rise in the exchange rate implies
(a) appreciation of the US dollar.
(b) depreciation of the US dollar.
(c) appreciation of the Australian dollar.
(d) (b) and (c).
3. If the AUD/USD exchange rate declines from 1.2500 to 1.2430, then the fall is equal to
(a) 70 points.
(b) 7000 pips.
(c) 700 points.
(d) 70 pips.
4. Bank XYX quotes 1.2500 – 1.2550 for the AUD/USD exchange rate to a customer. What is the price at which the customer can buy one unit of the Australian dollar?
(a) 1.2500.
(b) 1.2550.
(c) 0.8000.
(d) 0.7968.
5. If a fixed exchange rate is set below the equilibrium rate in a fixed exchange rate system it will create
(a) a deficit in the balance of payments.
(b) a surplus in the balance of payments.
(c) inflation.
(d) deflation.
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.
12. Suppose one observed the following direct spot quotations in New York and London, respectively: 1.2500-60 and 0.8000-50. Arbitrage profits per $1 million equal
(a) $637
(b) $0
(c) $1,268
(d) $4,492
(e) None of the above
13. The $/DM exchange rate is DM1 = $0.35 and the DM/FF exchange rate is FF1 = DM0.31. What is the FF/$ exchange rate?
(a) 3.226 French francs per dollar
(b) 1.129 French francs per dollar
(c) 0.886 French francs per dollar
(d) 9.217 French francs per dollar
(e) none of the above
14. American terms refers to the
(a) number of U.S. dollars per unit of foreign currency
(b) number of foreign-currency units per U.S. dollar
(c) quotation system found in the United States
(d) bid-ask spread on the U.S. dollar
(e) none of the above
15. In a freely floating exchange rate system, if the capital account is running a deficit
(a) the balance of payments must run a deficit
(b) the balance of payments must be zero
(c) the current account must run a surplus
(d) b and c above
(e) none of the above
16. A nation that saves less than it invests in its economy must run a current account
(a) surplus
(b) deficit
(c) based on foreign borrowings
(d) based on capital inflows
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.
22. If the AUD/USD exchange rate declines from 1.2500 to 1.2450, then the fall is equal to
(a) 50 points.
(b) 5000 pips.
(c) 500 points.
(d) 50 pips.
23. The following are the spot and the swap rates of the AUD/USD
Spot 1.2500–1.2550
One-month 40–20
This means that
(a) the US dollar is selling at a forward discount.
(b) the US dollar is selling at a forward premium.
(c) the Australian dollar is selling at a forward discount.
(d) after allowing for transaction costs, both currencies sell at par.
24. Suppose the spot quotes for the Italian lira and Swedish krone are $0.00050-51/Lira and $0.1201-10/Krone, respectively. What is the cross-exchange rate in Rome in direct terms?
(a) 0.00413-25
(b) 0.00422-31
(c) 235.49-242.00
(d) 237.81-245.03
(e) none of the above
25. A deficit of the merchandise trade account results in a current account
(a) deficit
(b) surplus
(c) can’t tell
26. The J-curve effect shows
(a) the initial deterioration and eventual improvement of the trade balance following a depreciation.
(b) the initial improvement and eventual deterioration of the trade balance following a depreciation.
(c) that both imports and exports are responsive to exchange rate changes, but only in the short run.
(d) None of the above.
27. Suppose you observe the following exchange rates: €1 = $.85; £1 = $1.60, and €2.00 = £1.00. How can you best make money if you start with $1,000,000?
(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 = $1.60.
(c) Start with euros; exchange for pounds; exchange for dollars; exchange for euros.
(d) No arbitrage profit is possible.
28. Considering the spot and forward rate quotations for the Swiss franc below, calculate the three month forward premium (p.a.) in American terms. Assume 30–day months, 360–day years, and F1 = one-month forward rate. [Kelvin Tan updated on 22 May 2015].
S($/SFr) = 0.85
F1($/SFr) = 0.86
F2($/SFr) = 0.87
F3($/SFr) = 0.88
(a) 0.0353
(b) 0.4235
(c) 0.1364
(d) 0.1412
29. Suppose you observe the following exchange rates: S($/€) = 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
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