Unit I Exam Practice Questions Flashcards
Interest earned on foreign holdings of U.S. federal, state and local government debt are recorded in the:
a) services account.
b) merchandise account.
c) income from investment account.
d) capital account.
e) unilateral transfers account
c) income from investment account.
True or false: A current account deficit must be accompanied by a corresponding deficit in the financial account.
False
The balance of payments:
a) Must sum to zero in the end, by definition.
b) Records a country’s trade in goods, services, and financial assets with the rest of the world.
c) Requires two entries for each transaction.
d) (a.) and (b.) only.
e) (a.), (b.), and (c.).
e) (a.), (b.), and (c.).
In terms of the balance of payments accounting, a credit:
a) is entered for exported goods
b) sends foreign exchange out of the country
c) results in a demand for foreign exchange
d) none of the above
a) is entered for exported goods
A unilateral transfer is:
a) migration into or out of the country.
b) where you “draw the line”.
c) birthday money from your aunt who lives in Thailand.
d) part of the financial account but not the current account.
c) birthday money from your aunt who lives in Thailand.
Use the information in the following table to answer the questions about Switzerland’s 1992 international transactions
Balance of Payments Account Amount
Merchandise imports $ 78,893
Merchandise exports $ 78,642
Services imports $ 11,526
Services exports $ 18,734
Investment income receipts $ 28,131
Investment income payments $ 18,691
Unilateral transfers $ -2,977
What is the balance of trade in merchandise? (Note: enter your answer without the dollar sign)
Exports - Imports, -$251
Use the information in the following table to answer the questions about Switzerland’s 1992 international transactions
Balance of Payments Account Amount
Merchandise imports $ 78,893
Merchandise exports $ 78,642
Services imports $ 11,526
Services exports $ 18,734
Investment income receipts $ 28,131
Investment income payments $ 18,691
Unilateral transfers $ -2,977
What is the current account? (Note: enter your answer without the dollar sign)
Current Account = (Merchandise Exports + Services Exports + Investment Income Receipts + Unilateral Transfers) - (Merchandise Imports + Services Imports + Investment Income Payments)
$13,420
At the last BIS survey, the average daily volume of foreign exchange trading was approximately equal to
Correct!
a) $5,100 billion.
b) $100 billion.
c) $15 billion.
d) $2,000 billion
a) $5,100 billion.
Suppose that in the free market, where the supply of the foreign currency is equal to demand for that currency, the peso-dollar exchange rate is 4 pesos = $1. Assume the central bank sets an official exchange rate at 3 pesos = $1, we can say that in the official market the dollar is:
a) overvalued.
b) undervalued.
c) appreciated.
d) None of the above.
b) undervalued.
It takes less pesos to buy one USD, hence making the US dollar weaker.
The essential feature of a ________ is that it immediately fixes the rate at which a specified amount of one currency is to be delivered in exchange for a specific amount of another at a future date.
a) forward contract
b) spot contract
c) money contract
d) bid contract
a) forward contract
Associate forward with future.
The reduction or covering of a foreign exchange risk is called
a) hedging.
b) speculation.
c) intervention.
d) arbitrage.
a) hedging.
Riskless transactions to take advantage of profit opportunities due to a price differential or a yield differential in excess of transaction costs are called
a) differential actions.
b) cash transactions.
c) arbitrage.
d) forward transactions.
c) arbitrage.
Suppose an investor has 100 euros, and has a choice of: 1) buying a bond in Germany that pays 5% interest in euros; 2) buying a similar bond in the US that pays 5% interest in dollars. If the exchange rate today is 0.87 euros per dollar, what the exchange rate have to be at the maturity of the bonds for the investor to earn the same return from either bond?
a) 1 euro per dollar
b) 0.87 euro per dollar
c) 0.87 dollar per euro
d) 1.3 dollar per euro
e) none of the above
b) 0.87 euro per dollar
True or false: Foreign exchange activity is dominated by the spot and swaps markets.
True
A gain can be made by the holder of a call option when the current exchange rate
a) exceeds the exercise price.
b) exceeds the forward price.
c) is less than the futures price.
d) falls to zero.
a) exceeds the exercise price.
An increase in the exchange rate from $2.00 per euro to $2.20 per euro is a
a) 10% depreciation of the euro with respect to the dollar.
b) 10% depreciation of the dollar with respect to the euro.
c) 10% appreciation of the dollar with respect to the euro.
d) None of the above.
b) 10% depreciation of the dollar with respect to the euro.
If the exchange rate for the Australian dollar is US$/A$=.7833 and the exchange rate for the Hong Kong dollar is US$/HK$=.1280, then the Kong Kong-Australian dollar exchange rate (or how many HK$s does it take to buy one A$), HK$/A$ equals
a) 1.2767
b) 7.8133
c) 6.1195
d) 9.9738
c) 6.1195
Suppose:
1 £ = 2.435 $ in New York
1 $ = 1.07 € in Paris
1 € =0 .4 £ in London
How much could you profit per pound initially traded?
a) 0.04218 £
b) 0.1042 £
c) 0.6055 £
d) 1.6055 £
a) 0.04218 £
Start with 1 pound (£).
Convert it to dollars ($) in New York using the exchange rate: 1 £ = 2.435 $.
So, you get 1 £ * 2.435 $/£ = 2.435 $.
Now, take the dollars ($) and convert them to euros (€) in Paris using the exchange rate: 1 $ = 1.07 €.
So, you get 2.435 $ * 1.07 €/$ = 2.60545 €.
Finally, take the euros (€) and convert them back to pounds (£) in London using the exchange rate: 1 € = 0.4 £.
So, you get 2.60545 € * 0.4 £/€ = 1.04218 £.
Now, calculate the profit per pound by subtracting the initial amount (1 pound) from the final amount (1.04218 pounds):
Profit per pound = 1.04218 £ - 1 £ = 0.04218 £.
Suppose:
1 £ = 2.435 $ in New York
1 $ = 1.07 € in Paris
1 € =0 .4 £ in London
Suppose New York was considering adding a transaction cost for every trade of pounds to dollars. What is the lowest transaction cost that would remove the arbitrage opportunity? Hint: a transaction cost of x means that for every 1 £ traded you receive back (2.435 - x)$ in New York.
a) 0.097 $
b) 0.098 $
c) 0.099 $
d) 0.1 $
c) $0.099
Arbitrage opportunity:
Buy 1 GBP in New York for 2.435 USD
Sell 1 GBP in London for 0.4 EUR
Sell 0.4 EUR in Paris for 0.4 * 1.07 = 0.428 USD
Profit = 0.428 - 2.435 = -2.007 USD
Transaction cost to remove arbitrage opportunity:
Transaction cost must be greater than 2.007 USD
The lowest transaction cost that would remove the arbitrage opportunity is 2.008 USD
Therefore, the answer is $0.099, which is the difference between 2.008 USD and 2.435 USD.
The nominal interest rates in US and UK are 8% and 6%, correspondingly.
The corresponding national inflation rates are: 10% (US) and 4% (UK).
The spot rate is $2 for 1 pound.
What is your best estimate of the expected forward rate (dollars per pound)?
Calculate the real interest rate in the US and UK:
US real interest rate = 8% - 10% = -2%
UK real interest rate = 6% - 4% = 2%
Calculate the expected forward rate using the following formula:
Expected forward rate = Spot rate * (1 + Real interest rate in domestic currency) / (1 + Real interest rate in foreign currency)
Expected forward rate = $2 * (1 - 2%) / (1 + 2%) = $1.92
Therefore, the expected forward rate is $1.92.
True or false: The U.S. dollar is the dominant international reserve currency, but rising shares are held in euros.
True
Under the Maastricht Treaty, which of the following is not a requirement for a country to join the European monetary union?
a) The country’s inflation rate must not be more than 1.5 percentage points above the average of the lowest three member country rates.
b) Its interest rates on long—term government bonds must not be more than 2 percentage points above the average of the three lowest inflation members.
c) Its trade balance must not be more than +3 percent or less than 3 percent of its GDP.
d) Its government budget deficit must not exceed 3 percent of its GDP.
c) Its trade balance must not be more than +3 percent or less than 3 percent of its GDP.
Countries with floating exchange rates have certain characteristics. Indicate the one that does not apply to those countries.
a) closed economy
b) small economy
c) diversified trade
d) divergent inflation rates
b) small economy
________ keeps the exchange rate fixed in the short run but then adjusts its value at regular intervals to account for supply and demand pressures.
a) The European Monetary System
b) A managed floating
c) A crawling peg
d) A crawling float
c) A crawling peg
