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International Monetary and Financial Economics (Daniels / Van Hoose)
Chapter 2 The Market for Foreign Exchange
1) When international banks conduct daily trades of different currencies valuing in the millions
of dollars
A) they are using the spot market.
B) they are using the forward market.
C) they are using the futures market.
D) they are using the stock markets.
Answer: A
2) The market price of one currency in terms of another currency is also known as
A) the exchange rate between those currencies.
B) the future rate between those currencies.
C) the spot market.
D) the value of arbitrage.
Answer: A
3) If a trader thinks that the value of yen with respect to the euro is about to fall, which of the
following would enable him to make a profit?
A) buy a forward contract for euros
B) buy a forward contract for yen
C) sell yen in the spot market
D) buy euros in the spot market
Answer: A
4) If the bilateral exchange between U.S. dollars and euros is listed as 1.1875 $/€, how many
euros would buy $1?
A) 0.8421€
B) 1.187€
C) 0.1875€
D) 8.421€
Answer: A
5) You have the following data about the exchange rates between the Brazilian Real and the
Guatemalan Quetzal.
June 1, 2011 0.6752 Reales / Quetzales
June 1, 2012 0.3481 Reales / Quetzales
From this data you may conclude that
A) the Real depreciated.
B) the Quetzal appreciated.
C) the Quetzal depreciated.
D) the Real was revalued.
Answer: C
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6) If it used to take $2 to buy a Swiss franc and now it takes $1.50 to buy a Swiss franc, then
A) the dollar must have appreciated.
B) the franc must have appreciated.
C) the fed must have intervened in the exchange markets.
D) the value of Swiss francs must have increased.
Answer: A
7) An international art dealer finds a Fabergé egg in a remote village in Romania. The owner
wants to be paid in Romanian Leu. In order to determine the current price of the egg in dollars
the trader would need to calculate
A) the cross rate.
B) the real effective exchange rate.
C) the nominal exchange rate.
D) the purchasing power parity exchange rate.
Answer: A
8) On your first day at work, your boss tells you to call the bank and get the bid and the ask for
British pounds. Having just returned from studying in London, you know that the exchange rate
should be somewhere around 1.25. You call the number and the lady says "579 and 585." What
does that mean?
A) She didn't understand your question.
B) The bid is 0.579 and the ask is 0.585.
C) The ask is 0.579 and the bid is 0.585
D) The bid is 1.2579 and the ask is 1.2585.
Answer: D
9) Which of the following exchange rates account for changes in price levels between two
nations?
A) bilateral exchange rates
B) nominal exchange rates
C) real exchange rates
D) forward exchange rates
Answer: C
10) In order to determine how strong or weak a currency is, you should look at the
A) effective exchange rate.
B) real exchange rate.
C) bilateral exchange rate.
D) forward exchange rate.
Answer: A
11) The advantage of an effective exchange rate is
A) it gives us an accurate gauge for the strengthening or weakening of a currency.
B) it uses a weighted average of bilateral exchanges based on the country's trading partners.
C) unreliable because its using different weights to reflect trade flows.
D) A and B.
Answer: D
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12) If the bid price is 1.84 and the ask price is 1.96, what is the bid-ask margin?
A) 12%
B) 1.2%
C) 6.1%
D) 6.5%
Answer: C
13) SDRs, the currency of the IMF is an example of
A) a composite currency.
B) a real effective exchange rate.
C) a potential replacement for a nation's currency.
D) a purchasing power parity currency.
Answer: A
14) The practice of buying an asset in one market and selling it immediately in a second market
that is located in another country is known as
A) a spot market transaction.
B) spatial arbitrage.
C) bilateral arbitrage
D) a composite currency trade.
Answer: B
15) If a trader purchases Swiss Francs in New York, sells the Francs for Pounds in London, and
finally sells the pounds for dollars in Geneva, he is pursuing
A) effective exchange rates.
B) spatial arbitrage.
C) triangular arbitrage.
D) an illegal transaction.
Answer: C
16) The demand for currency is considered
A) derived because it is determined by the demand for international purchases.
B) linear because it is determined by forces that move so quickly.
C) derived because demand is a function of the government's intervention in currency markets.
D) relative because it is determined by exogenous variables.
Answer: A
17) If Japanese consumers demand Brazilian goods, this would lead to
A) an increase in the demand for Brazilian Real.
B) an increase in the supply of Brazilian Real.
C) a decrease in the demand for Brazilian Real.
D) an increase in the demand for Japanese Yen.
Answer: A
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18) The supply of a currency is
A) dependent upon the demand for other currencies.
B) dependent upon the amount of government intervention in the currency market.
C) independent of the balance of trade.
D) both A and B.
Answer: D
19) Suppose the equilibrium exchange rate for dollars to euros is 1.2 $/€ representing 2 billion
dollars traded, and the German consumers have recently started buying the latest iPads. What
would you expect to happen to the equilibrium quantity and price in the currency market?
A) The equilibrium price and quantity would fall.
B) The equilibrium price and quantity would rise.
C) The equilibrium price would rise, and quantity would fall.
D) The equilibrium price would fall, and quantity would rise.
Answer: A
20) In its simplest form, purchasing power parity would mean that a good in one country
A) would have the same exchange-rate adjusted price in another country.
B) will be available for sale in another country.
C) will reflect the exchange rate in another country.
D) will reflect the transportation cost differences in another country.
Answer: A
21) The CPI in Holland is 124, and the CPI in Israel is 186. If absolute purchasing power parity
holds then the Euro/Shekel exchange rate should be
A) 0.667.
B) 1.5.
C) 2.6.
D) cannot be determined by the information given.
Answer: A
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22) If a country's currency has a market driven value that is higher than economic theory would
suggest, the currency is considered to be
A) overvalued.
B) undervalued.
C) overestimated.
D) in arbitrage.
Answer: A
23) Absolute purchasing power parity is
A) likely to hold in real world situations because currency markets move so quickly today.
B) unlikely to hold in real world situations because goods cannot move as easily as currencies.
C) likely to hold because governments closely watch these markets to prevent their currencies
from becoming overvalued.
D) unlikely to hold because governments closely watch these markets to prevent their currencies
from becoming undervalued.
Answer: B
24) If last year's inflation rate in South Korea was 5.4% and last year's inflation rate in the U.S.
was 3.2%, we would expect the change in the Dollar/Won rate to have
A) decreased by 2.2%.
B) increased by 2.2%.
C) decreased by 1.6875%.
D) increased by 4.7%.
Answer: A
25) If you were trying to determine the best guide for exchange rate movements, you should
select
A) relative purchasing power parity rates.
B) real effective exchange rates.
C) absolute purchasing power parity rates.
D) nominal bilateral exchange rates.
Answer: B
26) If you were a government official trying to recommend a strategy for monitoring you
country's exchange rate, would you choose to use a real effective exchange rate or a relative
purchasing power parity rate? Explain what each one is, how they differ, and which you would
choose to employ and why.
Answer: Answers will vary.
27) If the demand for euros increases and the supply of dollars decreases, what is the direction of
trade between the U.S. and Europe? Draw the currency markets to reflect this occurrence.
Answer: Answers will vary.
28) On your first day at work, your boss tells you to call the bank and get the bid and the ask for
British pounds. Having just returned from studying in London, you know that the exchange rate
should be somewhere around 1.25. You call the number and the lady says "579 and 585."
Assuming that your recollection of the exchange was correct, calculate the bid-ask margin.
Answer: Answers will vary.
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29) Suppose you have the following information:
In Romania, the CPI was 124 and 130 in 2011 and 2012 respectively.
In Turkey, the CPI was 108 and 120 in 2011 and 2012 respectively.
The spot rate between the Turkish Lira to the Romanian Leu was 0.76 and 0.97 in 2011 and
2012.
Calculate the relative purchasing power parity for these currencies between 2011 and 2012.
Answer: Answers will vary.
30) When currency values change, U.S. students make different decisions about where to study
abroad? If the dollar is appreciating with respect to the Euro and depreciating with respect to the
Mexican peso, explain how the decisions made by Spanish majors where to study abroad would
be impacted first by the existing situation. Then explain how these Spanish speaking students
will impact the currency markets.
Answer: Answers will vary.
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