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Ch.2
一、Fundamental Questions
1. Complete the following cross-rate table
£
A$
C$
Sfr
$
Australia
1.53
Britain
0.65
Canada
1.45
Switzerland
1.37
United States
--
2. Suppose in New York the euro and British pound trade at the following exchange
rates:$1.234/€, $1.702/£ . In London, the euro equivalent rate of the pound is €
€1.425/£. Is there an arbitrage opportunity? Why or why not? Calculate the profit to
be made on $1,000,000.
3. In January 2000, the spot exchange rate for the euro was $1.05/€. In May 2004, the
rate was $1.19/€. In January 2000, the euro-area CPI was107.5 and the U.S. CPI was
112.7. In May 2004, the euro-area CPI was116.4 and the U.S. CPI was 122.2. Based
on this information, in nominal terms did the euro appreciate or depreciate against the
dollar? What was the rate of appreciation or depreciation?
4. Based on the information in question 3, and according to absolute purchasing power
parity(PPP), was the euro overvalued or undervalued relative to the dollar in May 2004?
By what percent?
5. Based on the information in question 3, and according to relative purchasing power
parity(PPP), what is the predicted value for the euro for May 2004?
6. Suppose the U.S.-dollar-per-currency exchange rate of the euro was 1.2201 on
Thursday and 1.2168 on Friday. Did the euro appreciate relative to the U.S. dollar?
How much was the appreciation/depreciation(in percentage change terms)?
7. What is the meaning of home currency appreciation or depreciation for the
international trader?
8. Do you know what is Big Mac Index? Explain briefly.
9. Interpret the following terms
(1) Bid-Ask Spread
(2) Triangular arbitrage
(3) Spatial arbitrage
(4) SDR
(5) PPP
(6) Spot market
(7) Cross rate
二、Multiple Choice Questions
1. A market that involves the immediate sale or purchase of an asset is known as
a(n)
A. currency market.
B. bond market.
C. spot Market.
D. free market.
2. The minimum value of a spot currency transaction is generally
A. $100,000.
B. $500,000.
C. $1 million.
D. $5 million.
3. If the currency-per-U.S. dollar exchange rate of the New Zealand dollar is 1.5,
what is one New Zealand dollar worth in terms of U.S. dollars?
A. $0.50
B. $0.67
C. $1.00
D. $1.50
4. Suppose exchange rate of the Argentinean peso relative to the U.S. dollar is 3
(Peso/$). If the peso were to undergo a 50 percent depreciation, the new
exchange value would be:
A. 1.5. B. 4.5.
C.
3.5. D. 0.5..
5. For which of the following sets of exchange rates has the cross rate been correctly
calculated?
A. £1 = 2 Swiss francs; $1.50 = £1; $1 = 0.75 Swiss francs
B. ¥200 = $1.00; 1 ringgit = $0.15; 20 ringgit = ¥1
C. £1 = 1.5 euro; 3 Swiss francs = 2 euros; 2.25 Swiss francs = £1
D. ¥100 = $1.00; 1 ringgit = $0.15; 20 ringgit = ¥1
6. A Korean trader wishes to make a purchase of Czech crystal worth 3 million
Czech korunas. Unfortunately, there is no published value of the Korean won
to Czech koruna exchange rate. In order to calculate the current price of the
crystal in won, the trader will need to calculate
A. the real exchange rate.
B. a cross rate.
C. the purchasing power parity rate.
D. South Korea's effective exchange rate.
7. Suppose the exchange rate between the U.S. dollar and the Canadian dollar is 1.37
(C$/$), while the exchange rate for the British pound is 0.66 (£/$). What is the
cross rate of Canadian dollars to the British pound (C$/£)?
A. 2.08
B. 1.37
C. 0.66
D. 0.48
8. An American tourist is planning to visit Mexico. The exchange rate at which the
tourist can buy pesos in a retail bank is the:
A. bid price.
B. ask price.
C. forward rate.
D. cross rate.
9. Suppose the bid price of British pounds is $1.49 U.S., and the ask price is $1.51
U.S. What is the bid ask margin?
A. 0.02%
B.
0.99%
C.
1.01%
D.
1.32%
10. The spot exchange rates published in financial newspapers are:
A. nominal exchange rates.
B. real exchange rates.
C. effective exchange rates.
D. forward exchange rates.
11. Which of the following exchange rates is adjusted for price changes?
A.
Nominal exchange rate.
B.
Real exchange rate.
C.
Effective exchange rate.
D.
Forward exchange rate.
12. The table below reports the movements of prices and exchange rates for the U.S.
and Indonesia over a year's time.
July 1, 2003
July 1, 2004
_____________________________
Indonesian rupiah/$U.S.
14,500
2,435
Indonesian price level (CPI)
100
152
U.S. price level
(CPI)
102
During this time, the Indonesian rupiah experienced a nominal
A.
B.
depreciation and a real appreciation.
depreciation and a real depreciation.
100
C.
appreciation and a real appreciation.
D.
appreciation and a real depreciation.
13. Based on the values in the table below, the percentage change in the value of the
rupiah was ___________ and the rate of inflation in Indonesia was __________.
July 1, 2003
July 1, 2004
____________________________
Indonesian rupiah/U.S.
14,500
Indonesian price level (CPI)
2,435
100
152
U.S. price level
100
(CPI)
102
A. 16.8% depreciation, 2%
B. 495.5% depreciation, 52%
C. 16.8% appreciation, 52%
D. 495.5% appreciation, 52%
14. The effective exchange rate is
A. the exchange rate facing large banks and other high-volume traders.
B. the exchange rate facing retail customers.
C. the nominal exchange rate adjusted for inflation.
D. a measure of the weighted-average value of a currency relative to a selected
group of countries.
15. An exchange rate that is weighted by the share of each partner in a nation's trade
is an example of a
A.
spot exchange rate.
B.
effective exchange rate.
C.
nominal exchange rate.
D.
real exchange rate.
16. The Special Drawing Right (SDR) is a
A.
means by which banks offer their best clients preferential loan rates.
B.
preliminary form of the proposed common currency in Europe.
C.
composite currency created by the International Monetary Fund.
D.
type of bank account used by currency traders.
17. A currency trader engaging in spatial arbitrage would be doing what?
A. Purchasing real estate in major financial centers.
B. Purchasing an asset in one market and simultaneously selling it at a different
price in another market.
C. Choosing an investment portfolio that contained assets from many different
countries.
D. Selling borrowed currency in the hopes that there will be a large appreciation.
18. The demand for a currency is an example of
A.
an aggregate demand.
B.
a derived demand.
C.
spatial arbitrage.
D.
a perfectly elastic demand.
19. A depreciation of the Japanese yen relative to the U.S. dollar is illustrated as a:
A. rightward movement along the demand curve for Japanese yen.
B. leftward movement along the demand curve for Japanese yen.
C. shift rightward in the demand for Japanese yen.
D. shift leftward in the demand for Japanese yen.
20. An increase in the demand for French goods and services will:
A. induce a rightward shift in the demand for euros.
B. induce a leftward shift in the demand for euros.
C. result in a leftward movement along the demand curve for euros.
D. result in a leftward movement along the demand curve for euros.
21. The demand for the U.S. dollar in terms of Swedish krona:
A.
is perfectly inelastic.
B.
shifts leftward in response to an increase in Swedish demand for U.S.
goods.
C.
is upward sloping.
D.
may also be represented as the supply of Swedish krona in terms of U.S.
dollars.
22. An increase in U.S. demand for foreign assets will result in a:
A. rightward shift in the supply of U.S. dollars.
B. rightward movement along the supply schedule for U.S. dollars.
C. a leftward shift in the supply of U.S. dollars.
D. a leftward movement along the supply schedule for U.S. dollars.
23. If U.S. demand for German products increases at the same time as German
demand for U.S. products rises, what is the effect on the U.S. dollar to euro
exchange rate?
A. The U.S. dollar will appreciate relative to the euro.
B. The U.S. dollar will depreciate relative to the euro.
C. The U.S. dollar will not change relative to the euro.
D. The U.S. dollar may appreciate, depreciate, or remain unchanged relative to
the euro.
24. An increase in the demand for the Canadian dollar will lead to
A. an appreciation of the Canadian dollar and a higher quantity of Canadian
dollars traded.
B. a depreciation of the Canadian dollar and a higher quantity of Canadian dollars
traded.
C. an appreciation of the Canadian dollar and a lower quantity of Canadian
dollars traded.
D. a depreciation of the Canadian dollar and a lower quantity of Canadian dollars
traded.
25. An increase in the supply of the Mexican peso will lead to:
A. an appreciation of the peso and a higher quantity of pesos traded.
B. a depreciation of the peso and a higher quantity of pesos traded.
C. an appreciation of the peso and a lower quantity of pesos traded.
D. a depreciation of the peso and lower quantity of pesos traded.
26. Which basket of goods would be most likely to exhibit absolute purchasing power
parity?
A. The goods in the Consumer Price index.
B. Specialized luxury goods, which are subject to different tax rates across
countries.
C. Locally produced goods, such as transportation services, which are not easily
traded.
D. Highly tradable commodities, such as wheat.
27. The difference between relative and absolute purchasing power parity (PPP) is
A. relative PPP includes a measure of the aggregate price level in each country,
while PPP does not.
B. empirical studies show that relative PPP holds in both the short and long run,
w
while absolute PPP holds only in the short run.
C. relative PPP relates interest rate differentials, while absolute PPP relates goods
prices.
D. relative PPP implies that exchange rate movements will offset changes in
relative prices over time, while absolute PPP implies that exchange-rate
adjusted prices will always be equal.
28. If the price of a pair of shoes in the U.S. is $80, the price of the same pair of shoes
in Germany is €120, and the exchange rate is 1.5 $/€, the euro:
A. is correctly valued according to PPP.
B. is overvalued according to PPP.
C. is undervalued according to PPP.
D. correctly valued according to relative PPP.
29. Assume that PPP holds in the long run. If the price of a tradable good is $20 in
the U.S. and 100 pesos in Mexico and the exchange rate is 7 pesos/$, which of
the following changes might we expect in the future?
A.
B
an increase in the price of the good in the U.S.
a decrease in the price of the good in Mexico.
C.
D.
an appreciation of the peso in nominal terms.
a depreciation of the peso in nominal terms.