Question 1 Assume that the U.S. one-year interest rate is 5% and the one-year interest rate on euros is 8%. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro’s spot exchange rate is $1.40. What will be the yield on your investment if you invest in euros?Answer 8%5%3%2.78%1 points Question 2 Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%.Answer appreciate; 4.85depreciate; 3,11appreciate; 3.11depreciate; 4.851 points Question 3 Assume that U.S. and British investors require

a real return of 2%. If the nominal U.S. interest rate is 15%, and the nominal

British rate is 13%, then according to the IFE, the British inflation rate is

expected to be about ____ the U.S. inflation rate, and the British pound is

expected to ____.Answer 2 percentage points above; depreciate by about 2%3 percentage points above; depreciate by about 3%3 percentage points below; appreciate by about 3%3 percentage points below; depreciate by about 3%2 percentage points below; appreciate by about 2%1 points Question 4 The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE), the British pound should adjust to a new level of:Answer $1.47.$1.53.$1.43.$1.57.1 points Question 5 Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of:Answer interest rate parity.locational arbitrage.purchasing power parity.the exchange rate mechanism.1 points Question 6 Assume that the international Fisher effect (IFE) holds between the U.S. and the U.K. The U.S. inflation is expected to be 5%, while British inflation is expected to be 3%. The interest rates offered on pounds are 7% and U.S. interest rates are 7%. What does this say about real interest rates expected by British investors?Answer real interest rates expected by British investors are equal to the interest rates expected by U.S. investors.real interest rates expected by British investors are 2 percentage points lower than the real interest rates expected by U.S. investors.real interest rates expected by British investors are 2 percentage points above the real interest rates expected by U.S. investors.IFE doesn’t hold in this case because the U.S. inflation is higher than the British inflation, but the interest rates offered in both countries are equal.1 points Question 7 Given a home country and a foreign country, purchasing power parity (PPP) suggests that:Answer a home currency will depreciate if the current home inflation rate exceeds the current foreign interest rate.a home currency will appreciate if the current home interest rate exceeds the current foreign interest rate.a home currency will appreciate if the current home inflation rate exceeds the current foreign inflation rate.a home currency will depreciate if the current home inflation rate exceeds the current foreign inflation rate.1 points Question 8 Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).Answer reduce; increase; appreciationincrease; reduce; appreciationreduce; increase; depreciationreduce; increase; appreciation1 points Question 9 According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:Answer follows their exchange rate movement.is due to their inflation differentials.is zero.is constant over time.1 points Question 10 If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.Answer greater thanless thanequal toanswer is dependent on whether the forward rate has a discount or premium1 points Question 11 According to the IFE, if British interest rates exceed U.S. interest rates:Answer the British pound’s value will remain constant.the British pound will depreciate against the dollar.the British inflation rate will decrease.the forward rate of the British pound will contain a premium.today’s forward rate of the British pound will equal today’s spot rate.1 points Question 12 Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?Answer purchasing power parity (PPP).triangular arbitrage.international Fisher effect (IFE).interest rate parity (IRP).1 points Question 13 Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?Answer purchasing power parity (PPP).triangular arbitrage.international Fisher effect (IFE).interest rate parity (IRP).1 points Question 14 Which of the following theories suggests the percentage change in spot exchange rate of a currency should be equal to the interest rate differential between two countries?Answer absolute form of PPP.relative form of PPP.international Fisher effect (IFE).interest rate parity (IRP).1 points Question 15 Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect, British pound’s spot exchange rate should ____ by about ____ over the year.Answer depreciate; 1.9%appreciate; 1.9%depreciate; 3.94%appreciate; 3.94%1 points Question 16 A fundamental forecast that uses multiple values of the influential factors is an example of:Answer sensitivity analysis.discriminant analysis.technical analysis.factor analysis.1 points Question 17 Which of the following is not a limitation of fundamental forecasting?Answer uncertain timing of impact.forecasts are needed for factors that have a lagged impact.omission of other relevant factors from the model.possible change in sensitivity of the forecasted variable to each factor over time.1 points Question 18 Which of the following forecasting techniques would best represent sole use of today’s spot exchange rate of the euro to forecast the euro’s future exchange rate?Answer fundamental forecasting.market-based forecasting.technical forecasting.mixed forecasting.1 points Question 19 If the forward rate was expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then:Answer covered interest arbitrage is feasible.the international Fisher effect (IFE) is supported.the international Fisher effect (IFE) is refuted.the average absolute error from forecasting would equal zero.1 points Question 20 If speculators expect the spot rate of the Canadian dollar in 30 days to be ____ than the 30-day forward rate on Canadian dollars, they will ____ Canadian dollars forward and put ____ pressure on the Canadian dollar forward rate.Answer lower; sell; upwardlower; sell; downwardhigher; sell; upwardhigher; sell; downward1 points Question 21 Sensitivity analysis allows for all of the following except:Answer accountability for uncertainty.focus on a single point estimate of future exchange rates.development of a range of possible future values.consideration of alternative scenarios.1 points Question 22 If speculators expect the spot rate of the yen in 60 days to be ____ than the 60-day forward rate on the yen, they will ____ the yen forward and put ____ pressure on the yen’s forward rate.Answer higher; buy; upwardhigher; sell; downwardhigher; sell; upwardlower; buy; upward1 points Question 23 Which of the following forecasting techniques would best represent the use of today’s forward exchange rate to forecast the future exchange rate?Answer fundamental forecasting.market-based forecasting.technical forecasting.mixed forecasting.1 points Question 24 Small Corporation would like to forecast the value of the Cyprus pound (CYP) five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the U.S. is 11%, while the Cyprus five-year interest rate is 15%. Based on this information, the Cyprus pound should ____ by ____% over the next five years.Answer appreciate; 16.22depreciate; 16.22appreciate; 6.66depreciate; 6.661 points Question 25 Which of the following forecasting techniques would best represent the use of relationships between economic factors and exchange rate movements to forecast the future exchange rate?Answer fundamental forecasting.market-based forecasting.technical forecasting.mixed forecasting.1 points Question 26 Assume that the forward rate is used to forecast the spot rate. The forward rate of the Canadian dollar contains a 6% discount. Today’s spot rate of the Canadian dollar is $.80. The spot rate forecasted for one year ahead is:Answer $.860.$.848.$.740.$.752.1 points Question 27 If a particular currency is consistently declining substantially over time, then a market-based forecast will usually have:Answer underestimated the future exchange rates over time.overestimated the future exchange rates over time.forecasted future exchange rates accurately.forecasted future exchange rates inaccurately but without any bias toward consistent underestimating or overestimating.1 points Question 28 Which of the following is not a method of forecasting exchange rate volatility?Answer using the absolute forecast error as a percentage of the realized value.using the volatility of historical exchange rate movements as a forecast for the future.using a time series of volatility patterns in previous periods.deriving the exchange rate’s implied standard deviation from the currency option pricing model.1 points Question 29 Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the Mexican five-year interest rate is 8% annualized. Today’s spot rate of the Mexican peso is $.20. What is the approximate five-year forecast of the peso’s spot rate if the five-year forward rate is used as a forecast?Answer $.131.$.226.$.262.$.140.$.174.1 points Question 30 Assume that the U.S. interest rate is 11 percent, while Australia’s one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:Answer depreciation in the Australian dollar’s value over the next year.appreciation in the Australian dollar’s value over the next year.no change in the Australian dollar’s value over the next year.information on future interest rates is needed to answer this question.

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